Prospect of cuts in subsidies for renewable energy developments causes alarm as oil giants lose interest in sector
The SNP Government’s predictions of a boom in renewables developments look increasingly fanciful as doubts grow about the potential of an industry it has put huge faith in.
Ministers have held out the prospect of a surge in floating windfarm developments off Scotland, which they claim will help the country make up for past disappointments.
However, the outlook for the floating wind sector darkened last week as the UK energy minister signalled public funding for expensive renewables developments will be cut.
The warning will alarm the SNP Government which reckons Scotland is ideally placed to benefit from the promised floating windfarm revolution.
Under the leadership of SNP administrations since 2007, Scotland has seen the benefits resulting from the development of windfarms fixed to its seabed hogged by firms based outside country.
Read more
New SNP Government already peddling old green jobs myths
Scotland windfarm cost concerns mount as developments stall
North Sea oil giant rubs salt into SNP Government wounds
£2bn North Sea buyout bid underlines value of huge Shetland oil field
Major Scottish motor trade player wins Chinese car sales boost
SNP ministers have claimed Scotland can expect to become a global leader in the development of floating windfarms, as they could be deployed in deep water off the country to harness strong and persistent winds.
They have had the gall to boast that Scotland’s case for leadership is reinforced by its oil and gas heritage although SNP Governments have turned against the industry.
Former first minister Nicola Sturgeon opposed plans for the giant Cambo oil field development off Shetland as she courted the Scottish Greens. The draft energy strategy published on her watch recommended a presumption against further North Sea exploration.
Humza Yousaf slammed the former Conservative Government for approving plans for the Rosebank development West of Shetland.
While current FM John Swinney has criticised the North Sea windfall tax in a bid to regain support for the SNP in Scotland’s oil and gas heartlands, voters appear unconvinced by the party’s stance on energy issues. In this month’s Aberdeen South by-election the SNP lost the seat to the Conservatives, who introduced the windfall tax when Boris Johnson was prime minister in 2022.
The Aberdeen South defeat came as SNP ministers faced uncomfortable indications that investors are having second thoughts about floating windfarms.
In November Shell axed plans for a huge development that was meant to deliver a £3bn boost for the Scottish economy after deciding that it could make much more money in the oil and gas business than in renewables. The company was reported this month to have put its entire offshore wind portfolio up for sale.
Other oil giants appear to have reached similar conclusions.
The change partly reflects the impact of the surge in inflation that followed the end of the pandemic.
Conditions are set to get even tougher as the fallout from the US-Israeli war on Iran ripples through the market.
The price of metals that are widely used in renewables such as copper and aluminium has surged amid disruption to Middle East production and energy costs have risen.
While oil and gas prices have fallen since the ceasefire between the US and Iran was extended, they remain above pre-conflict levels. Market watchers have said it could be many months for metals supplies to be restored fully.
Competition for metals from data centres will make matters worse.
However, UK energy minister Michael Shanks last week signalled that the Government may cut the supply of the public funding that renewables investors have counted on to insulate them from the effect of cost increases.
Windfarm developments have been supported by huge subsidies under the Contracts for Difference programme, which guarantees them a minimum price for their output. The costs have been added to household energy bills.
Mr Shanks told industry leaders that the Government will put a much greater focus on costs in the Allocation Round that will open for applications on July 20, the FT reported.
“We need to recognise that although securing offshore wind will be critical to our future energy goals, it cannot and will not be at any price,” said Mr Shanks, who is MP for Rutherglen.
He added: “Price will be the absolute central factor in AR8 far more than it has been in any other round.”
Mr Shanks may not be in place after Andy Burnham chooses his ministerial team if he replaces Sir Keir Starmer as prime minister in July, as expected. However, the pressure to reduce costs will remain.
That will have worrying implications for developers of floating windfarms, which produce power far more expensively than other energy sources.
In the seventh allocation round the Pentland floating wind project off Scotland won support at £155.37 per MWh output. Windfarms fixed to the seabed won backing at just £65.45/MWh.
The results of the allocation round suggested that the costs associated with floating wind energy have been rising, along with the premium over those related to fixed developments. In AR6 the Greenvolt floating wind scheme was offered £139.93/MWh for its output while fixed developments got £54.23/MWh.
Against that backdrop, the prospect of a cut in the support provided in AR8 would pose tough challenges for floating windfarm developers.
It they can’t cut costs fast enough, developers may have to accept lower returns on their investment. That could lead more to follow Shell’s lead by axing projects.
The implications for the supply chain are worrying.
The SNP Government has welcomed moves by some firms to invest in the development of ports and subsea cable manufacturing facilities that could support floating windfarm developments.
However, the related investments will be based on assumptions of activity levels that may soon have to be revised.
In March turbine giant Vestas made the link between investment in Scottish production facilities and the provision of support for developments under the Contracts for Difference scheme explicit.
Announcing plans to build a turbine plant in Scotland that would create 500 jobs the Danish firm said: “The final investment decision is conditional on securing sufficient UK-based orders in AR7 and AR8.”
All this means the SNP Government would be unwise to expect a big boost from floating windfarm development any time soon whatever ministers may claim.
Cuts in allocation round funding could also kill off any lingering hopes that Scotland has any chance of fulfilling Alex Salmond’s prediction that it would become the Saudi Arabia of the marine energy business.
Scottish tidal energy projects have won support at even higher output prices than floating wind schemes in recent years.
Concerns about energy security stoked by the war on Iran have strengthened the case for domestic hydrocarbon production as experts on energy jobs have underlined the risks of placing too much reliance on renewables.
In a report published last week Robert Gordon University said Scotland could lose 18,000 offshore energy jobs by 2035 if renewables are not developed fast enough to compensate for expected reductions in oil and gas activity.
Professor Paul de Leeuw of the university’s energy transition institute underlined the degree of concern about the outlook for offshore wind activity noting that companies had handed back licences while project timelines have moved “to the right”.
His fear is that unless policies become more supportive oil and gas activity will contract at such a pace infrastructure that could play a vital role in renewables developments will be decommissioned too soon. Skilled workers and companies in the supply chain will have no choice but to move to other countries where the prospects are brighter.
Highlighting the value of offshore energy jobs, Mr de Leeuw insisted: “The priority must be to prevent these losses in the first place, not simply to manage the consequences after the fact.”
Against that backdrop, the SNP Government may need to rethink its opposition to oil and gas exploration and development activity rather than regurgitating hype about renewables.
Share