How can the UK secure its offshore wind future?
Changes need to be made to get the UK back on top in offshore wind
Much has been said about the potential for offshore wind to help us achieve Net Zero.
But there is much more to it.
The offshore wind industry has the potential to provide much wider opportunities for the UK economy.
However, with rising international competition for investment, and the recent failure of the Contracts for Difference scheme to support any offshore wind projects, the UK must do more to fully reap the benefits of the growing offshore wind industry.
According to research by Offshore Energies UK (OEUK, Business Outlook 2022), the UK’s offshore energy producers plan to invest £200-250 billion to help the UK reach its target of 50GW of offshore wind capacity by 2030 (currently c.14GW). The scale of this investment means that opportunities for UK businesses in the UK offshore wind industry are plentiful.
The UK has long been a leader in this space, having one of the largest installed capacities of offshore wind energy in the world, but is now facing increasing competition from other countries. This requires the UK to decide which parts of the value chain it wants to have the skills to compete in and then put in place measures to remain competitive.
In this post, we will be examining the opportunities available to UK businesses and the range of barriers different companies might face in trying to seize these opportunities. We will argue that while the UK has several measures in place to support its position in the market, such as the Contracts for Difference (CfD) scheme and the Offshore Wind Sector Deal, these are not currently sufficient and more needs to be done.
The expansion of offshore wind can help promote economic growth
The UK aims to increase the proportion of offshore wind investment that is sourced from UK suppliers from 49% (2019) to 60% (for projects commissioning from 2030 onwards).
This will allow the UK offshore wind market to deliver £2.6 billion in Gross Value Added (the value that UK companies have added to the economy by building offshore wind) per annum by 2050.
The main growth areas for the UK are a doubling of UK input to turbines (from 5% to 10%) and more than tripling UK-sourced input for other activities (from 2% to 7%).
Figure 1(a): Aggregate of UK content for recent projects (top); and aspirations for projects constructed in 2030 (below)
Figure 1(b): Aggregate of UK content - aspirations for projects constructed in 2030
Source: Catapult, Offshore Renewable Energy, Guide to an offshore windfarm 2019
The UK government has set an ambitious target of increasing offshore wind industry exports fivefold (from 2019) to £2.6 billion by 2030.
UK-based companies are well-positioned to export their offshore wind industry knowledge. The UK was one of the first countries to develop a large-scale offshore wind industry, and as a result, UK companies have accumulated a wealth of experience and expertise in the area. Additionally, the UK has a well-established and diverse offshore wind supply chain. UK-based companies are increasingly exporting their offshore wind industry knowledge to other countries around the world. For example, SSE Renewables has partnered with a number of Chinese companies to develop offshore wind projects in China.
The offshore wind industry will continue to generate opportunities for the workforce as it offers diverse job roles across various skill levels. The industry’s growth means a continuous demand for skilled workers. The sector is expected to create over 97,000 jobs by 2030 (an increase from 31,000 currently).
This should have a positive impact on regional economies in the UK, providing investment and employment opportunities, and helping to revitalise coastal communities. It is likely to be a major boost to the government's levelling up agenda as most jobs are expected to be concentrated in regional manufacturing areas such as the Humber Estuary and Teesside.
There are obstacles to be overcome to maximise these opportunities.
Unfortunately, the UK can no longer assume it has a competitive advantage as a destination for low-carbon energy investments – other countries are encouraging investments including through subsidies.
In 2021 alone, China built more offshore wind capacity than the rest of the world (combined) had built in the previous 5 years.
Figure 2: Global Offshore Market Outlook to 2031 (GW)Actual value for 2021, expected values 2022-31
In fact, data produced in 2020 showed that European offshore wind investment had declined by 10% compared to the previous year and that investment in the UK had fallen by 49%.
This decline is likely due, in part, to increased competition from other countries, driven by the major incentive schemes that some countries have put in place. The US has set a target of reaching 30GW of operating offshore wind capacity by 2030. To make this happen, in September 2022, the US government allocated tax credits for wind component manufacturers, as part of the $370 billion of clean energy measures included in Biden’s Inflation Reduction Act. Twelve months after passing, the Act’s impact in industrial investment, new jobs, and other economic activity already exceeds early estimates.
Likewise, the European Union’s REPowerEU package, introduced in 2020, includes measures to increase investment in renewable energy, such as tax incentives and investment funds as well as funding for research and innovation in renewable energy; aimed at developing new technologies and improving the competitiveness of existing ones.
In contrast, there have been concerns in the UK that the government is not doing enough to maintain the attractiveness of the UK for offshore wind investment. In February, four leading trade associations (EnergyUK, the Nuclear Industries Association, RenewableUK, and Scottish Renewables) wrote a joint letter to the Chancellor to express their view that the government lacks a clear plan to continue attracting clean energy investment into the UK.
Government has sought to support the offshore industry
The UK government has put several measures in place to support the offshore wind sector, including:
The Offshore Wind Sector Deal which was signed in 2019. This is a long-term partnership between government and industry to accelerate the growth of the offshore wind sector. The deal committed £557 million of funding over five years and included investment in infrastructure, research and development, and skills development.
Initiatives to support the development of skills in the sector, including apprenticeships, work-based learning programmes, and research and development projects.
The Contracts for Difference (CfD) scheme, introduced in October 2014. CfDs incentivise investment in renewable energy by providing a subsidy to developers of projects with high upfront costs and long lifetimes to protect them from volatile wholesale prices, as well as protecting customers from increased costs when electricity prices are high. Since its inception, the CfD scheme has facilitated investments in 29.4 GW of renewable energy generation. However, we should reflect on the outcome of the September 2023 CfD auction which received no bids for offshore wind projects - developers considered the budget for annual subsidies too low at a time when costs for offshore wind developers are estimated to have risen up to 40%.
More needs to be done to help the UK maximise the benefits from the offshore wind industry
Industry players have challenged whether the government’s 2030 target of 40GW of offshore wind remains realistic, even with major government intervention. In response to this, on 16 November 2023, DESNZ announced that the maximum strike price for offshore wind projects has been increased by 66% for the sixth CfD allocation round. Offshore wind will also be given a separate funding pot to reflect the high number of projects ready to bid.
Separately, the sector has established an Offshore Wind Innovation Group. A key focus of the group is on increasing the efficiency of offshore windfarms while reducing lifecycle costs.
However, we think there is room for more action to promote the industry. The UK offshore wind industry requires a more robust and consistent government policy to attract investment and reduce reliance on imported components.
The UK has the opportunity to enjoy environmental and economic benefits from the growth of the offshore wind industry but changes need to be made
In the past, the UK has been attractive for offshore wind investments, not least because of the CFD scheme and investment funding.
But, over time as other countries have developed their own incentive programmes, the UK has not kept up. This has been demonstrated most recently, by EY’s November 2023, biannual global ranking of the most attractive places for investment in renewables, showing the UK falling three places to seventh for overall renewables, and losing its top spot at the most desirable destination for offshore wind investment to the US.
Whilst the government has put in place schemes to support the expansion of skills in the sector, these need to be accompanied by fiscal incentives to encourage inward investment if the objective of creating the 97,000 additional jobs in the sector by 2030 is to be achieved.
There is an opportunity for the UK to enjoy increased economic benefits from offshore wind investments, but it is in competition with other countries with similar objectives. Policy decisions need to be made now.
