Are we too obsessed with zero-subsidy offshore wind farms?

Swedish utility Vattenfall has won the right to build two wind farms totaling 700MW in Dutch waters with no government subsidies. However, a headlong rush to zero-subsidy projects could make life tougher for wind businesses. Richard Heap reports

It was a good day to bury bad news. Last Monday, Swedish utility Vattenfall set out plans to cut 1,500 jobs from its 20,000 workforce. However, the firm also celebrated a win in the Dutch government’s 700MW Hollandse Kust 1 and 2 offshore auction – and the latter story dominated wind industry headlines last week.

The two projects, each set to measure 350MW, are all the more notable because they could be the first zero-subsidy offshore wind farms completed anywhere in the world when they complete, due in 2022. The zero-subsidy projects awarded support in the first German offshore wind auction last year are not due until after 2024. This could be an exciting period for the wind industry.

And yet, we see reasons to be concerned about the rush towards ‘zero-subsidy’ offshore wind farms. Some of these were summed up neatly by Scottish Power CEO Keith Anderson during an Aurora Energy Research conference in the UK last week.

He said he hated the phrase ‘subsidy-free’ and can’t see why the industry is becoming “obsessed” with it. It means that wind farm owners will be relying solely on wholesale power prices, which is a risk he said he isn’t prepared to take.

“If you’re looking at building a £2.5bn offshore wind farm in the UK, if you think I’m going to do that at market risk, you’re bonkers,” he said. “In the UK, nothing in this industry [i.e. the energy industry] is built without some sort of support.”

Equinor’s Irene Rummelhoff gave a similar warning last September that zero-subsidy projects could “ruin the reputation of the industry” if they’re not done successfully – although she did say in December that the company had submitted a zero-subsidy bid in this Dutch auction. It isn’t a path that Scottish Power, which is owned by the Spanish utility giant Iberdrola, is keen to follow.

Anderson said that going ‘zero-subsidy’ raised the risks for wind farm owners, or pushed them to try to secure corporate power purchase agreements – even though deals big enough to support offshore wind farms don’t exist. He said the UK should continue to support offshore wind farms via Contracts for Difference, as well as new onshore wind farms, because they give long-term certainty to the wind farm owner and the government. This kind of long-term government support is important.

And Vattenfall CEO Magnus Hall also backed the use of CfDs.

We can see why the wind industry is keen to shout about ‘zero-subsidy’ schemes. It shows that the offshore wind sector is becoming even more competitive with other energy sources. However, it could also push operators into an impossible corner.

For one, it suggests many people in the wind industry don’t know how best to engage with the debate on government support for schemes, whether that is in the form of subsidies, CfDs or other mechanisms. And we can see why: for years, wind has been a victim of critics who argue wind farms are unreliable, and can only be profitable if their owners receive huge public subsidies. People in the industry have been working hard to address these criticisms – and have made good progress too.

Now wind farms are more predictable and costs are lower than ever, and we can see the temptation to say: ‘Actually, we don’t need subsidies now, so there.’

But why get drawn in? Almost every UK power plant receives subsidies, and any new fossil fuel plant would too. It’s a victory for the fossil fuels sector that the debate around subsidies and constraint payments is always about how they are paid to wind farm operators, when fossil fuels benefits from the exact same thing.

And yet, despite those headlines, renewables enjoy strong support. Official figures from the UK government show 82% of people in the UK back the use of renewables, and 79% support offshore wind specifically. Most don't care about the payments.

What we need is a sensible discussion over government support for all sectors, not that we'll get it. What we don’t need is the wind industry boxing itself into a corner where it won't be able to accept help again. Wind’s main message should be that it delivers stable, long-term, low-cost and clean energy, and so needs stable market mechanisms to continue doing that.

Because, for the industry’s critics, ‘zero-subsidy’ won't be virtuous enough. In the Dutch auction, no doubt much will be made of the fact Vattenfall isn’t paying for the grid link and that’s still a form of support. The wind farm haters won’t just go away.

And those in the wind industry in the UK should also make the point that the country has committed to de-carbonise its energy mix. Using renewables is one way to help do this, and that stable support is the way to achieve this, not market uncertainty.

We’re sure Vattenfall has done its sums. However, our worry is more firms might be bounced into agreeing ‘zero-subsidy’ deals that give them little certainty over long-term returns from merchant power prices, or from PPAs where the counterparty might not be around in 20 years’ time. These are big risks to the sector’s long-term reputation – and all to avoid making the blindingly obvious point that wind deserves the same support as other sectors.

Good news? Let’s hope so.