Britain's Record Renewables Auction Rescues Offshore Wind by Accepting Higher Prices. That Was the Right Call
On 3 September 2024 the UK government announced the results of the sixth allocation round of its Contracts for Difference scheme. AR6 awarded contracts to a record 131 projects with a combined capacity of about 9.6 GW. Offshore wind secured about 4.9 GW, including 3.36 GW of new fixed-bottom projects such as Ørsted's Hornsea 4 and ScottishPower's East Anglia Two, at a strike price of GBP 58.87 per megawatt-hour in 2012 prices, and about 1.58 GW from projects that had reduced previously contracted capacity and re-entered, at GBP 54.23.
The offshore wind clearing price was around 19 per cent below the administrative cap of GBP 73. Solar, onshore wind, floating offshore wind and tidal projects also won contracts. The result is a sharp recovery from AR5 a year earlier, when no offshore wind projects bid at all because the government's administrative strike price was too low to cover the higher costs of turbines, steel and finance that followed the 2022 inflation shock. Our view is that the new government was right to raise the ceiling and enlarge the budget.
The administrative strike price for offshore wind in AR5 was GBP 44 per megawatt-hour in 2012 prices. That was set on the basis of cost assumptions that had been overtaken by events. For AR6 the government raised the administrative strike price for fixed offshore wind to GBP 73 and increased the budget for the round. That gave developers room to bid at levels that reflected the new cost environment. In today's money, that price is substantially higher than the 2012-price figure suggests, because contract prices are indexed to inflation.
Even so, it compares well with the expected cost of new gas-fired generation once carbon prices and fuel costs are included, and it provides price stability over the contract's life. The size of the auction budget determines how much capacity can be bought at a given price. AR6 is a useful signal for other European markets that have struggled with offshore wind auctions.