Sluggish Policy Stalling the Winds of Change
The UK and EU must address shared long-term challenges to deliver enough certainty on wind power generation to entice investors.
Wind has an essential role to play in the decarbonisation of the energy sector and wider economy, but both the UK and EU have some way to go to meet targets set for 2030 and beyond.
Earlier this year, the European Parliament and Council increased a binding target for the share of renewables in the energy mix from 32% to at least 42.5% by 2030, with offshore and onshore wind vital to achieving this goal.
The UK currently does not have a comparable wind energy target, but its government has pledged to install 50 gigawatts (GW) of offshore wind by 2030, representing a three-fold increase from the 13.9GW installed today. During Q1 2023, renewables – including offshore and onshore wind – generated a record 48% of electricity in the UK.
Harry Boyle, Portfolio Manager at Impax Asset Management, tells ESG Investor that the progress of wind as a power source is “stalling” both from a UK and European perspective.
According to data from WindEurope, the whole of Europe invested €17 billion (US$17.9 billion) in new wind capacity in 2022, down from €41 billion in 2021, and the lowest amount of investment since 2009.
The investment last year financed wind farms with a total capacity of 12GW across Europe, with 10 GW of this in the EU. However, this represents less than half of the 31GW of new wind turbines that the EU needs to reach its 2030 targets.
In the UK, wind farms contributed a record 26.8% to the country’s energy mix, but the recent failed contracts for difference (CfD) auction could have notable long-term effects on the pace of future capacity.
Experts say there are three key policy related issues that could stunt wind generation and the renewable energy transition. These are failure to address the long-term issues of grid connection and permitting, not accounting for supply chain issues and inflation in CfD auctions, and the need to accelerate the impacts of onshore wind policy changes.
Long-term headwinds
As of 2022, Europe has 255GW of installed wind capacity, with 204GW of this in the EU alone, with that figure comprised of 188GW onshore and 16GW offshore.
Meanwhile, the UK has 14.5GW installed onshore and 13.9GW offshore. The UK’s offshore wind pipeline has neared 100GW and is expected to pass this milestone by the end of the year.
This sounds encouraging but grid connectivity is a big barrier. Ben Wilmot, Co-founder of newly launched sustainability consultancy Canbury, says that offshore wind projects are “struggling to get onshore connections”. Onshore wind, however, can “face significant barriers in obtaining local support”.
“The electricity network needs significant investment and reform to enable the next wave of clean energy projects to connect,” he says, noting that new projects are being offered connection dates extending into the late 2030s.
Grid connection issues are long-standing, both in the UK and EU, and require action from policymakers to be overcome.
As of November 2022, there were 600 projects with a combined capacity of 176GW in England and Wales queued up for connection to the national grid.
Connectivity is a global problem. A report published this week by the International Energy Agency (IEA) said that a “lack of ambition and attention” on electricity grids risks making them the “weak link” in clean energy transitions. It underscored that “urgent action” is required to create the policy, regulatory and investment environment that will enable grids to “keep up”.
The IEA called on policymakers to play a central role in creating an “enabling framework” to accelerate grid connections for renewable projects, including offshore and onshore wind. It also noted that new resources such as offshore wind may need “dedicated grid development”.
According to the report, annual investment in grids has remained “broadly stagnant” and needs to double to more than US$600 billion a year by 2030.
Chris Rosslowe, Senior Energy and Climate Data Analyst at global energy think tank Ember Climate, says that grid connection is second only to permitting in terms of challenges facing the wind industry.
Adam Berman, Deputy Director of Policy at energy industry trade association Energy UK, notes that Europe faces similar problems to the UK on wind, but asserts that the region has “moved quickly” to introduce programmes to incentivise investment while the UK has “fallen behind”.
This opinion was shared by Ed Matthew, Campaign Director at think tank E3G, who adds that investors need to be provided with “policy certainty”.
In September, the European Commission unveiled its Wind Power Package, with a key objective of fast-track permitting.
In some member states, the entire permit-granting process for large renewable energy projects can take up to nine years, with approximately 80 GW of wind power capacity currently stuck in permitting procedures across Europe, of which at least 59 GW are onshore.
In October, the EU Council adopted the Renewables Energy Directive, which calls on member states to design “renewables acceleration areas” where projects will undergo simplified and fast permit-granting processes.
Member states including Germany, Spain and Portugal have already defined these acceleration areas.
Under the directive, renewable energy sources will also now be treated as ‘overriding public interest’, which aims to help overcome the legal challenges that see the construction of projects delayed.
Offshore omens
According to a report from Morningstar, the price of offshore wind projects has doubled due to higher construction and capital costs, with higher turbine prices largely responsible for this increase.
The investment data and analytics provider said this has resulted in project impairments, renegotiations, and failed auctions.
Arnaud Van Dooren, Climate and Energy Policy Officer at WWF Europe, says that supply chain issues and recent increased costs have “slowed down” the expansion of wind in both the EU and UK.
