What the AR6 Auction Results Mean for Consumers

Higher prices and more damage to the economy are inevitable as we enrich overseas investors.

Introduction

The much-anticipated results of the annual auction of renewable capacity were released last week. The headlines about the AR6 results have been mixed, with the Telegraph claiming the auction will “add £150 to household bills” and Carbon Brief claiming the “record-breaking auction will cut consumer bills.”

They cannot both be right, so time to dig into the results announcement and what it means.

AR6 Auction Results

Let us start with what has actually been announced, then work to evaluate what it means. The results were announced on the Government website and there is quite a lot of detail. Figure A shows a table summarising the results.

Figure A - Summary of AR6 Prices and Comparison to Administrative Strike Prices by Technology

Solar power with a capacity of 3,288MW was awarded Contracts for Difference (CfDs) at a strike price at 2024 prices of close to £70/MWh. A further 990MW of onshore wind won contracts at £71/MWh with several small tidal stream projects with a total capacity of 28MW also awarded contracts at £240/MWh. Green Volt, the largest ever floating offshore wind project with a capacity of 400MW won a contract at a 2024 price of £195/MWh. A total of 3,363MW of new fixed offshore wind capacity won contracts at £82/MWh. A further 1,579MW of offshore wind capacity was rebid as “permitted reductions” from earlier rounds and won new contracts at close to £76/MWh.

The surprising thing is that all the awards came in at lower prices than the Administrative Strike Prices that were offered in the auction. The reduction against the offer prices is around 20%. The surprise for offshore wind comes because at the end of last year Tom Glover, chairman of RWE’s UK arm, called for offshore wind strike prices to rise by 70%. He called for prices of £65-75/MWh in 2012 terms. All the winning bids are below the range he suggested. Moreover, Baroness Brown of the Climate Change Committee and non-executive director of offshore developer Ørsted warned in May that the prices on offer “may not be appealing enough” and that the “Government needs to be a bit more generous and a bit more flexible.” This raises suspicions that there may be some other factors at play behind the scenes. Maybe the “Sustainable Industry Awards”, also known as extra bungs for the industry, will be brought forward from AR7. Or maybe Great British Energy together with the Crown Estate might put some cash into these projects on favourable terms. Chairman Jurgen Maier certainly seems very eager to spend our money. We shall have to wait and see if any further information comes to light.

AR6 Prices Higher than Market Rates and Projections

Even though the contract prices are lower than the administrative strike prices, they are above recent market reference prices as shown in Figure B.

Figure B - AR6 CfD Strike Prices vs Market Prices (£ per MWh)

In 2024 prices, the AR6 contract awards are all more expensive than the simple average of the Intermittent Market Reference Price (IMRP) for the first four months of this financial year. Of course, by the time the projects come online the strike price will have been indexed even higher, which means that if gas prices remain at the current elevated levels, they will be in line for even higher subsidies.

Of course, the strike price of the CfDs is only part of the overall cost we pay for renewables. Last financial year, we paid about £2.5bn in grid balancing charges. Adding more intermittent renewables will only exacerbate this problem and we can expect grid balancing charges to rise. Moreover, with so much intermittent capacity we also need to pay through the Capacity Market for reliable generators to be ready to step in when the wind is not blowing. We paid about £1bn for this last year and we can expect capacity market costs to increase too. Finally, these 131 projects will need to be connected to the grid at great cost. As previously discussed, the National Grid has announced £112bn of spending on the grid up to 2035. We will pick up these hidden extra costs of renewables through our bills.

The solar and offshore wind awards are also higher than last year’s contracts and almost double the Government projections discussed last week. Onshore wind prices fell slightly from last year, but again are well above the projections in the 2023 Generation Cost Report, see Figure C.

Figure C - Evolution of Renewables CfD Prices vs Gen Cost Report (£ per MWh)

These Government projections, or similar projections from other bodies underpin the estimates for the costs of achieving Net Zero. Even though the AR6 awards are better than expectations, the crocodile jaws are still wide and the costs of Net Zero have been woefully under-estimated.

