By Kathryn Porter, Watt-Logic

Last week, Energy Secretary Ed Miliband announced the Administrative Strike Prices for the upcoming 7th auction round for the Contracts for Difference subsidy scheme. These represent the maximum prices he is willing to pay for each technology type. Or I should say, the maximum he is willing for consumers to pay, since it is us and not him that does the paying. Not only have the contracts been extended from 15 to 20 years, but the new maximum strike prices, the highest in over a decade, are eye-watering.

This should finally end the claim that renewables are cheap, since even at the first order level, that is the subsidy, they are likely to be higher than the cost of generating electricity using gas. Even for solar which is the cheapest of the lot.

We have suspected for some time that AR7 was going to be expensive. The Government delayed the issue of the methodology while it consulted on various changes to the contracts and budget setting, the outcome of which clearly prioritises volume over value. And we know that with the Clean Power 2030 targets just about all of the projects will need to secure contracts meaning there will be little or no price tension in the auction.

And we also know that turbine makers have increased their prices significantly, driven by a combination of factors: tightening warranties after years of claims hurt their balance sheets, passing though higher raw materials and financing costs and increasing profitability after years of losses, and, more recently, the impact of US tariffs, particularly on steel.

A report by developer Ørsted found that the costs of offshore wind have increased by 50% since 2020. Vestas has increased its average selling price for wind turbines from €0.75m /MW in 2018-2020 to €1.24m /MW in Q1 2025, and increase of 65%. It’s clear from the chart that this is a persistent rising trend, with no quarter since the start of 2021 being close to the average price over the previous three years. It is therefore difficult to justify an assumption that prices are falling or will fall in the near future – the trend shows the exact opposite.

So what are the new Administrative Strike Prices (“ASPs”) and how do they compare with previous years?

The cleared auction prices for the previous auction rounds were:

These are quoted in 2024 money (£2024) since this is the new indexation the Government is now using (from £2012 previously). The new ASPs fort AR7 compared with AR6 are below. There is an additional column showing an estimated 12% uplift which is roughly the value of the contract extension, so in order to compare like with like, this adjusted column puts the AR7 ASP onto an equivalent tenor basis:

When compared with the actual wholesale power price in 2024 (average of the N2EX day ahead prices), it can be seen that solar and onshore wind priced slightly below gas-based electricity generation while offshore wind was 13% higher. That apparently was too low for some, as Ørsted later cancelled the flagship Hornsea 4 project. The new ASPs are, except for solar, significantly higher in AR7 than AR6, but all of them are higher than the gas-based wholesale price of electricity last year.

“One of my major battles in the Department was getting them to work out the true cost of renewables. Ed’s scrapped that work. The entire government machine and surrounding ‘independent’ bodies are working off of completely bogus numbers that don’t reflect the true costs. And we will all pay the price,”
– Claire Coutinho, Shadow Energy Secretary

Of course for a proper price comparison it is necessary to add the full system costs to the renewables, that is the costs of backup for when it’s not windy or sunny, the costs of connections which are higher for renewables given their lower energy density (more wires are needed for the same MW), the costs of curtailment where windfarms have been built behind grid constraints so their electricity cannot be used, and the costs of real time balancing, which are increased by the real time intermittency of wind and solar – gusts of wind and clouds create real time output variations.

The offshore wind prices are also significantly higher than the levelised cost assumptions made by the Climate Change Committee in its 7th Carbon Budget.

Surely this is proof renewables are not cheap

If these ASPs are any indicator of where the auctions will clear, and we have to believe they are, otherwise why would they have increased, then it is likely that the cleared strike prices will be higher than in AR6, which extends the rising trend since the low of AR4.

AR4 is widely thought to have been unrealistically low – developers re-bid their maximum volumes in AR6 after AR5 failed for offshore wind attracting no bids at all, and also petitioned the government for additional economics in the form of tax breaks.

But since AR6 prices more or less at or above the gas-based wholesale price of electricity, anything higher will fully undermine any arguments that renewables are cheap. If the first order cost – the subsidy – is above the price of generating electricity with gas (after the addition of carbon costs) then clearly the all-in system costs including backup, connections, curtailment and balancing will be far higher.

The Conservatives and Reform smell blood in the water. How can Ed Miliband possibly sign 20-year contracts with headline strikes above the current wholesale price? How can he continue to claim renewables are cheap? And how can he honour Labour’s promise of a £300 reduction in bills when such a subsidy hike would see bills increase?

However if he does not sign these contracts he will be unable to deliver the renewable capacity increases required for his Clean Power 2030 Plan.

“We estimate that the net costs of Net Zero will be around 0.2% of UK GDP per year on average in our pathway, with investment upfront leading to net savings during the Seventh Carbon Budget period,”
– Climate Change Committee

This may well be make or break for Miliband. Keir Starmer is showing signs of concern over energy costs, and when the £300 savings will emerge since this was such a high profile campaign promise. Yet it seems to have escaped everyone’s notice that the Climate Change Committee has contradicted these claims saying there will likely be no net zero savings until the 7th carbon budget period in 2038-2042, ie not in 2030 as Miliband claims. Starmer may well step in a prevent AR7 clearing at the expected high prices on the basis that it will make the £300 promise impossible to deliver.

This would likely cost Miliband his job. It’s hard to see how he could remain in post if he has to choose between a failed auction or much higher strike prices, and it’s hard to see how Starmer can avoid sacking him if he pushes electricity prices up rather than down.

The omens are not good. Turbine prices are clearly higher, as are financing costs. And industry gossip was suggesting even higher prices, above the offshore wind ASP, which may well exclude some projects that might have bid if the ASP was set higher.

Miliband has staked everything on renewables being cheap. But with subsidy levels increasing and with a good chance of being materially above the cost of gas-based generation for wind if not solar, it will be hard to defend that message. Perhaps a failure to close AR7 at a reasonable price will force Starmer to remove his Energy Secretary, despite his popularity with Labour members, and install a more moderate replacement who will re-set energy policy based on evidence rather than ideology.

We can but hope.

Original article   l   KeyFacts Energy Industry Directory: Watt-Logic