UK Allocation Round 8: Pricing, Floating Competition and the Path to 2030

Intro (00:00):
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Dan Wiseman (00:23):
Hello and welcome to another episode of PowerPod with me, your host, Dan Wiseman, market analyst here at TGS 4C. Today I'm joined by my colleague Jordan, and we're going to go over the current UK Allocation Round 8. We're going to have a discussion about what's exactly going on, what we're going to be seeing during the rounds, and what we can expect in terms of prices as well. So, Jordan, welcome to the podcast. Good to have you on. Why don't you start by giving a quick introduction on who you are and what you do here in the company?

Jordan May (00:58):
Hey, so I'm Jordan May, senior analyst at TGS 4C. I cover the UK, Norway, and Denmark, and I also lead the offshore wind farm subscription.

Dan Wiseman (01:06):
Excellent. So, for anybody who doesn't know - I'm pretty sure anybody who's listening to this kind of has an idea of what's going on in the UK, what exactly has happened this time around, and how is this round going?

Jordan May (01:23):
So, the round is currently just getting started. The qualification window has just opened, so people are applying to see if their projects are even eligible to enter into the round. So we don't know too much just yet, but what we've currently seen is the allocation strike price methodology, which shows the budget parameters, and we've seen the framework, which details who is eligible to enter and who isn't. But beyond that, we haven't seen a lot. We haven't seen the budget notice, we haven't seen the award, we don't know how much is going to be given or what the prices are.

Dan Wiseman (01:52):
Right. And I mean, looking at the face of it, it seems very similar to last year's as well. So, what sets this apart from last year? Has anything changed at all, or is it just very much the same thing?

Jordan May (02:04):
Yeah, it's very largely the same. The parameters given are the same: the capacity factors, the transmission losses, a lot of the mathematical side of things are the same, the strike price is the same. The only real difference in the stuff that we're seeing at the moment is offshore, or rather deepwater offshore wind, ODO as it's called, is allowed to enter in the same pot as floating with the same strike price and the same parameters, which makes it a hot contender this year.

Dan Wiseman (02:30):
And of course, I mean this has been brought forward slightly as well. So at this current moment, I mean we're the 20th of July as of recording, we'll probably put this out a little bit later, where are we at now in the auction? When are we expecting to see any sort of results in the future?

Jordan May (02:47):
So today is the day that qualification has opened, and it should close on the 7th of August. But from here we are going to see five different possible timelines depending on appeals, although last year we saw the same thing and the state revised the way the timelines worked to make things more streamlined and speed things up a little bit. Currently we're expecting from mid-September to mid-November to get a budget notice, so we'll know roughly how much can afford to be built, and then we're going to see from sort of end of November through to the middle of February, we're going to see the awards depending on how many appeals there are. There is quite often an appeal, so generally expect in the middle of these, but if the state continue to speed things up, we might see an award this year.

Dan Wiseman (03:22):
And as you were saying, obviously they'll be looking at how much they can afford to build. Do we know how much we can expect from these rounds?

Jordan May (03:29):
Unfortunately not so much. We've heard that last year's massive budget uplift, which caused a record offshore wind off-take of 8.4 gigawatts, is not expected to happen this year. But that's not the end of the world. The reality is our 2030 targets, which are pretty much out of reach at this point, require another 6.3 gigawatts of off-take, so we could potentially expect that, which would be basically exactly three quarters of what was awarded last year, and it's still a decent amount of offshore wind.

Dan Wiseman (03:55):
And is that likely to be fixed bottom or are we expecting to see any sort of floating in this round as well?

Jordan May (04:02):
It's going to be very, very heavily fixed bottom, and we may see some test and demonstration floating projects, but we may also see some larger deepwater offshore wind projects that compete against floating.

Dan Wiseman (04:36):
And I mean, we know the UK tends to be very by the book with policies. Is there anything that we can expect to see that would be maybe a bit more interesting this time around?

