Despite Array, clouds on horizon for UK offshore wind

www.environmental-finance.com
London, 14 May

The UK government will have to extend its additional subsidy for offshore wind, or the industry will have to cut its costs, if the UK's medium-term targets for renewable energy are to remain in sight, according to bankers and analysts. This warning comes despite the news on Tuesday that the first 630MW phase of the world's largest offshore windfarm, London Array, will go ahead, after months of uncertainty regarding its economic viability.

"In the medium term, there is a huge challenge for industry and government.., in delivery of offshore wind and how feasible it is," said Arnaud Bouille, an assistant director in consultancy Ernst & Young's renewable energy practice. "The costs of building and operating projects will have to come down - industry will have to deliver cost reductions," he added.

A London-based energy banker said: "I suspect that two years down the line, subject to power prices, capital costs and exchange rates, the government may have to extend its subsidy at the two-ROC level." He was referring to a change in the renewable energy support programme, announced in last month's UK government budget, that saw the number of 'Renewable Obligation Certificates' (ROCs) awarded to offshore windfarms rise from 1.5 to two per MW-hour of power produced, for those farms placing equipment orders this financial year. That figure drops to 1.75 next year, and back to 1.5 from 2011.

Each ROC is currently worth around ￡52 ($79), and electricity suppliers are required to surrender each year ROCs equivalent to a growing percentage of the total power they sell. ROCs are awarded to a range of renewable energy generating technologies, with onshore windfarms getting 1 ROCs per MWh, and co-firing of biomass with fossil fuels receiving 0.5.

It was this change to the subsidy regime that led the developers of the London Array - the UK arm of German utility E.ON, Denmark's DONG Energy and Abu Dhabi investment fund Masdar - to give the project the green light, the parties said earlier this week. They plan to invest €2.2 billion ($3.0 billion) in the project, which is expected to begin generating power in 2012.

Another five offshore projects are likely to quickly follow the London Array, said Colin Morgan, director of offshore wind at wind energy consultancy Garrad Hassan. These are Centrica's 200MW Lincs project, EDF's 90MW Teesside development, npower renewables' 750MW Gwynt y Mor farm, DONG Energy's 450MW Walney project, and the 500MW West of Duddon Sands project, under construction by DONG Energy's, ScottishPower and Eurus Energy.

"The two ROCs decision was specifically targeted at keeping these projects moving," he said. "It sends the signal that the government is prepared to intervene to keep offshore projects on track." The government has set a target of developing 25GW of offshore wind by 2020 - at the moment, less than 3GW is operational. Bouille at Ernst & Young said that his company has a medium-case scenario of 18-20MW, and a low-case scenario of 14-15GW.

"There are lots of challenges, including supply chain constraints. If the wind turbine market doesn't unlock new manufacturers, if the market remains an oligopoly, you'll find the UK government will have to decide if its prepared to re-increase the level of ROCs to make sure projects happen," he added.