THE BLOG
17/07/2013 11:11 BST | Updated 16/09/2013 06:12 BST

Why the UK Should Adopt a 'Can Do' Attitude to Offshore Wind

Despite the "stubbornly expensive" label it is often given, offshore wind offers a huge potential to reduce its costs and contribute to the UK's objectives on energy security, growth and climate change, but the UK needs to adopt a decisive "can do" attitude to unlock these benefits.

With the publication this week of the Government's power sector delivery plan and the imminent release of its long-awaited industrial strategy for offshore wind, now is a good time to reflect on the potential costs and benefits of offshore wind. This is all the more the case as yet another factually dubious campaign, this time from the TaxPayers' Alliance, has revived the debate around the costs of renewable technologies in the UK.

With the UK's offshore renewable energy resource representing six times the UK's electricity consumption in 2009, offshore wind is likely to make a significant contribution to the country's low-carbon and energy security ambitions, regardless of which technology you think might dominate the UK's low-carbon mix in the future.

Yet, offshore wind is regularly described by its critics as "stubbornly expensive" and therefore not worthy of any significant support until the industry has substantially brought its costs down. Setting any long-term ambitions for the deployment of offshore wind in the UK would, the argument goes, condemn consumers to high electricity bills for ever after, an issue that was hotly debated during the recent passage of the Energy Bill through the House of Commons.

Whilst offshore wind is an expensive technology today and reducing its cost must undoubtedly be a priority for industry, these criticisms fail to appreciate the significant potential - both in terms of cost reductions and macro-economic benefits - that the offshore wind sector could offer the UK.

A report last year by the Crown Estate, the most in-depth study carried out on the topic so far, found that the cost of offshore wind farms in the UK could go down by a third for projects approved in 2020, with greater cuts possible in the 2020s as well. Shortly after, a report by Cambridge Econometrics also found that a stable deployment of offshore wind could increase UK GDP by some £20bn annually by 2030, reduce UK gas imports by £8bn a year and provide higher net employment compared to a scenario where the UK produced most of its electricity from gas plants.

Portraying offshore wind as "stubbornly expensive" ignores the fact that there is an awful lot that can be done to reduce the costs of the technology in the near-term. A significant chunk of its cost comes from the financing of a project, mainly in the form of interest rates. To illustrate this, the Crown Estate study found that for every 1% reduction in the costs of borrowing, the overall costs of offshore wind farms was likely to go down by around 6%.

Whilst the costs of borrowing are partially linked to how mature a technology is perceived to be, a lot of it is also to do with investors' perception of political risk. By providing the right political "mood music" and showing that it is committed to helping the sector grow over the long-term, the Government can play a key role in reducing the current cost of borrowing for offshore wind projects.

Looking further ahead, a stable deployment of offshore wind over the next 20 years could significantly reduce its costs through learning by doing, harnessing economies of scale, developing a more co-ordinated offshore grid infrastructure and critically, by supporting the development of a local supply chain.

The development of a supply chain is often encouraged for the sizeable economic growth benefits that it could bring to the UK. However, of equal importance, is the fact that a growing domestic supply chain could reduce the UK's current exposure to transport costs, currency risks and bottlenecks in the international supply chain, all of which could significantly reduce the cost of offshore wind.

But as pointed out in a recent report by the Institute for Public Policy Research (IPPR), these benefits can only materialise if the Government puts forward a set of long-term and coherent policies for offshore wind with clear commitments in terms of deployment, funding, skills development and the upgrading of critical infrastructure such as ports. You could argue that the publication this week of widely different power sector scenarios in the Government's delivery plan, including one that envisages the UK power sector having a carbon intensity four times higher than recommended by the Committee on Climate Change for 2030, is not the best way to go about this.

Providing long-term support to offshore wind - and indeed any low-carbon technology - should not mean awarding a blank cheque to the sector, as well explained in a recent report by the Committee on Climate Change. To strike a balance between protecting consumers and giving investors certainty, the UK's long-term ambitions for offshore wind could vary within a range depending on the level of cost reductions achieved: the greater the cost reductions, the more industry could aim to deliver the upper end of the UK's ambitions.

What matters most in all of this is that the 'rules of the game' are set at the outset and based on transparent criteria. This will be key to avoid a repeat of the damaging signal sent to investors by the solar PV feed-in tariffs fiasco in 2011, when the Government announced a major cut to tariffs with just six weeks' notice.

Offshore wind has a huge potential to reduce its costs and contribute to the UK's low-carbon, energy security and economic growth ambitions. Now is the time for the Government to decisively seize this opportunity. As the IPPR warned in their recent report, a failure to do so could result in the UK "achieving a 'worst of all worlds' outcome: low volume, high cost, and a low share of manufacturing activity from domestic suppliers."