Jordan May (04:54):
One thing that could be seen is there's a concept called minima, which is instead of just running the auction, you run a smaller auction first where the technology that has a minima, say floating, is considered before. It can either be a soft or hard, which depends exactly how the budget's calculated, but I won't go into that detail. If there's no minima for floating and the ODO technology is just significantly cheaper, we may see absolutely zero megawatts of floating wind awarded this year unless the state adopts a minima to ensure there is some demonstration of floating offshore wind. So, it could be quite interesting.

Dan Wiseman (05:25):
Okay. I mean, I guess it's good to kind of have a safeguard in place for floating, and hopefully that's something obviously we're seeing more and more interest in in other markets where floating seems to be taking off, but I guess it's still…

Jordan May (05:44):
Taking off slowly.

Dan Wiseman (05:45):
Yeah, still kind of a nascent technology that people are still getting their head around. And I think it's a topic that we speak about quite a lot on our podcasts is floating wind, and it's just waiting for that one company to kind of have that flagship floating demonstration or floating prototype that will work for commercial wind farms. And I guess another thing that's always been quite an important part of these allocation rounds, especially in the UK, are the prices. I know previously prices have been a very big sticking point for a lot of developers, and there's had to be quite a bit of flexibility and negotiations around prices. So what are we looking at this time around? Is there going to be more flexibility or are they quite strict on what they're offering price-wise?

Jordan May (06:23):
So, developers can put in whatever price they want. The reality is I don't think the administrative strike price, the ceiling of the strike prices, if you will, is too low, so we'll see a competitive strike price. But it's probably going to be about the same as last year, because unfortunately last year was more expensive, but the price of steel hasn't come down. If you look at monopile manufacturers' reports, they're paying about the same amount for steel as they've been paying for the last few years. Financing rates haven't really come down, installation rates haven't come down. We're probably going to be seeing very similar strike prices to last year, potentially a little higher or lower, but we're not going to see dropping from 91 down to 80.

Dan Wiseman (07:05): And I mean, this is maybe looking forward a bit in terms of prices for future rounds as well. How much of an impact have kind of geopolitical goings-on, the war between Russia, Ukraine, and the goings-on in Iran, how is that likely to affect future allocation rounds?

Jordan May (07:22):
Oh, god yes. The impact on them has been massive. So of course COVID had an impact on steel, Russia and Ukraine had an impact on fuel prices, which is both for the installation and the operations phase. Everything has had an impact on the gilt markets, so how expensive is it to take on debt, and the answer is it's a lot more expensive than it used to be. All of these geopolitical impacts have had an upward impact and will continue to do so until they're resolved or replaced entirely. Either Indian steel, which is what shut down during COVID quite heavily, unless we can replace that, or unless we can find a cheaper or easier way to get fuel and a cheaper way to get financing, it's going to affect the next few allocation rounds until it's sorted.

Dan Wiseman (08:00):
And what about the tariffs with the US? Have we found that these have had any impact on offshore wind in the UK specifically?

Jordan May (08:12):
I wouldn't think so. Most of Europe's supply chain is either entirely in situ or using the Middle East for substations or using China. So, there's very little supply from the US that will have an impact on the tariffs. It'll be the export that really gets curbed.

Dan Wiseman (08:34):
Okay. Now, one interesting bit of news that's happened today, again, the 20th of July, is Andy Burnham coming into power as the new PM. Obviously, he's had his views on North Sea drilling for oil. How much of an impact is that going to have on the UK's renewable outlook?

Jordan May (08:52):
Yeah, so the North Sea drilling could be a very interesting one. All offshore installations are going to be required to be powered from shore or from offshore wind farms. It looks like the INTOG round has been unsuccessful. It seems very unlikely that an offshore wind farm will plug into an oil and gas installation. But power from shore means increased demand for renewables, increased demand for cabling, which is very good for both just the offshore wind industry and the cabling industry in general.

I believe it's about 4% of global emissions come from the generators on, or generators venting and flaring on offshore installations. So it's a great way to move forward with the UK's target. However, yeah, I don't know how significantly it's going to uplift the demand for electricity in the UK. Possibly the only way to do that will be to bring down the price of electricity so people are more willing to buy it, the products they produce using it are more cost-effective and more profitable. Raising the demand is one thing; raising the appetite for the supply is another.