What Will AR6 Mean for Consumer Prices?

After going through the results of the auction, we are no clearer on how the Telegraph came by its £150 claim, nor how Carbon Brief could credibly claim lower bills.

In its results announcement, the Government estimates what it calls the “notional monetary Budget impact” of the agreed strike prices and capacity. The final year estimate of the budgetary impact is £1,286m, which with roughly 28m homes would equate to a cost of about £46 per household per year. However, the way these budgets are calculated is both convoluted and opaque. In fact, the whole budget process could probably justify a standalone article. First, all the estimates are made in 2012 prices, so we might expect the annual impact to be about 40% higher, or £64 per household in 2024 terms.

However, as someone once said, it is difficult to make predictions, especially about the future. The CfD budget calculations are based on these difficult predictions about the future. First, they make an estimate of the “reference price” in future years (see Schedule 2, Appendix 2). The reference price is subtracted from the strike price to calculate the subsidy per MWh in 2012 terms. However, their estimates of the reference price are somewhat questionable. For instance, their estimate of the reference price for 2029/30 is £25.81/MWh in 2012 money, which equates to about £36/MWh in today’s money and compares to the YTD reference price of £65/MWh. Using their reference price and the agreed strike prices gives a subsidy of ~£33/MWh for offshore wind. Whereas using the 2012 equivalent of today’s reference price of £46.70, cuts the subsidy per MWh by nearly two thirds to £12/MWh. Clearly, the subsidy per MWh is highly sensitive to the assumptions about reference price.

Once they have settled on a subsidy per MWh, they then calculate the amount of electricity the projects will generate on an annual basis. This calculation too is problematic. They take the nameplate capacity of the winning projects and work out what the annual production will be using estimated load factors. For offshore wind, they have used 61% (Schedule2, Appendix 3) as their load factor. This compares to the achieved offshore wind load factor averaging about 41% over the past five years. It is therefore likely that the actual load factors will be lower than the Government’s estimate, meaning less electricity will be generated. Multiplying a much smaller subsidy per unit by much less generation will result in a much lower annual impact than is suggested by the Government’s figures, even if we index upwards to 2024 prices.

We can conclude that the Telegraph’s claim of a £150 increase and the £46 calculated from the Government’s budget estimates will not reflect the reality of the cost of direct subsidies. However, the extra costs of renewables described earlier will have an unquantified impact.

But what of Carbon Brief’s claim that AR6 will lead to lower bills? In part of their article, they quote “the only meaningful comparison is between a system that has those additional wind and solar projects and a system that does not.” This is actually quite sensible. As we have shown above, all the contracts have been awarded at prices above recent market reference prices. The only way that AR6 contracts could be lower priced than gas-fired electricity in the future is if gas prices rise much faster than the index-linked strike prices of the CfDs. However, if gas prices were to rise sharply again, then inflation would undoubtedly rise too, meaning CfD strike prices would catch up with gas prices in the year following the spike. As it happens the 2029 futures prices of gas is ~65p/therm, quite a lot lower than recent prices in the range 85-90p/therm. This means the price of gas-fired electricity is likely to fall. So, the CfD strike prices are likely to remain above those of gas-fired electricity over the medium term. The gap would be even wider if we removed the carbon tax on gas-fired electricity and invested in new sources of gas supply. Moreover, if we did not add the extra renewables to the system, we would incur lower grid balancing and capacity market costs and would need to spend less on grid expansion. Finally, it is a racing certainty that the floating offshore wind and tidal stream projects will add to bills because their strike prices are many multiples of current market prices. Although they are relatively small in the grand scheme of things so the impact will be small.

It is beyond reasonable doubt that AR6 will add to consumer prices. However, there are too many variables to make a sensible estimate of the precise impact.

