Orsted’s recent decision to cease operations on the Hornsea 4 wind farm marks a significant setback for Labour’s net-zero initiatives. As the largest wind farm developer globally, the Danish company had secured the contract just last year, but economic factors made it untenable. Hornsea 4 was projected to deliver 2.4 gigawatts of power, a noteworthy contribution considering that the UK’s average daily electricity demand ranges from 30 to 35 gigawatts.

This development underscores a more serious issue: this year’s auction for renewable energy sources could determine the future of net-zero ambitions. Should the auction fail to secure sufficient capacity at competitive prices, it may undermine Energy Secretary Ed Miliband’s claims regarding renewable energy being more cost-effective than fossil fuels, jeopardizing his target of achieving a near carbon-neutral electricity supply by 2030.

The auctions form a crucial part of the strategy established by various administrations to transition the UK away from coal, oil, and gas, fulfilling national and international obligations under the 2016 Paris Climate Agreement. The inaugural auction took place during David Cameron’s government in 2014, and this year marks the seventh iteration, officially known as allocation round seven. The process involves detailed regulations, and numerous consultancies and law firms benefit from advising participants.

At its core, the auction process is relatively simple. The government sets a low-carbon electricity target, inviting companies to bid to supply this energy. A guaranteed price for the power is established, with commitments to maintain that price for typically 15 years. If the market price fluctuates above the guaranteed rate, the difference is covered by a charge on consumers’ electricity bills. Conversely, when the guaranteed price is lower than the market rate, consumers benefit from reduced bills. This mechanism, known as the “contract for difference,” is frequently referenced in discussions regarding renewable energy subsidies.

This system has proven effective, particularly in fostering investment in offshore wind. In 2014, wind power constituted 9 percent of the UK’s electricity; by last year, this figure rose to 30 percent, surpassing gas at 26 percent, while overall renewables accounted for half of the national electricity mix. Coal’s contribution has diminished significantly, from 10 percent at the beginning of the century to nearly non-existent today.

Despite this progress, there remains considerable work ahead to meet climate change objectives, along with Miliband’s secondary goal of a largely fossil-free grid by 2030. The target calls for between 43 and 50 gigawatts of offshore wind capacity to be operational by the decade’s end. Currently, 28.6 gigawatts have either been completed, are under construction, or have received approval (this figure was previously 31 gigawatts before Hornsea 4’s withdrawal), meaning at least 14 gigawatts need approval in the upcoming auction or the one following. After this, it will be too late to impact the 2030 aims.

Unfortunately, the timeline is falling behind schedule. Last year saw bids submitted in February, with contracts awarded by September. In contrast, this year’s auction has yet to initiate, with the government only indicating that the process will begin in the summer. Insiders suggest a possible start in July, likely delaying contract awards until next year.

The holdup is largely due to modifications in the auction framework. Notably, the budget for the auction will now be disclosed only after bids are evaluated, a departure from prior practices. The Secretary of State (Miliband) is also equipped with enhanced authority to review anonymized bid information before finalizing the budget, allowing for adjustments to ensure the availability of adequate funding for the desired power allocation. Another factor contributing to delays involves a critical choice regarding a potential shift from national to zonal pricing in electricity, a significant matter for wind farm developers seeking to avoid negative changes.

Moreover, the issue of pricing looms large. Miliband has asserted that a transition to renewable energy will lead to lower electricity costs, yet the Hornsea 4 situation casts doubt on this claim. Orsted initially agreed to a price of £56 per megawatt-hour (MWh), which, when adjusted for inflation to this year, equates to approximately £82—already higher than the current mid-70s market price. If Orsted cannot justify the project at £82, it signals that bids this year might be even pricier. Furthermore, Hornsea 4 is now effectively sidelined, as auction regulations prohibit its re-entry for two years, although the government may be inclined to seek ways to reintegrate it.

Ultimately, the dynamics of oil and gas prices will heavily influence the landscape. A sharp increase in these prices, akin to those seen during the recent Russia-Ukraine conflict, could validate Miliband’s position. However, presently, oil prices have declined significantly, from around $85 a barrel to $63 over the past year. Gas prices have also experienced volatility but recently dropped from 125p per therm to 101p.

This situation culminates in a challenging outlook for the energy secretary. If upcoming bids exceed market values, he may have to confront the reality of abandoning promises for reduced energy bills. Nevertheless, he has two fallback premises: the necessity of renewables for meeting climate targets and their potential to bolster energy supply security. Yet, in a government increasingly focused on economic growth and responding to calls for lower energy costs, these rationales might fall on uninterested ears.