Dan Wiseman (09:59):
And I mean, if they're looking to as you kind of push towards their target, if the demand isn't there, is there any talk of export at all, or is UK offshore wind being UK offshore wind?

Jordan May (10:14):
Oh no, we're definitely looking to get involved in the Hamburg Agreement. The Trianel Windpark Borkum 3 offshore wind farm would connect to the UK via its multi-purpose interconnector. So there is definitely an appetite for that, but the reality is the offshore wind target is a sub-target. The actual target is reducing the emissions of the grid down by 95% by 2030. So if there's no demand, then they'll just continue to replace gas and we won't need that much offshore wind to meet the actual target that overrides all of the little sub-targets like how much gigawatts of offshore wind or solar or onshore wind.

Dan Wiseman (10:55):
Okay. And I mean, in terms of those targets, how—because they feel quite ambitious, especially kind of seeing the way things have been for UK offshore wind over the last couple of years, how likely is it for the UK to be hitting these targets that either they've set or how different are they from the targets that we estimate they're going to reach?

Jordan May (11:25):
So I believe we're estimating in the mid-30 gigawatts will be under construction by 2030, whereas the state wants 43 to 50 gigawatts. The reality is, I would say there is exactly a 0% chance that the state meets these targets. And I say this because the last allocation rounds developers have to declare when they'd want the project to come online. And this is relatively binding because if they go on too long after that, they face penalties, so they're not going to lie about when they want to come online. Most of the projects bar Norfolk Vanguard, East and West, were post-2030 already, so this round will be probably post-2031 or two. And we haven't got enough capacity that can build without it. We have 36.7 gigawatts of projects which have some form of off-take or have already constructed. So, we don't even have enough projects that are shovel-ready essentially to meet these targets. It's almost impossible that it happens now, if not entirely impossible.

Dan Wiseman (12:35):
And I guess kind of staying on the topic of potential pitfalls, we've seen in previous years when it comes to lease auctions in the UK that there's not really a lot put in place to protect the country from I guess non-committal or non-commitment from developers. We saw this with Vattenfall who sold one of their projects because they just weren't interested in it anymore. And I know that the UK used to have a rule of, you know, if you do this then you can't take part in the next auction, which is neither here nor there for some developers. Is this still the case or have they tried to kind of close that loophole?

Jordan May (13:14):
Yes. So being unable to take part in auctions was the NDD, the non-delivery disincentive, which only applies to allocation rounds and only applies to that individual project. So, if a developer has four projects and one of them pulls out of their CFD, it doesn't affect the other three projects. With leasing rounds, it's not such an issue that they're non-committal, because as we've seen with Morgan, which recently gave its lease back to the Crown Estate, it has been paying its option fees the whole time, the state has made a profit, and now they're looking to retender the site and give it away to another developer, possibly for lower annual fees with a project that already has consent. So the timeline on the project's probably been pushed back by a few months. Developers will have to get up to speed with the exact details of the consent and what they can do and figuring out the finances of bidding it into an allocation round. But the reality is it's much more advanced than the Leasing Round 5 projects, for example, which haven't even applied for consent yet. So, in leasing, the non-committal elements will only appear if there isn't an appetite for UK sites.

Dan Wiseman (14:40):
Right. Okay. And this is a subject that kind of creeps up quite a lot, and something we recently did a podcast episode on, and that's the matter of Chinese components. So obviously we saw not so long ago the Ming Yang production facility up in Scotland was shut down by the government. Was there any reason ever given on why this was? I know the EU are quite I guess strict on their views on Chinese products. In the UK, my second question on that I guess would be: how reliably can we look to see the UK reaching their target or trying to reach their target based purely on European products and not having to rely on China?

Jordan May (15:35):
Yeah, so there was no reason ever given beyond security concerns. There was some bickering in Parliament which ended with I believe Michael Shanks saying he'd be willing to show another MP the security briefing, but the public has never seen this, so we don't know the exact details of what actually the security concern is. It's also quite possible that Labour are looking to industrialize the UK more because they've complained about deindustrialization.

