“Immensely challenging” and pushing the limits “of what is feasibly deliverable”. That was the state-owned National Energy System Operator’sdescriptionof itsown proposalson how to decarbonise electricity generation in Great Britain by 2030. In short, it thought clean power by that date, a key Labour manifesto pledge, was “credible” and “achievable” as long as little went wrong along the way.
Neso’s £200bn plan, detailing a rapid rollout of offshore wind, onshore wind, solar farms plus a major upgrade of the electricity grid, was adopted virtually unchanged by the government at the end of last year.
Now something has gone wrong. Ørsted, the Danish developer,has stopped work on one of the world’s biggest offshore wind projects, Hornsea 4 off the Yorkshire coast. It can’t make the numbers add up. It would rather write off £400m-plus in impairments and the cost of cancelling orders with suppliers.
One windfarm alone, you might think, cannot put a serious dent in the overall 2030 project. Up to a point, that’s true. There is time to catch up and Neso’s report spoke about “some flexibilities at the margin” when it came to technologies – extra solar could substitute for a shortfall in wind. In any case, the precise 2030 target for installed offshore wind capacity hasn’t yet been nailed down; it is between 43 and 51 gigawatts depending on how many carbon capture sites and green hydrogen plants end up being built.
Yet the basic point remains: Hornsea 4 is a bad one to lose. It is a 2.4GW project – vast, in other words – and, whatever fiddles can be made around the edges, Neso was always clear that offshore wind would be “the bedrock” of a cleaned-up system, providing over half of Great Britain’s generation. If the government already needed to secure 20GW of offshore wind in the next couple of years, which is roughly how the blurry maths works out, the requirement has gone up by 10% overnight. A demanding deadline has become even more demanding.
Ed Miliband, the energy secretary, would be within his rights to be furious with Ørsted. The company grumbled about supply chain costs, interest rates and “adverse macroeconomic developments”, but no other offshore developer that won a price contract in last year’s auction round (AR6) has dropped its project. It rather looks as if Ørsted bid too aggressively, was distracted by its woes in the US, or failed to agree contracts with suppliers in time, or all three. Hornsea’s place in the AR6 auction could have been taken by a disappointed bidder, such as RWE.
Alternatively, Ørsted may be engaged in brinkmanship, a question asked by Barclays’ energy analyst. The headline on the company’s announcement said Hornsea 4 would be discontinued “in its current form”, seemingly suggesting it would be back in the game if only the government would cough up more than the £58.87 per megawatt hour at which the AR6 auction settled for offshore wind projects. The energy department’s comment that it would “work with Ørsted to get Hornsea 4 back on track” hinted it may indeed be up for renegotiation. If so, those entitled to be furious would be other AR6 developers who are delivering what they agreed at the original price.
Whatever happens at Hornsea 4, the timing of Ørsted’s move sends a bad price signal (from the point of view of the government and consumers) for AR7, the renewables auction due this summer. The background noise is already complaints from companies about ministerial dithering over whether to switch toa zonal pricing system for electricity; and, if zonal is rejected, what does the alternative of a reformed national market look like? The information is critical to anybody planning to invest in billions in generating capacity.
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The zonal uncertainty had probably already added upwards pressure on prices for new offshore wind capacity. Now Ørsted has created a catch-up problem, while advertising worries over costs.Energyanalysts reckon the government will be lucky to contain inflation in offshore wind contracts to 10%. It could be higher.
Therein lies one problem with setting a rigid 2030 deadline. You can end up paying extra to get the job done on time, or renegotiating major projects from a position of weakness. We’ll reserve judgment until we see the actual prices in the AR7 auction. But 2030,which many energy executives never thought was do-able anyway, already looks too tight for comfort.