Summary and implications
In our April 2009 edition, we reported how the Government has earmarked £525 in the Budget for offshore wind energy projects over the next two years. Continuing to investigate measures of incentivising offshore wind, DECC has:
- commissioned a report, 'Cost of and financial support for offshore wind' examining the role of the Renewables Obligation
- considered a review of the scheme., andlaunched a small scale grant scheme to incentivise 'next-generation' technology.
Cost of Financial Support for Offshore Wind
Following the Budget announcement, DECC published 'Cost of Financial Support for Offshore Wind' on 27 April 2009, a report prepared by Ernst & Young which considered an assessment of the current capital and operating costs for offshore wind projects in the UK and the historical evolution of the key drivers of these costs as well as an initial assessment of the likely evolution of such costs.
The report considered the level of financial support required to encourage the short-term roll-out of offshore wind projects in the UK and made an outline of alternative support measures that could be considered. The Government commissioned the report as they are aware that the economics of offshore wind projects have been particularly hard hit by a combination of the credit crunch coming at a time when supply chain costs have been rising.
The report illustrates how a combination of factors have led to a significant increase in costs over a relatively short period. These factors include: increased costs due to the immature supply chain; increased foreign exchange costs where the majority of the capital costs are priced in Euros or Danish Kroner and increased cost of risk in the current financial climate.
The report indicates that offshore wind projects at or near financial close in January 2009 have considerably higher costs than an analysis completed in April 2007 which indicated that Renewables Obligation (RO) banding of 1.5 Renewable Obligation Certificates (ROCs) per MWh was appropriate for offshore wind.
The report concludes that if support were to be provided through the existing mechanism of the RO, the number of ROCs per MWh required to provide a reasonable economic return would need to be between 2 and 2.5 ROCs. The report recommends that Government considers providing additional support in the near term to enable projects to proceed, to counteract short term price issues (i.e. exchange rate fluctuations).
Offshore Wind Review
The Secretary of State has decided that the evidence of changes to the costs of offshore wind generation meet the criteria for announcing an early review of the offshore wind banding provisions set out in the Renewables Obligation Order 2009. Therefore, they have announced a review of the support for offshore wind under the RO.
DECC have indicated that if the review confirms the information they have received to date on the costs of offshore wind, they would consult on amending the Renewables Obligation Order with effect from 1 April 2010 so that offshore wind projects qualified for 2 ROC/MWh (building on the current uplift of 1.5 ROCs). This would be subject to conditions which are designed to ensure that the additional support is targeted at projects which would not otherwise proceed, being most affected by the current high costs caused by the supply chain issues and current financial climate.
These changes to the RO would be limited to offshore wind projects which sign contracts between 23 April 2009 and 31 March 2010 and which start offshore works before the end of 2011. The cut-off date of the 23 April 2009 has been introduced as DECC consider that where contracts were signed before the Budget announcement, this was on the basis that projects were commercially viable at 1.5 ROCs/MWh. The proposal to set the cut-off date for eligibility at 23 April 2009 will be subject to the forthcoming consultation.
The consultation will also consider if there is scope to allow projects which sign contracts between 1 April 2010 and 31 March 2011 and start offshore works before the end of 2012 to qualify for 1.75 ROC/MWh.
ETF Offshore Wind Demonstration Call
DECC, continuing its support for offshore wind, has made a call for proposals for demonstration projects for offshore wind technology (the "Call"). The Call was announced on 28 May 2009 and will run until 31 March 2011. The Call aims to provide up to £10m to support a limited number of projects. The scheme aims to stimulate and encourage the development and demonstration of next-generation offshore wind technologies for larger multi-MW turbines to enable their faster deployment within the 2020 timescales, as well as to build the capability of the UK supply chain and industry.
Other aims of the Call have been identified as providing a learning experience which can improve confidence and help reduce future costs and also to produce an economic evaluation of all projects supported by the scheme. The closing date for applications was 3 June 2009.