If a manufacturer is in the UK where they're not going to make most of their components in China shipped over to the UK for assembly, then you can start to understand that there's probably more tax in it for the government, there's more jobs in it, although the Vestas factory which replaced the Ming Yang one did offer less jobs in its original application and announcement, so we'll have to see how that one goes. In terms of reaching targets, I believe there is definitely an issue with European turbine suppliers. GE are basically out of the race at this point, they've almost shut down their business.

There's only two left, and a duopoly is never necessarily healthy, especially when one of them is very far in the red, making a comeback—don't get me wrong, they're not necessarily going under—but there is the issue that they may not be able to invest heavily in new sites, meaning that the rate of European expansion could be curbed. That doesn't necessarily mean that we have to use Chinese technology, but it means there needs to be some kind of turning point if we want to build offshore wind at the scale advertised by the state.

Dan Wiseman (17:08):
Yeah, absolutely. Mean like you were saying, with GE kind of being out of the race, and I guess Vestas being very limited in terms of what they're willing to do turbine size-wise in offshore wind, that really doesn't leave a lot of options. So, I mean, personally I kind of feel kind of letting China into Europe would be a good thing in terms of manufacturing, because it would just mean that if Siemens and Vestas want to stay in the game, then they need to kind of pull their finger out and kind of get on with it.

Jordan May (17:42):
Yeah, definitely. There is also the issue you mentioned with turbine sizes. As we get to bigger sizes, we're starting to see new issues in physics regarding wakes, specifically reaching the boundary layer. So this is called mesosphere effects, where we don't actually know how the wake's going to decay as you get this high up, especially not for engineering models and site design. So we don't know if bigger turbines are actually necessarily going to be as good as advertised. It's not necessarily the same relationship when you get to this size.

So, the 15-megawatt turbines could be good, especially as we learn what actually goes on, but we are going to need to build more, and someone does need to either use some kind of state funding to give to the manufacturers the ability to do this at scale. But also, there hasn't actually necessarily been any projects that haven't built in Europe because they couldn't get turbines. Whilst they're not necessarily expanding at the rate they should, there also isn't enough orders that means that they're completely swamped, and they are still opening new factories, but they're not unable to take on these orders, which suggests that unless the state actually increase the demand for turbines, there's no reason to increase the supply either.

Dan Wiseman (19:07):
Yeah, and the only two that I can think of that were affected that way were a couple over in the States where they were looking to use Vineyard's 18 and a half megawatt turbines, and Vineyard came out and said, "Oh, we're not going to be going for large capacity anymore, we're just going to concentrate on our workhorse lower capacity turbines." So they've had to kind of reorganize their plans, but I mean that's kind of beating a dead horse at the moment in terms of markets. The US—

Jordan May (19:37):
The States has other issues, I think.

Dan Wiseman (19:39):
Yeah, and I think offshore wind's probably the least of the issues. But in terms of the UK, I mean is there anything else kind of going on outside of AR8 that should be peeking anybody's interest or anything that we should be looking forward to over the next sort of couple of months?

Jordan May (19:55):
Next couple of months, not so much. It's going to be very heavily on Allocation Round 8 and the budget notice coming out sort of mid-September to mid-November. Start of next year though, we might see the information memorandum and bidders' days for Leasing Round 6 coming out, which will tell us exactly how much and which sites are going to be offered, the funding structure, because the UK has had the issue that the Crown Estate has been getting very large option fees from projects that haven't even applied or reached consent yet, and this is derailing the UK's ambitions. So, we could see a new model where they're not charging anywhere near as much money or not charging money at all, which could be very interesting to see. But I think the UK's quite locked in on Allocation Round 8 for now.

Dan Wiseman (20:46):
Cool. Excellent. Well, thank you very much for joining me. It's been always good to have a chat about the UK. I think it's one of the markets that obviously us being based here in England we see the most of, and we read the most about, so it's always interesting to have a chat about what's going on, because it's never quite as straightforward as you think.

Jordan May (21:05):
Yeah, unfortunately not.

Dan Wiseman (21:07):
And thank you for listening. As always, join us next time for another episode of PowerPod where I'm sure we'll have plenty more to talk about here at TGS 4C.