- Britain is not on track to meeting the government’s targets for decarbonising electricity generation: installed offshore wind generation capacity is set to reach only a little over two-thirds of the government’s target by 2030, while installed solar capacity will remain below half of the national target by 2035, Aurora Energy Research forecasts.
- Utilising innovative financing mechanisms, such as combining CfDs with PPAs, or an alternative subsidy scheme could boost the profitability of offshore wind projects and accelerate deployment, Aurora finds.
- As renewables buildout continues to outpace grid expansion, location will be key to profitability; groundbreaking new tools for assessing locational value, pioneered by Aurora, can enable projects to be developed in constrained areas, incentivising further decarbonisation.
- Aurora’s Christian Miller and Ashutosh Padelkar presented this analysis across two keynote speeches at the Aurora Renewables Summit London 2023—view their presentations in the Renewables Summit Highlights Pack here.
Great Britain’s legal deadline for reducing greenhouse gas emissions to Net Zero1 is fast approaching: 2050 is less than three decades away. Successive governments have placed the power sector at the forefront of efforts to reduce emissions, setting ambitious targets to expand renewable electricity generation and phase out fossil fuel usage in the sector. Despite significant progress—total power sector emissions fell by 70% between 1990 and 2021—Britain is not decarbonising fast enough. The country is on track to remain reliant on unabated thermal power2 after 2035, missing the government’s target of delivering a fully decarbonised electricity system by that year, Aurora Energy Research forecasts. Lagging renewables buildout is a key driver—Britain’s installed offshore wind capacity reaches 35 GW by 2030 under Aurora’s base case, compared to the 50 GW government target. Installed solar capacity totals 35 GW in 2040 under Aurora’s base case, falling far behind the targeted 70 GW by 2035.
Accelerating renewables buildout is crucial to achieving the country’s decarbonisation aims. Many of the obstacles to deployment are well known—grid connection represents a severe bottleneck in project development, the transmission system needs to expand at an unprecedented pace to accommodate new renewable power supply, recent inflation has driven up costs for developers—yet action to remove them remains slow.
Innovation is key to progress, new analysis presented at the Aurora Renewables Summit London 2023 finds. For example, creative revenue stacking offers prospective developers new opportunities for boosting profitability, which is crucial for securing investment as costs rise. Exploiting multiple revenue streams within a single project increases investor returns: an offshore wind project financed by a government-backed Contract for Difference (CfD), a Power Purchase Agreement (PPA) and a Capacity Market contract has a higher internal rate of return (IRR) than a project relying solely on a CfD—the most popular method of financing offshore wind projects in Britain—Aurora finds.3
Innovating the subsidy scheme for offshore wind projects could also incentivise further investment. An offshore wind farm supported by a revenue cap and floor mechanism—where any revenues above a certain price level (the “cap”) are returned to consumers, but generators are compensated when revenues fall below another set price level (the “floor”)—would have a higher IRR than if the same project were supported by a CfD awarded in the current ongoing auction round, Aurora’s modelling shows.4
Groundbreaking new tools for assessing the value of prospective project sites can enable development in areas that would otherwise be unattractive. Aurora expects installed onshore wind capacity in northern Scotland to rise sharply over the next decade due to favourable weather conditions, which risks reducing further developer interest in the region as a result of revenue cannibalisation. However, more advanced modelling,5 pioneered by Aurora, demonstrates that onshore wind assets in northern Scotland can earn above-average6 revenues in the Balancing Mechanism (BM),7 potentially offsetting this cannibalisation and driving up the region’s attractiveness.
This is not a one-size-fits-all solution; solar projects located in southern England are also at risk of being impacted by cannibalisation, but would earn below-average revenues in the BM. Developers could, however, increase southern solar assets’ BM revenues by co-locating with a two-hour battery, Aurora finds, using its innovative Chronos software. Chronos produces asset-specific battery revenue forecasts in Great Britain, including for systems co-located with solar and wind; get in touch to find out more.
Dan Monzani, Managing Director, UK and Ireland, Aurora Energy Research, commented:
“Despite the undeniable cost increases and uncertainty currently facing the sector, Aurora’s analysis presented at the Renewables Summit illustrates reasons to be optimistic that innovation in financing, policy, and locational business models could help accelerate Britain’s energy transition.”
Ashutosh Padelkar, Research Associate, Aurora Energy Research, commented:
“The CfD is no longer the one-stop shop for financing renewables. You need to innovate, negotiate PPAs, and consider co-location. The market no longer rewards the risk-averse.”
Christian Miller, Senior Advisory Associate, Aurora Energy Research, commented:
“It’s important to keep in mind that renewables developers face a myriad of uncertainty when building business cases: different pathways to achieve Net Zero, varying levels of grid buildout, electricity market reform. Using innovative tools to more accurately assess locational value can unlock needed revenues in the face of rising costs—like taking advantage of turn-down in the Balancing Mechanism, or co-location with battery storage—but uncertainty will remain a threat to the energy transition until authorities cement plans and funding for a streamlined Net Zero system.”
1 Or by 100% from 1990 levels
2 Fossil fuel-fired generation without Carbon Capture and Storage
3 The IRR of an offshore wind asset in the North Sea starting operations in 2030 rises by 1.5 percentage points when supported by a CfD, PPA and CM contract, compared to the same project supported solely by a CfD.
4 An offshore wind farm located in the North Sea and starting operation in 2030 supported by CfD awarded in the ongoing Auction Round 5 at the government-allocated strike price (£44 (real 2012)) would capture an IRR of 4.7%, pre-tax. The same offshore wind asset supported by a cap and floor mechanism (£300/kW cap, £200/kW floor) would capture a pre-tax IRR of 6.0%. A £250/kW cap and a £150/kW floor would result in a pre-tax IRR of 5.4%, while a £350/kW cap and a £250/kW floor would result in a pre-tax IRR of 6.0%.
5 Aurora used a seven-zone model of the British power system for this analysis, updating its three-zone model.
6 Above the national average, as calculated by Aurora
7 The BM is a continuously open online auction, administered by British electricity system operator National Grid ESO, used to balance electricity supply and demand across the country in real time.
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From its Oxford academic roots, Aurora Energy Research has grown to become the largest dedicated power market analytics company in Europe, providing data-driven intelligence for strategic decisions in the global energy transformation. We are a diverse team of more than 400 experts with vast energy, financial, and consulting backgrounds, covering power, hydrogen, carbon, and fossil commodities. We are active in Europe, Australia, and the US, working with world-leading organisations to provide comprehensive market intelligence, bespoke analytic and advisory services, and cutting-edge software.
