The U.K.’s offshore wind auctions have driven prices so low that developers could prefer to go merchant rather than take part in the next round two years from now, according to a Wood Mackenzie analyst.

Results of the third round of the program, announced Friday morning, awarded 5.5 gigawatts of offshore wind capacity, with prices bottoming out at £39.65 ($50.05) per megawatt-hour.

The previous round in 2017 yielded offshore wind prices of £57.50, so Friday's results represent a substantial decline. The biggest winners (PDF) included SSE, Equinor and Innogy.

The U.K.'s contracts for difference (CFD) system issues 15-year contracts at a given strike price. If the wholesale power price drops below that rate, the government tops up their revenue to match it. If the wholesale price is above the strike price, the project owner pays the difference back to the government.

The winning projects are all to be delivered by 2024-25, with half the capacity due in 2023-24. Official forecasts currently expect 2024’s wholesale electricity price to land around £58 per megawatt-hour.

Shimeng Yang, Wood Mackenzie senior research analyst, said the new projects would ultimately cost the government nothing. That changes the conversation around the fourth round, scheduled for 2021.

"It will focus on capacity caps to ensure competitiveness, as well as volume needed to reach the 30-gigawatt offshore wind target by 2030," Yang said. "Furthermore, the declining U.K. offshore wind strike prices will force developers to prepare for bids below current power prices or to follow a pure merchant route to market."

The latest round's record-low strike prices of between £39.65 and £41.61 per megawatt-hour (in 2012 prices) is equivalent to roughly £45 to £47 per megawatt-hour if indexed to 2019 prices. That compares to expected average wholesale prices of £45 per megawatt-hour in 2019 in the U.K., Yang said.

Take note, Europe

Giles Dickson, CEO of the trade body WindEurope, called it the world’s largest wind energy tender round in a glowing assessment of the U.K.'s status in the sector.

Dickson said, “They have the largest auction plans: 2 gigawatts a year to 2030. They have the best auction model, the two-sided CFD…[which] delivers the lowest overall societal costs. And they have the best model for government-industry collaboration with the wind industry committing to 27,000 jobs on the back of the government’s commitments on future auctions." 

"Other European countries should take careful note as they finalize their offshore wind plans as part of their 2030 National Energy and Climate Plans," Dickson said.

SSE Renewables was awarded 2.2 gigawatts of the winning offshore capacity. The firm’s managing director, Jim Smith, said in a statement that it was now time for the government to raise its targets for the sector.

“Looking beyond this allocation round, we believe the U.K. government must raise its ambition above 30 gigawatts of offshore wind by 2030. Only by doing so can the country set itself on the right path toward future carbon budgets and meeting the challenge set by government to achieve net zero emissions by 2050.”

The tender, which was restricted to immature technology, also awarded 33.6 megawatts to advanced waste-to-energy projects and 275 megawatts of “remote island wind” projects. These are built on Scotland’s windier and more far-flung islands where greater wind resources come with higher project costs.

Onshore wind and solar are not currently supported by the U.K. government.


Wood Mackenzie is hosting an invite-only analyst briefing on the U.S. offshore wind sector in Boston the morning of Wednesday, October 23. Email [email protected] to express interest in attending.