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The developer behind one of Britain’s largest offshore wind farms is exploring ditching state subsidies in favour of private power deals as it scrambles to boost the project’s finances.
Ørsted has confirmed it may give up some government support that would apply to Hornsea 3, off the coast of Yorkshire, amid concerns that the subsidies it has been awarded are too low.
Instead, a spokesman said the company may seek to sell 25pc of the scheme’s power on a so-called merchant basis – where it receives no state support but can potentially reap bigger returns.
This would amount to selling about 700 megawatts of the wind farm’s planned 2.8 gigawatt (GW) output, a total which is enough to power three million homes.
The move comes as Ørsted’s bosses scramble to boost the viability of the scheme ahead of a final investment decision, expected by the end of this year.
The offshore wind industry has been hammered by rising costs for materials and equipment, as well as higher interest rates.
There are concerns that past subsidies awarded by the Government are now not generous enough to support projects given current costs.
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Subsidy deals are structured as contracts for difference (CfDs), which guarantee developers a “strike price” for the power they generate.
When power is sold for less than the agreed price the Government tops it up, while companies are required to pay back the difference when prices go above that level.
These deals are used across the offshore wind industry as a way to guarantee a project’s long-term income and make the projects less risky for investors to support.
Since Hornsea 3’s CfD and others were agreed, the offshore wind industry has been buffeted by surging costs and there are fears that some projects will be loss-making for years into the future.
Some schemes have already been put on hold, including Vattenfall’s Norfolk Boreas project.
On Friday, bosses at Ørsted told financial analysts they were examining an option to pass over 25pc of the CfD contract so the company would instead be free to sell power from the scheme for a higher market rate.
This could potentially boost returns from the scheme – assuming the company can secure better prices for the power privately than what it is guaranteed under Hornsea 3’s CfD.
Ørsted, the world’s biggest offshore wind developer, has insisted it intends to press ahead with Hornsea 3 in “all scenarios” but has yet to take a final decision.
The project is scheduled to begin generating in 2026 and has been awarded a subsidy deal worth about £45 per megawatt hour in today’s prices – less than what was offered in the most recent subsidy auction.
The pool of potential buyers for the 700 megawatts of power on offer is likely to be confined to heavyweight companies with big electricity demands.
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Ørsted has previously struck power purchase agreements with Amazon for undisclosed rates, providing about 360 megawatts of power to the internet shopping behemoth, which also runs massive data centres for its Amazon Web Services division. The deals sourced power from the company’s onshore wind farms in Scotland.
Kathryn Porter, an independent energy consultant and founder of Watt Logic, said Ørsted faced a difficult choice between “locking in at a really low level of return or taking bigger risks and being able to make more money”.
She added: “They may take a view that they can get the project over the line because electricity prices will be high enough that they can make a decent enough return.
“Experience to date, however, shows that UK power market investors do not have much appetite for risk.”
A key risk is whether the Government would extend the Electricity Generator Levy – which affects receipts from power sold at more than £75 per megawatt hour – beyond March 2028.
Ørsted was threatened with a credit downgrade by ratings agency S&P last week after taking huge writedowns on the value of its offshore wind projects in the US.
The turmoil in the industry has cast serious doubt over the UK government’s target to reach 50GW of offshore wind capacity by 2030. A subsidies auction this year received no bids amid complaints that the guaranteed power price offered by the Government was too low.
Tom Glover, country chair of RWE’s UK arm, said the prices offered to wind farm operators must rise by as much as 70pc to entice companies to build again.
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