From NOT A LOT OF PEOPLE KNOW THAT
By Paul Homewood
h/t Ian Magness
The developer behind one of Britain’s largest offshore wind farms is exploring ditching state subsidies in favour of private power deals as it scrambles to boost the project’s finances.
Ørsted has confirmed it may give up some government support that would apply to Hornsea 3, off the coast of Yorkshire, amid concerns that the subsidies it has been awarded are too low.
Instead, a spokesman said the company may seek to sell 25pc of the scheme’s power on a so-called merchant basis – where it receives no state support but can potentially reap bigger returns.
This would amount to selling about 700 megawatts of the wind farm’s planned 2.8 gigawatt (GW) output, a total which is enough to power three million homes.
The move comes as Ørsted’s bosses scramble to boost the viability of the scheme ahead of a final investment decision, expected by the end of this year.
On Friday, bosses at Ørsted told financial analysts they were examining an option to pass over 25pc of the CfD contract so the company would instead be free to sell power from the scheme for a higher market rate.
This could potentially boost returns from the scheme – assuming the company can secure better prices for the power privately than what it is guaranteed under Hornsea 3’s CfD.
Ørsted, the world’s biggest offshore wind developer, has insisted it intends to press ahead with Hornsea 3 in “all scenarios” but has yet to take a final decision.
The project is scheduled to begin generating in 2026 and has been awarded a subsidy deal worth about £45 per megawatt hour in today’s prices – less than what was offered in the most recent subsidy auction.
The pool of potential buyers for the 700 megawatts of power on offer is likely to be confined to heavyweight companies with big electricity demands.
Kathryn Porter, an independent energy consultant and founder of Watt Logic, said Ørsted faced a difficult choice between “locking in at a really low level of return or taking bigger risks and being able to make more money”.
She added: “They may take a view that they can get the project over the line because electricity prices will be high enough that they can make a decent enough return.
“Experience to date, however, shows that UK power market investors do not have much appetite for risk.”
A key risk is whether the Government would extend the Electricity Generator Levy – which affects receipts from power sold at more than £75 per megawatt hour – beyond March 2028.
Ørsted was threatened with a credit downgrade by ratings agency S&P last week after taking huge writedowns on the value of its offshore wind projects in the US.
The terms of the CfD are quite clear – it is all or nothing. Orsted are under no legal obligation to trigger their contract, in other words take up their option to sell. However, if they do, they must sell all of the electricity they supply to the Grid under CfD terms. The only way to avoid this would be to transmit power direct to an end user, bypassing the Grid.
And, I suspect, the government will be loathe to amend the contract to allow what Orsted want.
With market prices as they are at the moment, there is no logical reason why Orsted should not sell all Hornsea’s power via PPA’s. But as Kathryn Porter points out, investors in offshore wind farms like certainty, not risk. And the Electricity Generator Levy, if extended past 2028, would take away a large chunk of any excess profits.
Work on installing the turbines is not expected to start till 2026. Despite Orsted’s protestations, there is an increasing likelihood that they will pull the plug on Hornsea.
But whether they do, or sell via PPAs, private consumers will not benefit from the low prices already contracted.
Meanwhile SSE’s Dogger Bank offshore wind farm, which began generating last month, has still not appeared to have triggered its CfD, currently priced at £49.77/MWh.
I’m waiting confirmation from the Low Carbon Contracts Company, but it seems that they too will sell at much higher market rates.