Introduced in 2014, the UK’s CfD policy aims to provide a publicly funded support measures for larger scale renewable energy projects, protecting project proponents from changes to the wholesale electricity price and providing a guarantee of a steady revenue streams and, therefore, reducing investment risk for private investors.
Impax’s Boyle stresses that the UK CfD auction process is “excellent”, a sentiment shared among other experts. However, the EU’s Wind Power Package aims to address this imbalance.
Romania and Serbia plan to start CfD auctions for onshore wind this year. The former also intends to introduce a legal framework for offshore wind and start offshore auctions. Slovakia and the Czech Republic have legislated for CfD auctions.
However, the UK’s most recent CfD auction was a notable failure, with not a single offshore windfarm bid was accepted.
E3G’s Matthew describes the failure as a “disaster”, adding that the lack of new projects slows the electrification of the economy and “sends a very negative signal to international investors”. Ember’s Rosslowe agrees that the auctions failure was “astonishing”.
Matthew explains that despite numerous warnings from the wider industry, the recent UK auction was not priced to account for spikes in costs incurred from inflation and supply chain disruption. This had a negative impact on investor appetite, which caused the absence of bids.
In February, ESG Investor reported that market momentum is being threatened by project delays and grid connectivity issues following a record year for new UK offshore wind capacity, but that investors had remained upbeat.
Energy UK’s Berman underscores the lack of bids are a “big deal”, and notes that the pipeline of offshore wind projects, as well as the underlying supply chain, require “long-term certainty”, with “consistency and predictability” needed to improve investor confidence.
“We have lost a year at a time when we couldn’t afford to lose any time at all,” he says.
“It has provided a lot of investors with pause for thought as to whether the UK is the stable investment environment it was even 12 to 18 months ago.”
In April, nine European governments agreed to a combined 120GW offshore wind capacity target by 2030 and 300GW by 2050.
However, a recent WWF report described the current yearly deployment for offshore wind in the EU as “far too low”, with its 16GW of installed offshore wind capacity way below the 116GW already pledged by 2030.
According to its analysis, offshore wind investment would need to increase by 625% to meet 2030 pledges and projections, while onshore would only need to increase by 65% to meet its target.
Last year, the UK government introduced a 45% windfall tax on renewable electricity generators, which is due to apply until March 2028. This was notably higher than the 25-35% windfall tax for the oil and gas sector.
Berman described the windfall tax as “poorly designed” and as having some “quite damaging” consequences for new wind projects.
“It’s clear that it’s disincentivising investment at precisely the time that we need to rapidly increase investment in wind,” he added.
Berman also says it was “striking” that in comparison the EU has largely moved away from windfall taxes.
“Other countries have moved more quickly, following the energy crisis to put in place compelling incentives,” he adds.
Accelerating onshore uptake
The EU leads the UK in terms of onshore wind capacity. Last year, 16% of EU electricity demand was provided by wind, with 14% being onshore and just 2% offshore.
In 2022, 87% of new wind installations in Europe were onshore, with Germany, Sweden, and Finland building the lion’s share of new projects.
Ember’s Rosslowe says that some countries, such as Spain and Germany, have an “incredibly supportive” environment to help them meet 2030 targets. Spain’s National Integrated Energy and Climate Plan was recently updated with a target of 62 GW of installed wind power by 2030. Germany’s Renewable Energy Act aims to roughly double its onshore wind capacity to 115GW by 2030.
According to WWF report, most Central and Eastern European (CEE) countries ambitions are falling far behind Paris-aligned contributions. However, countries like Lithuania are developing new onshore wind, and there are a number of onshore projects being created in Estonia and Latvia suggesting that this trend could be reversing.
Last year saw the installation of just two onshore wind farms in England, and ten across the whole of the UK. More than ten times as much UK offshore wind capacity was installed compared to onshore last year.
Berman branded the UK’s previous effective onshore wind ban as “counterproductive”. Under a previous rule introduced in 2015, just one objection to an onshore wind farm in England could prevent the project from progressing. Despite policy blocking the further expansion of onshore wind, it still currently accounts for more than half of the UK’s installed wind power.
Earlier this year, the UK government streamlined planning rules, meaning local areas have a greater say in how onshore wind projects should be considered. The goal of this is to increase electricity bill savings and bolster national energy security.
E3G’s Matthew says that there was a “major question” about whether what the government is doing is going to make any difference on onshore wind.
He also suggests that the previous success of offshore wind in the UK had “masked the lack of progress in other sectors”.
Berman argues that the onshore wind amendment offered through Parliament is “in practice going to do little to allow projects at scale”.
In September, a deal was signed by the wind industry and the Scottish government at Edinburgh’s Onshore Wind Conference 2023. This deal set out a series of key measures which will help the Scotland reach its target of 20GW of onshore wind by 2030 – more than double the country’s current operational capacity of 9.38GW.
However, in recent weeks a major onshore wind project planned for the south of Scotland was shelved due to its costs almost doubling from around £300 million to £500 million.
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