Sometimes you can have too much net zero. Rewind to last year’s green energy auction and that was precisely how many bids there were for offshore wind farms: the result of the last government setting a cheapskate strike price that failed to adjust for supply chain inflation or a higher cost of capital.
Labour’s fixed that, in time-honoured fashion, by chucking more public money at the problem: lifting an already increased budget for annual top-up payments by £530 million to £1.55 billion. This time, though, it’s not a cause for criticism. Britain couldn’t afford another flop — particularly when Sir Keir Starmer has made a heroic, and almost certainly undeliverable, pledge to have decarbonised our electricity grid by 2030.
Anyway, among a record 131 green energy projects, nine offshore wind bids have blown in, with Denmark’s Orsted winning 3.5 gigawatts of contracts for the vast Hornsea 3 and Hornsea 4 off the Yorkshire coast and Scottish Power landing a deal for its 963 megawatt East Anglia Two scheme off the coast of Suffolk. As Scottish Power boss Keith Anderson put it: “Offshore wind is back on track after last year’s misstep.”
And, up to a point, it is. Of the 9.6GW of projects winning state guarantees — enough to power 11 million homes — offshore wind made up about 5GW of it. Yet, two things stand out here. First, that about 1.6GW of that came from rules allowing developers to switch 25 per cent of their existing capacity to a higher strike price. And, second, that even if energy secretary Ed Miliband reckons the auction is “another significant step forward in our mission for clean power by 2030”, Britain will need far more ambitious contract rounds to get anywhere near Labour’s target.
Under the contracts for difference regime, developers get a guaranteed, index-linked strike price for the power they produce — receiving top-up payments if the electricity price dips below it and paying back the difference if it’s higher.
And, compared with the £92.50 per megawatt hour, in 2012 prices, for the £46 billion Hinkley Point C, most projects in the latest auction look decent value — even if their output will be far more intermittent. At the same 2012 prices, the strike price for offshore wind was £58.87/MWh, quite a leap on 2022’s record low of £37.35/MWh but manageable enough. The price for the near-1GW from the onshore variety was a cheaper £50.90, with solar’s 3.3GW less pricey still at £50.07. Only the Green Volt floating offshore wind project in Scotland, at 139.93/MWh, and tidal stream energy, at £172/MWh, outpriced nuclear.
Even so, it took Greenpeace to make the key point: “5GW of offshore wind is of course welcome, but it is only about half of what is required each year to meet the government’s 2030 target” — an increase in capacity from today’s 15GW to 50GW. So, with Britain needing to attract far more projects, why not put higher sums of public money behind a more ambitious auction? Yes, it may seem nuts. But in today’s money, the offshore wind strike price is about £82/MWh versus wholesale electricity prices for this winter of £88/MWh. Present prices may not last. But at these levels, the government wouldn’t have to make top-up payments.
Of course, securing projects is only half the battle. Connecting them to the grid risks a nimby backlash over new power lines, which, in any case, the government’s electricity networks commissioner Nick Winser found could take up to 14 years to install. Still, at least with this auction, Britain’s not looking quite so devoid of energy.
Sunnier outlook
Does gloom sell? “No cheer” Keir’s been at it non-stop since becoming PM. Who else spots only thorns in the No 10 rose garden, warning that “things will get worse before they get better” and readying the nation for a “painful” budget? Meanwhile, the chancellor Rachel Reeves somehow fell down a largely imaginary £22 billion “black hole”, without wondering if part of it could have been due to her topping up the pay of train drivers on £70,000 a year.
And yet, investors still can’t get enough of “broken” Britain. The latest evidence? A rush for a piece of a government bond auction: £110 billion of orders for an £8 billion gilt maturing in 2040, with a coupon of 4.375 per cent. Or record demand for an issuance of that size, according to Bloomberg data. Then there’s sterling. At the weekend Lucy Powell, the leader of the House of Commons, spoke of the tough action required, given the state of our public finances, to prevent “a run on the pound”. Yet, in the view of big US banks, it’s on track to be one of the best performing major currencies in 2024 and forecast to hit $1.41 against the dollar by the end of next year.
As Peel Hunt economist Kallum Pickering noted last week: “The gloomy narrative is at odds with the prevailing economic backdrop”, given UK growth in the first half of this year was “the strongest in the G7” and “consumer and business expectations are recovering nicely”.
New governments always blame the last lot. And our public services are a mess, not least the money-sink NHS. Yet, investors clearly think Starmer’s inheritance is better than he’s making out.
Clearlake signing
Who says the transfer deadline’s been and gone? Chelsea FC co-owner Clearlake Capital is already back in the market — expanding its lending wing by $5 billion with a deal to buy MV Credit, “a pan-European private credit specialist”, from investment group Natixis. How long before it changes the entire MV Credit team? Or signs 18-year old credit analysts from South America on ingeniously amortised nine-year contracts?