The UK’s plans for net zero require that the electricity industry is rapidly decarbonised, and the government is planning for at least 40 GW of offshore wind capacity by 2030. Recent investments have been supported (at ever-lower prices) by contracts for differences, but costs are now approaching the level of market prices and the government is considering changing (or removing) the mechanism used to support this investment.

Expanding offshore wind to 40 GW will bring associated engineering, economic and financial challenges. Wind and solar generators do not naturally add inertia to the power system – inertia is particularly valuable when power generators fail as it slows the rate of change of frequency after a fault, buying time for corrective actions. Alternative ancillary services will therefore be needed to maintain frequency stability, at significantly increased cost and we currently lack markets for many of these services.

Renewable generators’ costs are dominated by capital costs, whereas market prices are largely based on variable costs. Without the insurance of long-term contracts, renewable generators would face a much higher cost of capital. The fixed-price bids in recent auctions may be comparable with expectations of future market prices, but that does not necessarily mean that projects would be viable if facing market prices without additional support.

This project is a response to these interrelated challenges, drawing on our strengths in engineering, economic and financial modelling and our long experience of providing advice to policymakers. We will be using and enhancing existing models of investment decisions and of system engineering to address these issues.

A key aim is to present a market design and policy support package that allows the UK to meet its 2030 investment targets in an efficient manner and is robust against future increases in the level of renewable generation capacity.

In particular, the project will:

  1. Review international experience with electricity market design and support policy.
  2. Enhance our economics-led model of investment decisions to reflect more of the physical constraints on the system.
  3. Enhance our engineering-led system model to calculate efficient prices for energy and ancillary services.
  4. Use these models to assess a range of future market and support policy designs.
  5. Select and promote a market design and support policy package that offers the best prospects for cost-effective decarbonisation of the UK power sector.