Labour's energy policies face challenges despite a 'record' wind power auction.
The government's recent auction for offshore wind capacity defied predictions, with winning projects landing at approximately £91/MWh, compared to the expected £100/MWh. This achievement has sparked optimism from Ed Miliband, the energy secretary, who hailed it as a significant step towards achieving clean power by 2030. However, the reality is more complex.
The auction's success can be attributed to the competitive bidding process, which has proven the value of competitive tension. Yet, it also highlights two critical aspects of offshore wind and the broader clean energy transition.
First, the era of offshore wind becoming cheaper each year is over. The previous auction in late 2024 secured capacity at £82/MWh, but these contracts were for 15 years. Miliband's shift to 20-year contracts likely reduced the headline numbers by £5/MWh, making a like-for-like comparison closer to £96/MWh, an inflation of 17%. This indicates a significant departure from the price drops witnessed in 2022.
Second, the rollout of offshore wind at these prices won't significantly reduce electricity costs. The difference between £91 and a theoretically neutral price of £94 doesn't exert substantial downward pressure on bills. While more renewables provide protection against gas price spikes, it's important to note that Wednesday's inflation-linked prices are locked in for 20 years in a system already producing some of the highest electricity prices in the developed world.
Onshore wind and solar, with auction results expected in a fortnight, are anticipated to be cheaper. However, offshore wind, with its higher generating capacities, remains the backbone of the renewables sector. Energy analysts predict that 'whole system' savings from a renewables- and nuclear-heavy system will only become apparent around 2040.
Despite these challenges, offshore wind is essential due to the impending closures of several nuclear power stations and the aging of a third of the gas power plant fleet. As Miliband pointed out, building new gas plants is also costly, with supply chain bottlenecks driving prices to £147/MWh. This highlights the trade-offs in the energy transition.
The urgency of hitting Miliband's 2030 clean power target, defined as 95% generation from low-carbon sources, is questionable. The deadline was always artificial, and the government is likely on track for 85%-90% after Wednesday's auction. The focus should be on making electricity cheaper or at least not more expensive to encourage the adoption of electric vehicles and heat pumps.
The most pressing energy-related questions revolve around cost reduction. Can the £80bn bill for rewiring the electricity grid be significantly lowered? Will new transmission cables arrive before new wind farms are built, preventing 'constraint' payments that run into billions? And what is the government's strategy for gas, especially the backup system for cold, windless winter days, despite the warning of an 'emerging risk' of gas supply shortages by 2030?
