Key points

• Reaching our offshore wind targets will improve the UK's energy security, lower our emissions, create new jobs, and deliver wider economic benefits.
• The UK has previously led the world in offshore wind, thanks to policy mechanisms like Contracts for Difference (CfDs) which give investors certainty, and drive down costs.
• The previous auction (AR5) failed to secure any offshore wind because the administrative strike price (ASP) was set too low and did not reflect the changing economic and market conditions, putting energy security and climate targets at risk.
• Energy UK's recent report, 'Mission Possible ', called on the Government to increase the budget for AR6 to ensure that the UK's policy framework matched the scale and pace of its Net Zero ambition.
• On 30 July, the Government revised the budget for this year's CfD auction, known as Allocation Round 6 (AR6), with uplifts of £65m (to £185m) for Pot 1, £165m (to £270m) for Pot 2 and £300m (to £1.1bn) for Pot 3.
• Energy UK welcomes the announcement that the AR6 budget will has been increased. Strong Government ambition to accelerate the deployment of renewables provides a clear signal for industry to invest.
• This revised budget will enable more shovel-ready projects to secure CfDs, helping to steer the UK back on track to meet Net Zero following under-delivery in previous auction rounds.

Meeting energy security targets

Achieving a clean power system by 2030 requires an unprecedented buildout of low-carbon generation. To meet this target, we need to rapidly increase the pace and scale of delivery of renewable energy deployment.

The UK has led the world in offshore wind, largely thanks to its geography (windy coastlines and shallow seabed), but also supportive Government frameworks that give investors certainty, and in turn drive down the costs. These policy frameworks have been extremely successful - and replicated around the world.

However, despite the UK's legacy of growth and early progress in decarbonising its power sector, recent challenges, such as high energy prices, COVID-19 supply chain disruptions, high inflation, and rising interest rates have slowed down progress.

To meet the ambition of a Net Zero power system and 60GW of offshore wind capacity (55GW of fixed bottom and 5GW of floating) by 2030, the UK needs to build around 3.5 times the current operational capacity (15GW).

The under-delivery of last year's CfD auction AR5, which failed to secure any new offshore wind projects, has created additional pressure on future CfD auction rounds to make up for the lost capacity. Project timelines indicate that only the next two auction rounds (AR6 this year and AR7 in 2025) will be able to contribute to the capacity needed for 2030.

Increasing global competition for limited supply chain and skills also means these projects must be delivered across separate auction rounds, as they cannot all be developed simultaneously.

How does the CfD auction budget work?

The Allocation Round budget is not actual money that the Government will spend. Instead, it represents the potential cost of projects, helping to ensure value for money for consumers. Once they are built, CfD projects are paid a fixed price per unit of electricity produced and they will either receive a top-up or pay back to consumers depending on the market price.

How is funding allocated across pots?

The budget is allocated across different "pots" to support various types of renewable energy projects. Each pot is designated for specific technologies. Pot 1 typically includes established technologies like onshore wind and solar PV. Pot 2 covers less established technologies such as floating offshore wind, geothermal, and tidal, and Pot 3 is specifically for offshore wind. This structured allocation ensured the development of a diverse range of renewable energy projects, promoting innovation while maintaining a competitive process.

Maximising capacity at the lowest available cost

It is crucial to maximise renewable energy capacity at the lowest available price to meet Government targets. Considering the UK's current operational projects and those already committed for 2030, AR6 and AR7 must deliver 26GW of new capacity. Energy UK analysis in March showed that under the previous budget, AR6 was only likely to deliver 3-5GW of offshore wind capacity. Updated analysis shows that the revised budget could deliver between 4-6GW of offshore wind in AR6.

The revised budget could mean the changes to capacities of different technologies, although depends on the auction itself. However, even with an increased budget initial estimates show a further 20GW of (fixed) offshore wind is still needed to reach 2030 targets.

How will this investment help people and the economy?

Ambitious action to deliver Net Zero will bring large economic benefits. Energy UK research shows that investing in the energy transition will contribute to economic growth, energy security, and help to create jobs.

Economic benefits - In total, we estimate that AR6 alone could unlock £25bn of investment.^[1] Accelerating the transition to Net Zero could grow the economy by £240bn by 2050^[2]. In the short term, a successful AR6 will help set the UK on this path, creating jobs and scaling up UK manufacturing, supply chains, and port capabilities in the process. AR6 is a unique opportunity for the UK to position itself as a global leader in the development of floating offshore wind and reap the benefits of being a early-mover, as was done for offshore wind. Successfully launching floating offshore wind projects will also provide a pathway for a just transition for oil and gas workers.

Energy security - The 6GW of offshore wind capacity that AR6 could procure has the potential to displace gas equivalent to a fifth of the UK's seaborne imports in 2023.^[3] Scaling up renewable energy deployment will reduce the UK's reliance on gas for electricity generation, leading to lower carbon emissions and insulating customers from international price shocks. By increasing domestic renewable generation and decreasing gas imports, the UK will not only bolster energy security but also support the UK's trade balance. This shift also supports job creation and contributes to long-term economic stability.

Value for money - If the maximum new capacity that AR6 could bring forward had existed during the 2022 energy crisis, it could have saved consumers £2.3bn.^[4] Investing in renewable energy through the CfD mechanism is cost-effective and delivers long-term savings and greater value compared to fossil fuels. The CfD also remains highly effective at protecting customers by hedging against rising gas and carbon prices. This shields customers from market volatility and provides price stability - all while being funded off the balance sheet, which means it doesn't directly impact public finances.

Implications for power sector decarbonisation

It is hugely positive that the Government has increased the budget to maximise capacity in the next allocation round, which will significantly help reach our target to decarbonise the power system by 2030. Whilst the above highlights the challenges in meeting the 2030 offshore wind targets, it's important to remember that offshore wind is not the only tool available for achieving a decarbonised power sector.

The UK has experienced a hiatus in onshore wind, due to a de facto ban that has now been lifted, while solar energy remains one of the cheapest sources of electricity in the UK. Alongside rapidly building out all forms of renewable energy and ensuring that critical decisions on nuclear are made soon, it will also be critical to optimise the energy system and our energy usage. There are many other levers that can be pulled including improving energy efficiency, maximizing demand side flexibility and accelerating the deployment and integration of low-carbon flexible assets, such as hydrogen and energy storage solutions. Enhancing grid infrastructure will also be crucial to ensuring the resilience and efficiency of our energy transition. Energy UK has set out the steps required to make Britain a clean energy superpower in our report Mission Possible.

[1] Energy UK analysis

[2]Energy UK (2023), Clean Growth Gap

[3] Energy UK analysis

[4] Energy UK analysis

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