UK government’s offshore wind farm auction was a ‘disaster’. It could cost bill payers £2 billion

The Tory government’s “disastrous” handling of offshore wind farms could cost UK bill payers up to £2 billion per year, experts have warned.

Offshore wind farms are the backbone of the UK’s renewable energy strategy.

But zero new wind farms will be green-lit this year, jeopardising the government’s apparent plan to decarbonise the electricity system and achieve net zero by 2050.

The UK holds an annual auction where companies bid for contracts to build new wind farms. This year, all of the country’s offshore wind developers boycotted the sale over price disagreements with the Tory government.

Industry trade group RenewableUK claim that the lost wind farms could have saved consumers £2 billion a year – or £24 per household – compared with the cost of using electricity from gas.

“The failure to secure any new offshore wind is a major blow for consumers that could, and should, have been averted,” RenewableUK CEO Dan McGrail said.

“Building wind farms means we stabilise the cost of energy for the long-term and reduce our dependency on fossil fuels, prices of which can be manipulated by dictators and despots.”

Environmental campaign groups have slammed the outcome, with Greenpeace describing the auction as “the biggest disaster for clean energy policy in the last eight years”.

Friends of the Earth accused the government of “missing yet another open goal”.

Here’s how things went wrong – and what it will mean for your wallet. 

How do the government’s renewable power auctions work?

The UK has big ambitions for offshore wind. Ministers have pledged to more than triple current capacity by 2030, reaching 50 gigawatts (GW) – enough to power every home in the UK.

This would be great news for bill payers. Gas prices have soared since Russia’s invasion of Ukraine, while renewables rely on abundant free energy sources like the wind and the sun.

But the government has to secure companies to build these planned renewable projects.

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Every year, the UK invites companies to bid for project contracts. Under the ‘Contracts for Difference’ scheme, successful bidders receive a fixed price from the government for the electricity they generate.

When wholesale electricity prices are lower than the fixed price, the treasury pays the generator the difference. When they’re higher – which is currently the case – the supplier pays money back to the treasury.

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The auction system has helped the UK become a “world-leader” in offshore wind, a spokesperson for the Department for Energy Security and Net Zero claimed.

But the offshore industry says that the fixed price hasn’t kept pace with soaring inflation.

“The administrative strike price was simply set too low for developers to deliver their projects,” said Duncan Clark, Head of UK & Ireland at Ørsted, a leading renewable energy company.

“It’s been clear for some time that the rising cost of capital, materials and services has put huge pressure on the offshore wind industry globally.”

Currently, the government will pay companies a maximum of £44 per megawatt hour in 2012 money, or about £60 per MWh in 2023 prices.

By comparison, a 2023 offshore wind auction in Ireland set a guide price of €150 (£129) per megawatt hour. 

The UK government has defended its auction as a “success”, pointing out that it delivered 2.2GW of new solar capacity and 1.5GW of new onshore wind.

But offshore is the UK’s renewable powerhouse.

Shadow Climate and Net Zero Secretary Ed Miliband accused the UK government of ignoring industry concerns.

“They failed to listen to warning after warning from industry,” he said.

How could the failed offshore wind farm auction lead to higher energy bills?

RenewableUK arrived at the £2 billion figure by comparing the projected 2025 cost of offshore wind power with the projected 2025 cost of electricity from gas – around £150 per MWh.

If the UK had secured 5GW of contracts at the recent auction – as opposed to zero watts – the savings would have hit £2 billion, they claim. 

“Offshore wind remains the UK’s cheapest option for large-scale power, so slowing deployment will cost more and leave consumers exposed to volatile global gas markets for longer,” said RenewableUK’s executive director for policy and engagement,Ana Musat.

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Analysis by independent think tank the Energy and Climate Intelligence Unit (ECIU) suggests a more modest, but still significant, £1 billion loss. The difference is down to slightly different projections of the cost of gas in 2025; ECIU predict gas will cost £100 per MWh.

Regardless, disruption is inevitable for consumers.

“The more renewables, the less gas you have to buy,” said Jess Ralston, energy analyst at ECIU.

“New oil and gas licences don’t bring down bills. Offshore wind farms do.”

Around the world, renewables bring down bill costs. The global power sector saved $520bn (£414 billion) in 2022 thanks to already installed renewables, according to the International Renewable Energy Agency (IRENA).

The result of the UK auction will inevitably hike customer bills, Energy UK’s chief executive, Emma Pinchbeck said.

“Failing to invest properly risks blowing a hole in our ambitions for providing cheaper, domestic energy and puts the UK in danger of going from leader to loser in offshore wind,” she said.

“Customers are still facing historically high bills because of the volatile cost of fossil fuels.”