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ECEM: Offshore wind will meet cost-cutting goals – Davey

24 Sep 2013 12:02:18 | ecem

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UK energy secretary Ed Davey told ICIS this month he remains confident the offshore wind sector can meet its tough cost-cutting target and hit £100/MWh by 2020, “based on what I have seen and conversations I have had with industry”, he said.

This is the case despite the proposed £135/MWh strike price for offshore wind generators, effective for projects brought online in 2018-2019 under the forthcoming contracts for difference (CfD) subsidy model – a potential windfall for any generator with costs approaching a £35/MWh discount to the strike price.

The figure is a relatively modest drop from £155/MWh for projects brought to the grid in 2015-2016, given the short three-year gap, further fuelling the perception that the 2020 goal cannot be realised.

The offshore wind industry is in the midst of a high-profile cost-cutting push, headed up by a government-sponsored cost reduction task force.

The drive gained much traction last year with the publication of the task force’s first report, while a study published by offshore wind site lessor the Crown Estate also backed the target, citing rapid growth, technology acceleration and supply chain efficiency as a means of pulling down costs.

The publication of the £135/MWh strike-price was read by some as a stark indication that the Davey-headed Department of Energy and Climate Change (DECC) did not expect the offshore wind industry to meet this target – a target that could have a major impact on ROCs values, with offshore wind the most influential swing factor across the market.

If costs are pulled down and capacity employment picks up, as the government hopes they will, a particularly windy year can result in very weak pricing for ROCs in that compliance period (CP), because the calculations used to set suppliers’ quotas in any given CP cannot begin to account for climactic conditions.

Already ROCs traders are citing rapid UK offshore wind deployment as the primary factor driving a cautious approach to the market, with participants in fear of overly extending into long positions in light of very weak ROC values in recent years.

On track

However, despite the connotations of the £135/MWh strike price, Davey said the industry was on track to slash costs in line with the target.

He defended the strike price on the grounds that, when the levy control framework which caps the collective subsidy pool for low-carbon energy is taken into account, the strike price is the most effective means of bringing forwards 8-16GW of offshore capacity. “We don’t just want to write a blank cheque for industry,” he said.

The 8-16GW figure is a relatively wide spread in terms of capacity forecasts, indicating that DECC sees value in remaining explicitly technology neutral, rather than trying to second-guess the complex economics of the energy industry at a time of low-carbon transition. By not backing a technology, the department cannot be accused of backing a loser.

And despite the obvious advantage to maintaining an air of confidence in light of the investment community’s tough stance in such matters, Davey’s sentiment was shared by turbine manufacturer Siemens’ government affairs director Mike Rolls.

“The industry is becoming more and more competitive,” Rolls said. “There is competition among all of us, which means that we have to generate at lower and lower costs, otherwise we would not be able to compete with each other, and we would not compete in the global marketplace. If we can get costs down, a rise in deployment follows.”

On the other hand, Denmark-based DONG Energy’s UK country manager Benj Sykes questioned this final assumption, saying that capacity deployment was necessary first, in order for costs to fall. “This opens up an interesting chicken-or-egg question,” he said. “One must come before the other, but which is first?” Jamie Stewart

UK energy secretary Ed Davey told ICIS this month he remains confident the offshore wind sector can meet its tough cost-cutting target and hit £100/MWh by 2020, “based on what I have seen and conversations I have had with industry”, he said.

This is the case despite the proposed £135/MWh strike price for offshore wind generators, effective for projects brought online in 2018-2019 under the forthcoming contracts for difference (CfD) subsidy model – a potential windfall for any generator with costs approaching a £35/MWh discount to the strike price. The figure is a relatively modest drop from £155/MWh for projects brought to the grid in 2015-2016, given the short three-year gap, further fuelling the perception that the 2020 goal cannot be realised. The offshore wind industry is in the midst of a high-profile cost-cutting push, headed up by a government-sponsored cost reduction task force.

The drive gained much traction last year with the publication of the task force’s first report, while a study published by offshore wind site lessor the Crown Estate also backed the target, citing rapid growth, technology acceleration and supply chain efficiency as a means of pulling down costs.

The publication of the £135/MWh strike-price was read by some as a stark indication that the Davey-headed Department of Energy and Climate Change (DECC) did not expect the offshore wind industry to meet this target – a target that could have a major impact on ROCs values, with offshore wind the most influential swing factor across the market.

If costs are pulled down and capacity employment picks up, as the government hopes they will, a particularly windy year can result in very weak pricing for ROCs in that compliance period (CP), because the calculations used to set suppliers’ quotas in any given CP cannot begin to account for climactic conditions. Already ROCs traders are citing rapid UK offshore wind deployment as the primary factor driving a cautious approach to the market, with participants in fear of overly extending into long positions in light of very weak ROC values in recent years.

However, despite the connotations of the £135/MWh strike price, Davey said the industry was on track to slash costs in line with the target. He defended the strike price on the grounds that, when the levy control framework which caps the collective subsidy pool for low-carbon energy is taken into account, the strike price is the most effective means of bringing forwards 8-16GW of offshore capacity. “We don’t just want to write a blank cheque for [the] industry,” he said.

The 8-16GW figure is a relatively wide spread in terms of capacity forecasts, indicating that DECC sees value in remaining explicitly technology neutral, rather than trying to second-guess the complex economics of the energy industry at a time of low-carbon transition. By not backing a technology, the department cannot be accused of backing a loser. And despite the obvious advantage to maintaining an air of confidence in light of the investment community’s tough stance in such matters, Davey’s sentiment was shared by turbine manufacturer Siemens’ government affairs director Mike Rolls. “The industry is becoming more competitive,” Rolls said. “[This] means that we have to generate at lower and lower costs, otherwise we would not be able to compete. If we get costs down, a rise in deployment follows.”

On the other hand, Denmark-based DONG Energy’s UK country manager Benj Sykes questioned this final assumption, saying that capacity deployment was necessary first, in order for costs to fall. “This opens up an interesting chicken-or-egg question,” he said. “One must come before the other, but which is first?” Jamie Stewart

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