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LONDON (Reuters) - A huge jump in UK offshore wind power costs since 2005 is unlikely to be erased over the next 15 years and cost could rise further, the UK Energy Research Center (UKERC) said in a report on Monday.
Britain is banking on a huge expansion of relatively expensive offshore wind power over the next decade to help meet its 2020 renewable energy targets set by the European Union and the consumer will have to pay for it through subsidies to encourage new green technologies.
But, contrary to expectations that costs would fall as offshore technology develops, prices have soared because of a lack of competition between equipment makers, supply shortages, commodity price increases and a weaker pound for buying predominantly imported goods.
"Costs in the last five years or so have been heading in the wrong direction - going up when they were expected to go down," Robert Gross, head of technology and policy assessment at the UKERC said at the report launch.
"Costs per unit of electricity generated have gone up by about 50 percent and actually the capital costs have more or less doubled."
In mid 2000s Britain's first offshore wind farms cost less than 1.5 million pounds ($2.37 million) per megawatt of capacity installed, but the UKERC estimates capital cost have leapt to around 3 mln pounds/MW.
The UKERC said its "best guess" was for offshore wind capital expenditure costs to fall to just 2.8 mln/MW by 2025 -- or from 145 pounds per megawatt hour (MWh) of electricity produced currently to 116 pounds/MWh in 15 years time.
"We think there are ground for cautious optimism looking out to the mid 2020s," said Gross, the chief author of the report 'Great Expectations: The cost of offshore wind in UK waters'.
"But we don't expect a precipitous reduction in costs that matches this rather dramatic cost increase that we saw in the last few years."
None of the cost estimates for offshore wind -- which compare to less than 100 pounds/MWh for nuclear and gas technology -- include the billions of investment in new gas plants which analysts say will be needed for when there is little wind for the thousands of turbines around Britain's coastline.
The worst case scenario is for offshore electricity generation costs to surge to 185 pounds/MWh by 2025, although the UKERC thinks costs may have leveled out in 2010.
Britain opened its latest offshore wind farm last week, boasting that it now has more offshore wind capacity than the rest of the world combined -- albeit the equivalent capacity of one small 350-MW gas fired power plant.
But the UKERC warned that with about 80 percent of the equipment and services being imported, UK consumers who are having to foot the bill for it are effectively subsidizing Danish and German wind turbine makers.
The UKERC says the government should rethink its support for offshore wind to put more pressure on suppliers to cut costs overtime, while doing more to develop Britain's own wind power supply chain.
"There is this big level of subsidy available once you have built the wind farm," Gross said.
"Then there's a few crumbs that are scattered across the supply chain and there is a question over whether that balance is right."
Reporting by Daniel Fineren