Fact check: Major hurdle for UK offshore wind auction was changed by Conservatives

By August Graham5 Sep 2024UK PA Media3 Mins read69

Wind farm builders bid for so-called contracts for difference. — Ben Birchall/PA

Energy Security and Net Zero Secretary Ed Miliband has claimed that “Labour came in and fixed” last year’s failed offshore wind auction.

On social media, the minister wrote: “Last year, the Conservatives oversaw a disastrous result — with ZERO new offshore wind projects. Labour came in and fixed this. The results are power for over 11 million homes with a new supply of clean homegrown energy.”

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The auction round in 2023 was considered a failure for offshore wind largely because the price which companies were allowed to charge was too low. This price was increased before the election by the previous government.

The current Government’s contribution was to increase the budget available in this year’s auction, which likely increased the amount of renewables commissioned.

The facts

Each year, the Government holds an auction which allows companies to bid for so-called contracts for difference (CfD) in Great Britain.

These auctions promise companies they will be paid a fixed price for each megawatt hour (MWh) of electricity their wind farms produce for the lifetime of the contract — which is normally 15 years.

This gives companies certainty that they can invest money up front and still be protected should the price of electricity fall in the future. Due to the reduced risk they can also borrow money at lower interest rates, which reduces the cost of the project. It also protects electricity users should prices soar.

Ahead of each auction, the Government sets aside a budget. Companies bid saying what they can build and at what price per megawatt — this is known as the strike price. The Government then chooses the cheapest project, followed by the second cheapest and so on until the budget has been spent, or there are no more projects left.

Each auction round sets a so-called administrative strike price (ASP). This is the maximum amount that companies are allowed to charge per megawatt hour (MWh) if they want their project to be considered in the allocation round.

In each of the five auctions between 2015 and 2023, the ASP for offshore wind was reduced. That was designed to encourage developers to sell offshore wind power at increasingly lower prices.

In the first auction (known as AR1) the offshore wind ASP was set at £140/MWh in 2012 prices for the earliest delivery contracts. That fell to £105/MWh in AR2, to £56/MWh in AR3, to £46/MWh in AR4, to £44/MWh in AR5, and then it rose to £73/MWh in AR6.

In last year’s auction (AR5) no offshore wind contracts were awarded. This was widely seen as being because the ASP was set too low during the auction. Developers were facing dramatically higher costs due to a spike in global inflation. This left companies unwilling to build offshore wind farms at the same low prices they had previously accepted.

In response, the Government in November 2023 announced that it would increase the ASP to £73/MWh for offshore wind in 2024’s auction. This was when the Conservatives were still in Government.

After Labour came into power in July, it increased the budget allocated to the 2024 auction by £500 million to £1.555 billion in 2012 prices. That included £1.1 billion for offshore wind.

The larger budget likely ensured that more Contracts for Difference could be signed during the auction.