Has UK offshore wind farming become too costly?

Has UK offshore wind farming become too costly?

20th May 2008
By EBR Staff Writer

In a market characterized by price increases and turbine scarcity, the UK government has failed to enact regional climate policies that encourage and optimize the proliferation of UK offshore wind projects. Indeed, the promotion of wind investment structures has been undermined by the prevailing quota and certificate subsidy mechanism, as well as severe planning permission limitations.

If Shell is to be criticized for recently announcing, in an untimely fashion, that the company is pulling out of one of the largest offshore wind farm projects that the world has ever seen - the London Array - then the finger of blame should also be pointed firmly at a government that has largely failed to optimize the take-up of wind projects in the UK.

The UK operates a quota and certificate subsidy mechanism called the Renewables Obligation (RO). It is designed to promote and incentivize the generation of electricity from eligible renewable sources in the UK by placing an obligation on suppliers to source a growing proportion of electricity from renewable sources. Suppliers then meet their obligations by presenting Renewables Obligation Certificates (ROCs).

In practice, the RO mechanism has proved to be generous, yet overly complex, and has been marred by uncertain ROC prices. Coupled with the difficulty in getting wind farm development applications through the UK's planning system, these two limiting factors have done little to encourage the building of new wind turbines in order to meet the government's exacting renewable energy targets at a time when energy companies fear a renewables bubble. Indeed, record demand means that the global wind energy industry is currently having to overcome significant pricing and supply challenges as wind farm valuations reach an all-time high.

With the estimated cost of the London Array project increasing from GBP1m per MW in 2003 to GBP2.5m per MW in 2008, a Datamonitor cost and profitability model shows that the project would be heavily loss making (based on realistic UK financing standards and structures, the current UK RO framework, and turbine efficiency characteristics). However, a recent Datamonitor report entitled "Wind power market entry strategies - build or buy?" reveals that UK offshore wind projects can be profitable, provided that costs are kept below the break-even point of GBP1.45m per MW capital cost and a three years generation lead time (under realistic UK financing standards and the current RO framework). It also shows how UK offshore wind development costs have soared over the past few years and how this has made the economics of such projects marginal at best.

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