The transformation of the UK’s offshore wind sector is significantly influenced by policy mechanisms designed to attract investment and manage financial risk. This brief outlines the key implications of policy impacts on investor behaviour, particularly under the Contracts for Difference (CfD) scheme, compared to the previous Renewable Obligation (RO) framework.
The UK’s ambition to enhance its offshore wind capacity to 50 GW by 2030 as part of its Net-Zero Strategy has necessitated robust financial and policy support mechanisms. The shift from the Renewable Obligation (RO) to the Contracts for Difference (CfD) scheme marked a decisive change in the landscape of offshore wind investments. By offering a stable revenue stream, the CfD mechanism has successfully broadened the investor base, appealing to more risk-averse financiers such as banks, which led to a reduction in the cost of capital for offshore wind projects.
Analysis of 39 offshore wind projects, totalling 18 GW of financed capacity between 2000 to 2023, highlights a diversification in the investors engaging with the offshore wind sector. The investor base has shifted away from predominantly large energy companies and utilities financing projects from their balance sheets, towards specialised renewable energy developers using project financing facilitated by bank debt. This change is primarily attributed to the introduction of the CfD scheme, which substantially reduces investment risk, albeit at the expense of slightly reduced returns.
The empirical findings suggest that the CfD scheme has significantly impacted the financing landscape of offshore wind projects by attracting lower-cost sources of finance, thus lowering the overall cost of capital. However, the analysis also indicates a sensitivity to macroeconomic fluctuations, such as base interest rate changes, which can affect the attractiveness of offshore wind investments, as shown by the lack of bids for offshore wind projects in the latest CfD allocation round. Therefore, the study recommends further refinement of risk-managing policy mechanisms like CfD to ensure adaptability to broader market and macroeconomic changes.