This week, we look to the UK with our guest writer Caroline Taylor, CEO of Totum Compliance.
World-leading offshore wind generation
The UK is the world leader in generating electricity from offshore wind, boasting seven of the world's 10 largest offshore wind sites. In 2020, around 13% of the UK's electricity generation was from offshore wind[1] and the UK government has pledged to increase current offshore generation capacity four-fold from 10GW to 40GW by 2030.[2] That goal is expected to deliver £60 billion of investment and 40,000 jobs by 2026.[3]
Regulatory backdrop
In the UK, the rights to undertake an offshore wind project are allocated in a competitive process with a Wind Farm Agreement for Lease (AfL) granted to the successful developer(s). The seabed licensing agency, the Crown Estate, identifies suitable offshore wind project areas through an extensive data analysis to find the most technically favourable areas of the seabed for offshore wind development. Developers can take a degree of confidence from the government's initial feasibility studies and data sets which can level the playing field by centralising the initial cost to find viable sites. This enables bidders to "focus in" on the particular development and may attract more interest as a result.
The current leasing round is the fourth such allocation process and is underpinned by well-established processes for approvals from feasibility through to commercial operation. Before an AfL is granted by the Crown Estate, the proposed offshore wind projects undergo an initial environmental screening (a Habitats Regulations Assessment) by the Crown Estate through an independently overseen expert working group to identify any likely significant effects on protected habitats. If an AfL is awarded, developers then undertake further project-specific environmental assessments as part of the development consenting process, such as obtaining a marine licence from the Marine Management Organisation or a Development Consent Order from the Planning Inspectorate.
The AfL is granted for a maximum of 10 years to allow for the development and consenting phase (around five years), procurement and contracting (around two years) and construction (approximately three years). The AfL enables the developer to exercise an option to lease the area upon satisfying certain conditions. There is a separate Transmission AfL entered into when the cable route for the project has been identified and approved by the Crown Estate. With each AfL, the developer must provide a letter of credit as security for option fee payments and other obligations. In addition, project milestones are set to ensure that the project progresses in accordance with an agreed timeline and the Crown Estate can terminate the AfL if these milestones are not met by the due date.
During this period, a 60 year Wind Farm Lease is granted once all approvals are in place and a Transmission Lease is entered into. Both of these require the developer to provide security. The Leases include further milestones for the start of construction, generation, and completion of construction. The developer can exercise a break option after 25 years from completion of construction, subject to payment of a break fee. The Leases also contain decommissioning obligations.
What's the secret of the UK's success?
The UK implemented a Contracts for Difference (CfD) scheme that has succeeded in creating a competitive platform attracting investment and driving down costs. UK Energy and Climate Change Minister, Greg Hands, said the scheme's design has led to the price per unit of offshore wind to fall by around 65% between the first allocation round in 2015 and the third in 2019. The scheme subsidises the first 15 years of a development project (most have an estimated 25-year life cycle).
The price for offshore wind per megawatt-hour in 2017 was £167, dropping to £83 in 2021 and could reduce to £46 by 2025.[4]
However, with the UK's fourth offshore wind leasing round introducing a new annual upfront "option fee" payable by developers which could deliver the Government over £8 billion from the successful bidders, commentators have voiced concern that these costs could end up being passed on to consumers and make offshore wind power more expensive.
ScotWind
The ScotWind offshore wind leasing round in 2021 was the first in Scottish waters for a decade, after the rights were devolved to Scotland in 2017. It had been hoped that the 2021 ScotWind leasing round may result in projects for 10GW, but after evaluating 74 bids, a massive 25GW of offshore wind project development rights were awarded.[5] To put this in context, in 2020, 6 GW of offshore wind generation was commissioned worldwide.[6] Of course, it's a long road of consenting, financing, and planning stages to get through before any generation will become a reality.[7]
In the meantime, nearly £700 million worth of option fees will be paid by the successful bidders and are added to the Scottish Government's coffers.
Incentivising investment
The UK's current CfD scheme looks to secure 12GW of electricity capacity and supports offshore wind developments with £200 million funding per year, with £24 million allocated for floating offshore wind technologies.[8] The scheme reduces investor risk, and consequently reduces the cost of capital, thereby slashing overall project costs between 10-21%.[9]
In its 2021 Offshore Wind Operational Report, the Crown Estate (the UK's offshore wind leasing body) notes that 2020 saw the largest global offshore wind project financing to date (£5.5 billion) for the world's largest offshore wind farm under construction, Dogger Bank phases A and B.[10] The report notes that with a maturing offshore wind market, lenders and investors have become much more comfortable with the sector's risk profile and it has formed a key component in the pathway to achieving net zero.
The recent offshore wind auctions in Holland and Germany have been 'subsidy-free'. The fact that only two bidders competed in the Dutch leasing round may be an indication of investor sentiment to that model. Speakers at the Global Offshore Wind conference in London last September voiced concerns that adopting a "zero-subsidy route" in the UK could jeopardise the 40GW offshore wind target.
The challenges
It isn't all plain sailing. The Offshore Wind Operational Report recognises that as the deployment of offshore wind projects ramps up, the question of how future UK offshore wind sites are connected to the grid is becoming increasingly important from a range of perspectives - environmental, social and financial. A major government policy review is underway (the Offshore Transmission Network Review) to look at both minor near-term reforms to facilitate greater coordination of infrastructure in the 2020s, and developing a new policy framework for the longer term.[11]
The need for a clear regulatory path from offshore wind generation to distribution is brought into focus all the more with already-increasing energy prices in the UK compounded by rapidly rising oil prices resulting from the Russian invasion of Ukraine. In mid-March British PM Boris Johnson set out a revised energy strategy doubling down on investments in new wind power as part of a bid to attain energy independence. The 2030 'target' is starting to look a lot more like an imperative.
What can New Zealand learn from the UK regime?
New Zealand's offshore environment holds plenty of promise for offshore wind generation. Currently though, there is no clear government policy or tailored regulatory framework for securing the rights for offshore wind development. In what will be an increasingly competitive global market for development projects, this presents risks for investors compared to the UK approach discussed above.
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Thank you, Caroline! We will be discussing this structured approach more in the weeks to come with our next instalment looking to Australia's new Offshore Electricity Infrastructure Act regime. Following that update, we will wrap the series up and bring the focus back to New Zealand for our take on the future of offshore wind here at home.