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Strategic investment accelerating expansion of UK offshore wind power and energy mix transformation

Deloitte publishes UK Offshore Wind Power Market Update

Published: 12 August 2019

Deloitte recently published the UK Offshore Wind Power Market Update, a joint report by Deloitte UK, Deloitte China Energy, Resources & Industrials, the Wind Power Committee of the China Renewable Energy Society and China General Nuclear Power Group. The report analyzes the wind power market and offshore wind power policies in the UK and defines key phases of project development, providing deep insights into the UK offshore wind power that support Chinese companies' market entrance and promote cooperation between China and the UK.   

With natural advantages including a long coastline, high wind speed and areas of shallow seabed providing desirable conditions for the construction of large offshore wind farms, the UK is the world's leading offshore wind power market. There is 7.9 GW of offshore wind capacity in the UK already and the government has set an ambitious target of over 30 GW by 2030. Accounting for 14.7% of the total power generation, offshore wind power has seen substantial growth in the UK.  

Power companies including Ørsted, Vattenfall, Innogy, SSE and Scottish Power and financial investors such as infrastructure and pension funds are active in UK offshore wind power. Japan, China and other countries in Asia are also showing increasing interest in the market.

"With sophisticated regulation to support efficiency and encourage competition, the highly open and transparent UK power market has become one of the most attractive destinations for overseas investors. The market is transitioning towards a cleaner energy mix, with the UK recording one week of coal-free power generation this May and planning to phase out coal-fired power plants by 2025. Offshore wind power is increasingly important in the energy mix. UK practices and policies could inform Chinese companies' faster expansion of offshore wind power at home, significantly driving energy mix transformation and local economic structure upgrades", says Deloitte China Energy, Resources & Industrials Industry Leader Kevin Guo.

The UK power market is one of the world's most liberal and competitive. It has innovative regulatory frameworks and regimes that on one hand provide solid foundations for long-term growth and on the other hand create challenges for new entrants. Understanding the different regulatory frameworks, supporting systems and how they integrate can be challenging for overseas investors. For example, the EU's Third Energy Package requires that power generation and supply be operated under separate legal entities. One of the most important pieces of EU energy market legislation, it has four main requirements:

  • separation of energy suppliers from network operators;
  • greater regulatory independence;
  • the establishment of a European transmission system operators network based on cooperation; and
  • more transparent retail markets to benefit of customers.

An offshore wind farm can operate for 25-45 years and goes through several stages before starting operation. In the UK, these stages are seabed leasing, planning consent, generation license application and a contract for difference (CfD) auction. The UK's rigorous and complex procedures and market mechanisms can be challenging for new entrants.  

The Crown Estate (TCE) has completed three seabed leasing rounds so far, with a fourth started in May 2019. It encourages new entrants to increase competition and has introduced rules to provide flexibility. For example, a consortium that has only one strong member can be approved even if the other individual members fail the procedure, and an onshore wind farm developer can cooperate with an offshore infrastructure developer to meet technical requirements.

"The UK's offshore wind sector leads the world in capacity and technology. We can see from previous CfD auctions and the strike price in the third CfD round that the industry is extremely confident about reducing generation cost from offshore wind sources. This will help offshore wind power go from niche to mainstream," Kevin adds.

The UK power market is transforming towards de-centralization, decarbonation and digitization, which will provide investment and growth opportunities for both domestic and international players. Its openness and transparency have made it an attractive destination for overseas investment from investment funds as well as utilities. Deloitte expects this trend to be hastened by growing energy demand with economic development and population growth in the UK.

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