Record low prices power up the UK's energy sector

All eyes are on UK’s latest clean energy support agreements as cost of wind hits a new low.

September 20, 2019

Offshore wind is continuing its transition to the mainstream with an increasing range of renewable wind energy developments taking part in the UK’s latest contracts for difference (CFD) auction, providing further opportunities for investment into secure, asset-backed clean infrastructure.

UK offshore wind projects likely to attract over £20 billion of domestic and cross-border investment last week won government support agreements including those from SSE, innogy and Equinor. Offshore wind has fallen two-thirds in price since the first CFD auctions in 2015.

The UK government has offered CFDs, which give developers a pre-agreed price for the electricity they produce during the contract, over the past five years to support investment in renewable and low carbon power and provide projects with a stable income.

The latest CFD auction supports nearly 6GW of new renewable energy, enough to power over 7 million homes a year.

With investors from around the world hunting out opportunities in the UK’s offshore wind infrastructure, Dominic Szanto, Energy and Infrastructure director at JLL, explains what the latest auction says about the development of the sector.

What does this latest auction result mean for those investing exclusively in UK offshore wind?

When you consider that more than 9.4GW of offshore wind and some 1GW of remote island wind took part in this auction, it’s a sign of how far things have come. The UK’s ongoing support for new wind farms has helped drive interest in offshore as an energy source. We’ve moved to what amounts to a zero-subsidy environment and the cost of offshore wind has fallen as the industry has grown, in a relatively short space of time. If the UK is to achieve its 70 percent target of electricity coming from low carbon sources by 2030, then CFDs, while keeping energy prices in check for the end-user, play an indirect part in maintaining investor interest.

This is the third CFD auction by the UK government. How has this one differed to those in the past?

Mainland onshore wind did not form part of this auction, something that was challenged via judicial review. But interestingly, remote islands in Scotland have been awarded contracts for four sites, which demonstrates the understanding that onshore wind is the cheapest from of energy and one which can bring genuine benefits to local economies.

Also, this auction saw two advanced conversion technologies, which generate energy through gasification of waste, be awarded contracts. For investors this only a benefit as each form of generation presents a different opportunity, from small to large ticket size, lower or higher risk and diversification.

This must boost appetite for the wider UK renewable energy among global investors even further. But can capital keep flowing into the UK’s renewable energy sector?

We know there’s absolutely no shortage of global funds looking for places to deploy capital in the wider real assets world. The issue, whether you’re an investor in wind, solar, battery or biomass power, is finding the opportunity. Pension funds, sovereign wealth funds and large insurance groups are all battling it out for assets which can offer long-term, reliable income. That’s something the energy sector can and will continue to provide but it’s a highly competitive environment for investors.

Can the UK achieve its ambitious targets while keeping investors interested?

Energy pricing has fallen, and subsidies have virtually disappeared as the UK’s renewable energy sector has matured. But for investors, there’s an element of relativity here, particularly among the growing number of global investment management platforms who are increasingly bracketing infrastructure and real estate as one allocation. Returns may not be what they were half a decade or so ago, but the sector has become highly de-risked and larger investments are available.

Where next?

The proportion of electricity generated by UK renewables grew 33 percent last year, an impressive achievement as the UK aims to meet its clean energy targets.

Government initiatives alongside the CFD auctions are crucial if the sector is to move to a point where there’s enough scale for investors to regularly trade in and out of renewable energy assets. There are also still ample opportunities to invest in smaller scale generation such as solar and battery power; the wider renewable energy sector still has room to grow.