Industry Trend Analysis - CfD Cost Deflation Cements Robust Offshore Wind Outlook - OCT 2017

BMI View: We have upgraded our wind capacity forecast for the UK on the back of the substantial cost deflation registered for offshore wind in the second CfD auction . Substantial LCF budget cost overruns mean that we remain cautious on growth post-2023 , but a tight ening power supply margin, coupled with limited investment into conventional sectors , suggest that risks lie firmly to the upside.

The UK Department of Business and Energy and Industrial Strategy (BEIS) announced in September 2017 that it had awarded a total of 3,196MW to offshore wind projects in the country's second contracts-for-difference (CfD) auction. The winning bids outperformed cost reduction expectations, further cementing our view that the sector will drive UK's power sector expansion amid a relative investment hiatus in new conventional power generating facilities ( see 'Increasing Offshore Wind Uncertainty Post-2020 ' , May 12; ' Delayed Auction Not A Sign Of Policy Slippage ' , August 26 2016 and ' Brexit To Compound Power Sector Inactivity ' , November 15 2016 ).

On the back of the auction, we have upgraded our forecast for the UK wind power sector. Prior to the auction, we forecasted the sector to expand by an annual average of 2.7% between 2021 and 2026, in large part due to limited visibility into project development. Our new equivalent forecast averages 4.5%, with 2022 representing a growth peak at 8% (see chart below). Dong Energy's Hornsea Two (awarded 1,386MW), Statkraft's Triton Knoll (awarded 860MW) And EDP Renovaveis' Moray Firth (awarded 950MW) offshore wind farms submitted the most competitive bids.

Offshore Wind Sector Driving Power Growth
UK - Wind Capacity Forecast
e/f = BMI estimate/forecast. Source: EIA, BMI.

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