What the UK CfD auction fails for offshore wind could indicate for the Baltic [sea] Wind Farm

In early September, the British energy sector was rocked by the news of the first ever failed auction for offshore wind development. The causes and consequences of this event are also relevant to Lithuania, which this summer selected a developer for the Baltic Sea Wind Farm, but continues to complicate the development of commercial solar farms.

October 3, 2023

The UK is particularly favourable to offshore wind generation and is the world's second largest producer of offshore wind energy (after China). Building on this success, the UK has been pushing offshore wind as the flagship of its Net Zero ambitions and aims to triple its offshore wind capacity by 2030.

Such ambitious targets require a steady stream of projects to begin construction every year. It is therefore unsurprising that the British opposition is calling the auction for offshore wind development, which failed for the first time since 2014, an "energy security disaster".

The reasons for this failure are complex, but also relevant for future offshore wind farms: potential developers were no longer satisfied with the guaranteed minimum tariffs, while the risk to the projects' viability was exacerbated by the high cost of offshore wind components and globally disrupted supply chains. In other words, even with guaranteed minimum tariffs for offshore electricity (£44 per MWh, indexed from 2012), developers are now questioning whether the high cost of construction will pay off and whether the projects will even be completed on time.

In fact, offshore wind projects in the UK and other Western countries started to stall some time ago for these reasons. In July, the Swedish energy giant Vattenfall announced that it was suspending a massive 1400 MW offshore wind farm project in the UK, which it won just last year, on the grounds that costs had risen by 40% in the meantime. In September, the CEO of Orsted, the world's largest offshore wind farm developer, publicly announced that the company would pull out of planned projects in the US if the government did not show more commitment to offshore wind. Similar reasons are cited - challenges in supply chains, rising interest rates and lack of new (tax) incentives.

Some of these problems were indirectly created by Western governments themselves, who set ambitious green energy targets but did not think about the corresponding equipment production capacity. In the first half of this year, 2.1 GW of offshore wind projects were built in Europe, but this year the whole market has started to talk about the lack of turbine or cable factories, as well as the corresponding port infrastructure, dedicated ships and staff. And to meet the EU's own offshore wind targets of 60 GW of installed capacity by 2030, the volume of projects would need to be around three times higher than today.

The development of offshore wind is a crucial component in Europe's efforts to become a climate-neutral continent, but its current problems are a reminder of an old truth: the free market is the most efficient and self-regulating mechanism.

In the UK, solar farms are expanding at a breakneck pace, recently outnumbering onshore wind in terms of new added projects, and developers are bidding the lowest on the market. Although offshore wind accounts for 19.2% of the current British energy pie and solar just 2.3%, solar development has recently accelerated. In the first quarter of this year, the country saw 0.4 GW of solar installations and just 0.3 GW of offshore wind. And in the last auction, where offshore wind did not submit a single bid, the highest volume of bids came from solar developers - 1.9 GW. 

Across Europe, a solar boom has been witnessed in recent years. Last year alone, 41.4 GW of solar projects were installed in the EU - 47% more than in 2021 and twice as many as in 2020. Despite this growth in the sector, around €7 billion worth of solar modules are now stockpiled in Europe's ports and warehouses, awaiting new projects that will guarantee a stable supply of key components and further boost the competitiveness of solar energy.

Therefore, artificial interference in the Lithuanian market by de-facto reserving grid capacity for certain types of generation, such as offshore wind, may limit the development of other, potentially easier and more rapidly deployable forms of energy, such as solar or onshore wind.

In my opinion, Lithuania does not have the luxury of waiting and being picky: last year alone, 3.8 GW of developers showed their willingness to develop solar parks without any state support. If at least two thirds of these projects were completed, they would provide 100% of Lithuania's electricity needs in the summer season. Meanwhile, by giving priority to offshore wind, which has recently started to fizzle out, while at the same time holding back the development of solar energy, which, on the contrary, is currently the cheapest and fastest technology to implement, Lithuania is increasingly likely to remain an energy island for a long time. Good conditions for the development of solar energy may soon diminish considerably, and Lithuania should take advantage of the unique opportunities that have opened up to meet its electricity needs with cheap and clean energy. 

The answer to this situation is simple - the state must create technology agnostic, competitive conditions for all types of green energy, let the laws of the free market prevail, allowing  the rapid deployment of cheap, green electricity.

Declaration of Interest: Simon Coulson's company Aura Power is developing several hundred MW of commercial solar parks in Lithuania without subsidies, but the implementation of the projects has been severely complicated by decisions of the Lithuanian authorities since July 2022.

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