By Gavin Smart, Head of Analysis and Insights
Following further analysis and industry discussions, this article contains a number of amendments to the blog originally published on Monday 13th September. It is now more widely understood that the reference price year for estimating budget affordability is 2028/29 (see methodology note). This simplifies the analysis considerably (for once!) as we can estimate a single strike price which affords the consented capacity for the given budget in each technology. We have also amended our estimate of current consented offshore wind capacity to 5.75GW.
By popular demand, the following table shows a quick snapshot of key figures for offshore wind and floating offshore wind, which have a defined budget pot and a minima respectively.
The UK Government’s Department for Business, Energy and Industrial Strategy (BEIS) published the Draft Allocation Framework for the Fourth Allocation Round, 2021 on Monday 13th September. Following is ORE Catapult’s analysis of the amount of affordable capacity for different offshore renewable energy technologies based on the published draft framework.
Key figures are shown in Table 1. Inputs are in blue font, calculated values in black. All £ figures are in 2012 terms.
The final row in Table 1 shows the affordable capacity in each pot if bidders bid at the administrative strike price ceilings.
*Note we have assigned the balance of Pot 2 to Tidal Stream Energy for illustrative purposes – we are Offshore Renewable Energy Catapult after all!
At admin strike price ceilings, we estimate affordable capacities as:
Offshore Wind (OSW) 2.75GW; Floating Offshore Wind (FOW) 54MW and Tidal Stream Energy (TSE) 53MW. Total affordable at admin strike price ceilings 3.0GW. On the face of it, this looks like a low number, however….
As in previous allocation rounds, we expect actual bids will be below (and in some cases significantly below) the administrative price ceilings and so these headlines must be read in the context of the following analysis. The capacity affordable for each technology depends on the strike prices bid and awarded. You should use the curves shown in Figures 1 to 3 to understand what MW or GW capacity is affordable at different strike prices for each technology.
AR3 (in 2019) awarded 5.5GW of OSW at a weighted average strike price of £40.67/MWh (much lower than the £46/MWh admin price ceiling for AR4). Further reductions seem to be the expectation as applying the same weighted average strike price of £40.67 in AR4 would only afford 4.6GW of OSW (a decrease of 16% compared to AR3). The UK pipeline of consented OSW projects is currently sitting around 5.75GW with a further ~5.7GW in the planning system. According to our analysis, affording 5.75GW of offshore wind from a budget of £200m would require an average strike price of approximately £39.15/MWh. To afford 10GW would require an average strike price around £36.50/MWh.
We have not performed detailed analysis for Pot 1 Established technologies but included the capacity cap of 5GW and monetary budget of £10m in Table 1 (and included Onshore Wind capacity factor to provide an affordable capacity) for completeness.
Estimates of affordable capacity are based on the budget draw per MWh being equivalent to strike price minus BEIS reference price for the relevant commissioning year. The applicable BEIS reference price used in this analysis is £32.85/MWh for 2028/29 since “the applicable Valuation Years will be the two financial years following the final applicable Delivery Year” (i.e. 2 years after 2026/27 for OSW, FOW and TSE). As the 2028/29 reference is the lowest of all valuation years, it is the price which will set the affordability.
It is worth noting that the BEIS reference prices for OSW and FOW are lower than those for established technologies, which in turn are lower than the reference prices for TSE. The framework document contains the explanation but at a high level it relates to the expected “capture prices” for the different technologies (eg. OSW on average expected to capture lower market prices due to timing and variability of output, compared to TSE being considered more as capturing baseload due, in part at least, to predictability).
At the admin price ceiling of £46/MWh, 2.75 GW of OSW can be afforded from the annual budget of £200m.
To award 5.75GW of consented capacity will require average strike prices of £39.15/MWh.
To award 10GW of capacity (nice round number and takes into account further projects in the planning system achieving consent and grid connection agreement in time for AR4) will require average strike prices of £36.50/MWh.
For reference, the weighted average strike price of £40.67 achieved in AR3 would afford 4.6GW.
Figure 1 shows the results of our analysis, with the curve showing affordable capacity (Y-axis) against strike prices (X-axis). The intersections between the curve and dotted lines show the strike prices needed to afford 5.75GW and 10GW.
At the admin price ceiling of £122/MWh, 54MW of FOW can be afforded from the annual budget of £24m.
To award 108MW of capacity will require average strike prices of £77.25/MWh.
Figure 2 shows the results of our analysis, with the curve showing affordable capacity (Y-axis) against strike prices (X-axis). The intersection between the curve and dotted line show the strike price needed to afford 108MW.
At the admin price ceiling of £211/MWh, 53MW of TSE can be afforded from the annual budget of £31m. Note that this is just a working hypothesis for this analysis that TSE could bag all the remaining Pot 2 budget (i.e. £55m total minus £24m FOW ring-fence). We know a number of other technologies are highly likely to bid in to this pot.
To award 120MW of capacity (our estimate for eligible capacity) will require average strike prices of £114/MWh.
Figure 3 shows the results of our analysis, with the curve showing affordable capacity (Y-axis) against strike prices (X-axis). The intersection between the curve and dotted line show the strike price needed to afford 120MW.