UK Investors Undeterred by Offshore Headwinds

Onshore lag and grid connectivity issues plaguing the UK and its European counterparts, despite capacity growth.  

After a record year for new UK offshore wind capacity, market momentum is threatened by project delays and National Grid connectivity issues, but investors remain upbeat while backing calls for urgent reforms. 

The UK currently has the second-biggest operational offshore wind capacity and the second-largest offshore wind pipeline, with only China ahead of it. A quarter of British electricity on average is produced by wind each year, with it already an “integral part of the UK energy mix”, Alex Brierley, Co-Head of Octopus Energy Generation’s fund management team, told ESG Investor 

The UK benefits from relatively windy conditions, which means that electricity produced from wind is “cheaper than other methods”, Brierley said. 

There are currently 600 projects with a combined capacity of 176GW in England and Wales queued up for connection to the National Grid, but British lawmakers have been warned by Merlin Hyman, CEO at Regen, which manages industry group Electricity Storage Network, that renewable energy projects will be “lucky to be offered a grid connection within a decade”. 

The UK has more than 11,000 wind turbines installed with a total capacity of 28GW, driven largely by an offshore boom while onshore installation has dwindled. The UK’s pipeline of offshore wind projects at all stages of development now stands at 99.8GW across 130 projects – an increase of 14GW in the last 12 months. 

2022 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. 

Tailwinds for UK wind  

“At a macro level, we think wind in the UK makes a huge amount of sense,, said Brierley. “We’ve got a supportive, political, societal and regulatory environment for new wind development, certainly in offshore wind, and increasingly, in onshore wind, which we’re really excited about.”  

Despite the recent slowdown, Renewable UK said 74% of the public surveyed in a poll it commissioned support onshore renewable energy, illustrating widespread support for wind power. 

Octopus Energy has roughly £6 billion (US$7.2 billion) worth of assets in total, with £2.8 billion (US$3.37 billion) of assets in wind. Brierley said that at last count the firm has 42 wind farms under management, with investment in and development of further projects ongoing.   

Nick Wood, CEO and CIO of Resonance Asset Management, which currently has approximately £350 million invested in UK wind farms, said that the UK has some of the best locations for offshore wind assets in the world, the support of the UK government to increase capacity, and a “stable regulatory environment” for current onshore wind assets.   

“[We are] not concerned about our existing investments in UK wind,” he added.  

Three major UK offshore wind projects went fully operational in 2022, powering a record annual high of new wind capacity – enough to power more than 3.4 million UK homes. This broke the previous record of 2.1GW set in 2018, and marked a significant increase compared to 2021, when just one offshore project (48MW) went fully operational.  

Last year, the UK government announced a record 11GW of clean energy, secured via the largest ever round of its flagship renewables auction scheme, with offshore wind making up 7GW of that total. This is being driven by the falling cost of wind, with offshore costing £37 per unit – the cheapest form of renewable energy – followed by onshore wind at £42 per unit.   

Storm clouds on the horizon   

Renewables providers and energy experts have warned that delays in connection to the national grid could impact the UK’s efforts to decarbonise its electricity system by 2035. The National Grid normally gets 40-50 applications for grid connections per annum, but with 600 projects currently in the queue some wind projects have been told they will have to wait until 2036 for connection.   

Brierley criticised the queuing system currently in operation, saying it “can’t be right [that] we queue behind all sorts of different assets – some lovely renewable energy assets and some not so lovely fossil fuel assets that I suspect will never be built”.   

“In a world where renewable energy is the overriding backbone of an electricity market, the grid needs to be managed very differently,” he added. “We need to change the way the grid is managed. The grid needs to become digitised and smart rather than slightly archaic.”  

Wood said a major disincentive to developing further onshore wind capacity is the “extremely time consuming and expensive” planning process for getting assets connected to grid.   

Hornsea 4 has been delayed by more than four months due to final approval being needed by the government. Renewable UK said this delay underlines the need for “urgent reform” in the planning system, with the project due to produce 2.6GW of clean energy.   

Asset managers have also previously said that permits and connections pose a bigger challenge than finding investors. Scotland is expected to lose up to £60 billion due to the “underselling” of leasing rights for offshore wind.   

Continental connection conundrum  

Global wind capacity increased five-fold between 2010 and 2022, according to data from the Economist Intelligence Unit. Wind is forecast to grow from an estimated 896GW at the end of 2022 to 1,523GW by 2029. However, the International Renewable Energy Agency and the International Energy Agency estimate that offshore wind capacity will need to exceed 2,000GW by 2050 to achieve net zero.  

“The UK is not alone in having grid capacity issues,” said Wood.   

Polish think tank Forum Energii published a report that found the country’s energy sector must urgently accelerate network expansion in order to enable further renewable energy development.  

Environmental charity ClientEarth found Poland’s grid requires US$27 billion worth of investment enable renewables development, with 30GW of projects, including wind, refused grid connection approval between 2015 and 2021.   

“Every single different market has got a different challenge,” said Brierley, “Those challenges in the UK are the same or very similar in lots of other European markets and frankly global markets.   

“The need to understand how to fully integrate renewable energy, and then to manage the grid in a way that is highly efficient is a global challenge.”  

Overall investments in wind energy in Europe fell in 2022. Orders for new wind turbines in Europe dropped 47% from 2021, with inflation seeing costs rise at a “higher rate than prospective revenues”. 

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