The UK Government this month announced a modest increase in contract-for-difference prices for offshore wind to encourage an ambitious build programme through to 2020. However, new analysis by Bloomberg New Energy Finance shows that a range of financing risks may still hold back plans.

London, 16 December 2013 – The UK government may find it more difficult than it has bargained for to attract almost GBP 20bn of offshore wind investment required to hit its target for build-out of the sector by 2020, according to new research published this month by Bloomberg New Energy Finance.

The Department for Energy and Climate Change has stated that its models suggest a total of 10GW of offshore wind capacity could be installed off the UK by 2020, compared to 4.5GW now commissioned or under construction. On 4 December it improved slightly the electricity prices that developers of the next wave of offshore wind projects can expect to receive, in order to accelerate the build-out.

Bloomberg New Energy Finance has examined the risks that project developers will face in this relatively new sector, including construction delays, those associated with long-term power purchase agreements (PPAs), and risks associated potentially affecting the price of the electricity produced. Analysis shows that equity returns for investors in offshore wind projects will be between 8% and 12% for projects commissioned between 2014 and 2018, depending on the year of commissioning, marginally superior to the returns available under the current Renewable Obligation regime. However, the new analysis also found that the Contract for Difference (CfD) regime poses a number of new risks that may erode those returns in practice, and deter investors.

On 4 December, DECC unveiled revised strike prices for renewable energy technologies under its CfD support programme from 2014-15. CfDs are scheduled to take over from Renewable Obligation Certificates, or ROCs, as the main support mechanism to drive investment in clean generation, although ROCs will also be available for new projects until 2017. The strike price for offshore wind under the CfD was left unchanged from earlier drafts, apart from a small increase – from GBP 135 to GBP 140 per MWh – in the financial year 2018-19.

The strike price for projects commissioned in 2014-15 will be GBP 155 per MWh, so the change for 2018-19 implies that DECC has accepted that cost improvements would not be quite as rapid as it had previously hoped. Offshore wind remains significantly more expensive in terms of electricity generation cost than onshore wind, which will receive a strike price for new projects of GBP 95 per MWh in 2014-15, falling to GBP 90 in 2018-19.

Despite the attractive CfD prices for offshore wind, Bloomberg New Energy Finance has found that projects under the CfD are faced with risks at all project stages that could change the flow of payments to the generator from the four main contracting parties throughout the life of the project. Development and construction risk under the CfD is mainly related to the uncertainty over budget availability for offshore wind projects under the Levy Control Framework (LCF). Further risk during the development and construction phase arises from potential construction delays or a downsizing of total project capacity. Key risks in the operational phase are price and liquidity connected to power purchase agreements, "basis risk" (the danger that electricity prices fall below the CfD reference price), "balancing risk" (when actual electricity output does not match forecast output), credit risk posed by the CfD counterparty and supplier obligation, and the risk of further changes in regulations..

Sophia von Waldow, offshore wind analyst for Bloomberg New Energy Finance, said: "The government is anxious to convince investors and banks that it has built a cost-effective incentive system to drive the construction of offshore wind projects in the next few years, enabling the UK to maintain its position as the world's leading market for this technology.

"We are not convinced that it has yet done enough to minimise the complex web of risks that these projects, often in deep water and far from shore, will face. If so, the UK may fall short of that 10GW figure for offshore wind capacity by 2020."