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26 | 20TH - 26TH MARCH 2015 | UTILITY WEEK Finance & Investment Market view T he cost of electricity produced by the UK's offshore windfarms is falling. And you don't need to take my word for it – the evidence is out there for everyone to see. A report commissioned by the UK's Offshore Wind Industry Council (OWIC) has given us hard facts. Delivered by the Offshore Renewable Energy Catapult (ORE Catapult) in collaboration with The Crown Estate, the report was based on analysis of data gathered from offshore windfarms in UK waters by consultants Deloitte and DNV GL. The so-called Cost Reduction Monitor- ing Framework (CRMF) report concluded that the lifetime cost of energy from offshore wind dropped from £136 per megawatt hour (MWh) in 2011 to £121 per MWh for projects moving to construction between 2012 and 2014. This alone is really encouraging news, but it is always good to see the trend under- pinned by additional real-time data from the marketplace. And we have it. On the day OWIC published its report, we got the eagerly anticipated outcome of the first ever UK contracts for difference (CfD) auction run by the Department of Energy and Climate Change. This saw two major windfarm projects – East Anglia 1 (43km off the Norfolk/Suffolk coast) and Neart na Gaoithe (in the outer Firth of Forth, 30km north of Torness) – offered contracts at strike prices of £119.89p and £114.30p for projects deliverable in 2017-18 and 2018-19, respectively. We need to keep a couple of things in mind when comparing the two new sources of pricing data. First, the OWIC numbers are "levelised", so they are measured across the longer whole life of a project, not just the 15 years covered by government strike prices. Second, the OWIC study looked retrospec- tively at projects delivered between 2011 and 2014, while the CfD auction strikes look for- ward to projects delivered two or three years ahead in the future. But, whichever way you cut the numbers, the offshore wind industry is visibly deliver- ing on its promise to lower the cost of the electricity it produces. Innovation is bringing down costs incrementally with each round of construc- tion projects and, developers know they must seek competitive advantage if they are to be successful in the CfD auction process. OWIC's report suggests that, while further challenges lie ahead, industry targets to achieve a 30 per cent electricity cost reduc- tion for projects reaching final investment decision (FID) in 2020 look achievable. Dong Energy has set itself an industry-leading target of €100 per MWh for offshore wind projects in the same timescale. So cost monitoring data and strike price announcements are demonstrating that industry is delivering on its price reduction promise, underpinning the case for offshore wind to play a significant role in the UK's future sustainable energy mix. So where are cost reductions being achieved? The CRMF report identifies the industry's early adoption of larger tur- bines as the biggest single contributor to cost reduction. Where 3MW turbines were the industry standard until recently, 6MW machines are already generating on projects such as Dong Energy's Westermost Rough, 25km north of Spurn Head at the river Hum- ber estuary. Even larger 7-8MW turbines are waiting in the wings. Bigger turbines, allied to extra-large monopole foundations, and the support of improved operation and maintenance are all helping to drive down project costs and so electricity production costs are falling. The government has taken some flak for insisting that a relatively new generating technology such as offshore wind should be nurtured to maturity. But there was a clear risk of a hiatus in the development pipe- line as the old Renewables Obligation was retired under Electricity Market Reform to be replaced by CfD. Some sections of the media leapt hard on the process under which five offshore windfarms were awarded FID enabling contracts in April 2014. But the contracts, allocated through an administrative pro- cess, were always designed to be a bridging process to main- tain momentum in the offshore wind pipeline. And that is just what they have succeeded in doing. They have enabled projects such as the Burbo Bank Extension in Liverpool Bay to move into construction. They have also provided the catalyst for new contracts to be placed, which have encouraged international component sup- pliers to commit to locating manufactur- ing operations in the UK. This will have a knock-on effect throughout the supply chain, building home-grown content, and creating jobs. But what about the scare stories about the frightening impact on domestic energy bills? A timely poll carried out for the trade association Renewable UK found that the average estimate of how much people in the UK think that wind power subsidies add to the typical household dual-fuel bill is 14 times the amount they actually add. The average estimate among the 2,000 people surveyed was that they added a hey £259. In reality, the figure is just £18. So costs are coming down and comple- tion is increasing. Stories of the demise of offshore wind are greatly exaggerated. There is still much work to be done to demonstrate that electricity price targets can be met. And there are uncertainties around the support the industry can expect post-2020. But the sector is in good shape and the UK will con- tinue to hold the accolade of world leader in installed offshore wind capacity for some time to come. Brent Cheshire, UK country chairman, Dong Energy Offshore has wind in its sails Despite scepticism from some quarters about the affordability of offshore wind, Brent Cheshire is adamant that the technology works and its costs are coming down. "The average estimate of how much people in the UK think that wind power subsidies add to the typical household dual-fuel bill is 14 times the amount they actually add"