Statoil seals £1bn deal for windfarm off Norfolk

Construction to start this summer of 88 turbines at Sheringham Shoal

The construction of a £1bn windfarm off the Norfolk coast will go ahead this summer after Statoil Hydro, the Norwegian oil and gas group, signed a joint venture with Statkraft, the country's state-owned utility.

Once fully up and running, the 315 megawatt (MW) 88-turbine installation at Sheringham Shoal, 13 miles out into the North Sea, is expected to produce 1.1 terawatt hours of power, enough for about 220,000 homes. The first electricity will be produced in 2011.

The investment decision was due last autumn, but was delayed by ructions in the world economy as Statoil Hydro searched for a partner to share the costs. Statkraft signed a £514m deal for a 50 per cent stake in the project yesterday, paving the way for building work to begin.

For the two companies, the project is a chance to showcase their credentials. For the UK wind sector, the decision is a much-needed counterpoint to the growing list of suppliers baulking at the cost of offshore infrastructure.

Installations out at sea are vital to meeting the Government's commitment to source 15 per cent of all Britain's energy from renewables by 2020. But extreme environmental conditions – added to the scarcity of everything from turbine blades to cabling to the barges used for installation – multiply the costs.

The focus is on the Renewables Obligation Certificate (Roc) regime. The law requires power companies to derive a growing proportion of their electricity from renewable sources. By issuing certificates to generators – to be sold on to utilities to prove the obligation has been fulfilled – the system is designed to provide an extra revenue stream to help justify renewable infrastructure investments. Government plans to give an extra boost to more costly offshore installations by designating 1.5 Rocs per MW hour – compared with 1 Roc per MWh for onshore – came into effect yesterday, to help address operators' concerns.

Statoil Hydro is cagey about how much the extra allocation counted in its decision to go ahead with Sheringham Shoal, but stressed the centrality of the incentive scheme as a whole.

"The project was sanctioned on pure commercial terms," a spokeswoman said. "We won't go into the details of the business plan, but having incentives is crucial and is a very important signal from the Government."

But not all are convinced. Although Iberdrola, the Spanish energy giant, has denied press reports it is cutting 40 per cent, or more than £300m-worth, of wind-power investments in the UK, there are several outspoken examples of projects on hold for want of commercial logic.

Centrica's 250MW Lincs scheme, given the go-ahead by the planners in October, is still hanging in the balance and the company says the allowance for offshore developments will need to go up again – to 2 Rocs per MWh – to have a discernible impact. "We are still going through the costs of Lincs, but the economics just aren't stacking up at the moment," a spokesman for the company said. "Two Rocs rather than 1.5 would make a big difference."

Meanwhile, the London Array – the plan for 341 turbines covering 90 sq miles and producing enough power for 750,000 homes – is also still in jeopardy, despite the involvement of Masdar, the Abu Dhabi sovereign wealth fund, after Shell backed out last summer. Construction tenders are being evaluated, but whether the sums add up is not yet clear.

E.ON, a partner in the London Array, also backs calls for a 2-Roc allowance for offshore. Not only are the UK plans competing for resources in an increasingly global market – made even more competitive by US President Barack Obama's commitments to renewables, but bidding is starting for the UK's third round of offshore concessions. These are even further out to sea and will be even more expensive to build.

"There is a lot riding on decisions being made in the near future," a spokesman for E.ON said. "It is significantly easier to build in a Texan or Spanish desert than in the North Sea. And if the London Array can't be made to work then it is difficult to see how 'round three' will work either."

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