Britain’s failed auction for offshore wind projects last week is shocking but not surprising. Industry executives had warned for months about the dangers of setting guaranteed prices too low to attract bidders. The Government’s deafness threatens both Britain’s climate targets and its leadership in sea-based renewable energy. Urgent remedial action is required.

Up to five gigawatts of offshore wind capacity was up for grabs in this year’s allocation, in which companies compete for government contracts. The agreements protect wind-farm builders from volatile energy prices by guaranteeing a price per megawatt hour for 15 years. If wholesale electricity can be sold for more than the contract price, the developer pays the Government the difference, and vice versa if energy is cheaper. It is not the only way to add renewable-energy capacity to the grid — developers can take on the risk or enter power-purchase agreements with energy-intensive users such as data centres — but such contracts have been the preferred way for Britain to increase the availability of clean power in recent years.

The Government sets a maximum price, known as the administrative strike price, expressed in 2012 values. Companies submit competitive bids to produce electricity at prices below that strike level, with the contracts typically awarded at much cheaper rates. This year, however, the auction did not generate a single bid. The guarantee was set at £44 ($55) per megawatt hour — which would be about £60 in today’s money — far below the prevailing wholesale price of about £80 per MWh.

“The main problem was the fact that the maximum price that you could bid at was really, really low,” Ana Musat, executive director of policy and engagement at trade association RenewableUK, told me. Surging inflation, rising interest rates and the increasing cost of materials means that offshore wind projects don’t make economic sense at the electricity price the Government offered.

With a lot of coastline and shallow waters, Britain is particularly well suited to sea-based wind turbines and is second only to China in installed capacity. Britain sees the renewable-energy source as central to achieving a net-zero electricity grid, targeting 50 gigawatts of installed capacity by 2030. At present, the Britain has 13.7GW of fully operational offshore wind capacity, with a further 13.6GW under construction or about to be built. With just seven years left to almost double volume, time is running out.

In a statement, the Department for Energy Security and Net Zero said the failure “is in line with similar results in countries including Germany and Spain, as a result of the global rise in inflation and the impact on supply chains”. But Musat notes that Spain’s auction failed in November 2022 for exactly the same reasons as Britain’s bombed: prices were set too low and capital costs were rising too quickly. Britain could — and should — have learnt from that example.

Even the price Britain set at last year’s auction has proved too cheap: Swedish energy group Vattenfall halted a Norfolk offshore wind project in July owing to rising costs. It was set to be one of Britain’s largest wind projects and had been guaranteed at £37.35 per MWh.

The annual auction was designed to create certainty and encourage steady investment. But if we instead enter a boom-bust cycle, with projects viable in some years and not in others, investment will falter — and move elsewhere. “I’m not just concerned about the fact that we’ve had an unsuccessful auction,” says Musat. “I’m concerned that we’ve had an unsuccessful auction as a lot of very ambitious fiscal measures have been put in place in the US and the EU.” The US Inflation Reduction Act and the European Union Green Deal Industrial Plan both provide serious financial incentives to attract clean energy investment.

RenewableUK has sought government assurances that it has listened to this price signal and will set more attractive and viable parameters next year, taking into account the increased worldwide competition for offshore wind projects. That means a higher maximum price and a bigger overall budget. The trade body also wants to see a comprehensive, multi-year strategy for building out a home-grown supply chain, as well as other fiscal measures to attract investment such as extended capital allowances.

Britain has had a good year for renewable energy, with onshore wind enjoying a huge bump and a record number of tidal-energy projects receiving funding. But to appreciate the importance of offshore wind’s role, understand this: last year, Britain gained nearly 11 gigawatts of capacity on a £285 million budget. This time, Britain is getting just one third of that renewable capability for almost the same amount of money. Mispricing this year’s offshore wind auction will cost the nation dearly.

• Lara Williams is a Bloomberg Opinion columnist covering climate change