Rewards for Failure

We should now examine some of the other aspects of the AR6 announcement. As mentioned above, 1,579MW of offshore wind capacity was rebid in AR6 as “permitted reductions.” This means that some of the companies who won contracts in AR4 have failed to deliver on their contractual commitments. Inch Cape, Moray West, East Anglia 3 and Hornsea Project Three all won contracts at £37.35/MWh (2012 prices) in 2022.  They have all been allowed to rebid parts of their projects and have been awarded new contracts at £54.23/MWh, a 45% increase. In a rational world, failing to honour a contract would result in penalties but in the topsy-turvy world of green energy, failure leads to extra rewards.

Cui Bono from AR6 Offshore Wind Contracts?

It is also interesting to analyse who is going to benefit from these new contracts. Starting with the projects that won the permitted reduction contracts, Inch Cape is a 50:50 joint venture between Chinese company Red Rock Renewables and Irish energy company ESB. Moray West is mostly owned by EDP Renewables, headquartered in Texas, and French utility ENGIE. East Anglia Three is wholly owned by ScottishPower Renewables, which is ultimately owned by Spanish energy giant Iberdrola. Hornsea Project Three is owned by Danish Group Ørsted.

The new projects awarded contract in AR6 are Hornsea Project Four and East Anglia Two both have the same ownership as their namesakes above. In summary all the offshore wind projects awarded contracts in AR6 have foreign owners, and it is those owners who will benefit from the subsidies, effectively sucking money out of the UK economy.

How Much Power and How Secure?

In the announcement of the AR6 results, Energy Secretary Ed Miliband claimed the “sixth renewables auction delivers record smashing 131 clean energy projects powering equivalent of 11 million homes.” Miliband went on to assert the “new rollout of low-carbon electricity is a key step for UK energy independence and energy security.”

Ofgem says that the average household electricity consumption in 2,700kWh. 11m homes would mean annual consumption of 29.7TWh. For these projects to achieve that level, we would need to assume a 10.5% load factor for solar power, 34% for onshore wind and 50% for the various flavours of offshore wind. If instead we use the average load factors over the past five years then there’s only enough energy for 9.1m homes. This is also a misleading claim, because the electricity generated will not be at the time it is needed. Solar produces most on summer days when demand is low and nothing at all on winter evenings. It is obvious that wind turbines only produce electricity when the wind is blowing. So, on those cold, calm winter evenings when demand is highest, these new projects will power close to zero homes.

In recent years, both electricity demand and generation have fallen, probably due to soaring prices. However, imports have risen. Adding more intermittent renewables means we will have to rely more on imports over the interconnectors when demand is higher than domestic supply. It is exceedingly difficult to see how this improves energy security.

Shortfall in Rate of Delivery

Famously, Ed Miliband and the Labour Party promised in their 2024 manifesto to “double onshore wind, triple solar power, and quadruple offshore wind by 2030.” At the end of 2023, we had 16.2GW of solar power, 15.4GW of onshore wind and 14.7GW of offshore wind capacity (see ET6.1). To meet Miliband’s solar target, we need to deliver 4.6GW of solar each year. The AR6 contract awards fall 1.3GW or 29% short of this target. Onshore wind fell 1.2GW or 55% short of the required rate and new offshore wind fell short by 2.9GW or 46% of the rate required to meet Labour’s promise.

These shortfalls mean the target of achieving a net zero grid by 2030 is all but out of reach. Indeed, there are signs that the Government is preparing to scrap its 2030 target for offshore wind.

Conclusions

The Government hailed the AR6 results in terms Borat would not find unusual, describing them as “the most successful renewables auction to date.” Although the strike prices were lower than anticipated, the new projects will increase consumer bills so the “success” will only be felt by the project developers. That all the offshore projects are owned by foreign investors means the profits from these developments will accrue overseas and UK consumers will foot the bill. Some of the developers have even been rewarded for past failure.

Even this “great success” is not enough to get on track to meet Miliband’s suicidal renewable energy targets and his ambition of a net zero grid by 2030. We can expect more damage to be done to the economy and consumers before the whole edifice comes tumbling down.

---

The podcast version of this article can be found on these links to Spotify, Apple and YouTube.

---

If you enjoyed this article, please share it with your family, friends and colleagues and sign up to receive more content.