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Will low offshore wind prices stick in new European tenders?

IN DEPTH | The last three European offshore tenders saw staggeringly low winning bids — but will this trend continue at upcoming German and UK auctions? ask Bernd Radowitz in Berlin and Christopher Hopson in London

After Dutch and Danish tenders produced the lowest ever prices for offshore wind late last year, the sector is eagerly watching to see if this trend will continue at large upcoming auctions.

And with some 3GW of capacity due to be auctioned off in April in UK and German waters, the wait will not be long.

“We would be extremely surprised if we don’t see record-low prices in both markets this year,” WindEurope chief executive Giles Dickson tells Recharge.

His optimism comes after Swedish utility Vattenfall won the tender for the 600MW Kriegers Flak array off Denmark with a record low price of €49.90 ($52.50) per MWh last November. A month later a Shell-led group won the Borssele 3 & 4 tender in the Netherlands for €54.50/MWh.

But such low prices are highly unlikely to be seen in the UK and Germany; the Dutch and Danish prices do not include the costs of transmission and some pre-construction surveys and permits. This de-risked those projects to a great degree and reduced the upfront expense for developers.

Grid costs/price estimates

It is not entirely clear how much grid links add to overall costs, but a good indication is the €14/MWh payment that transmission system operator TenneT is calculated to receive from the Dutch state for providing the connection to Borssele and upcoming arrays.

Projects in the upcoming UK tender are further out to sea, which is likely to add to the grid link costs that developers must pay.

The same is the case in German North Sea projects. But tender winners here only have to pay for the inner-park cabling and substation, not for the transformer platform — which converts alternating current (AC) into direct current (DC) — or the high-voltage cable to shore, or the link between the substation and transformer.

Baltic Sea German projects are closer to the coast and do not require expensive transformers or high-voltage DC links to the onshore grid.

Industry experts estimate that developers’ offshore cabling will add €10-15/MWh to German North Sea projects.

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Despite the different conditions, offshore wind “will be the lowest-cost way of delivering clean electricity generation [in the future]”, Ray Thompson, head of UK business development at Siemens Wind Power, said at a recent Scottish renewables conference. “Offshore wind projects are increasingly seen as being safe, mature and not risky,” he said, adding that this has led to lower financing costs.

At the same conference, Alan Duncan, senior associate at BVG Associates, said his consultancy predicts sub-£90/MWh ($110.45) strike prices at the UK’s upcoming Contracts for Difference (CfD) auction, which is well below the government’s price cap of

£100-105/MWh, depending on when a project will be completed.

Terms also vary in other aspects, such as soil conditions and how long subsidies last. Germany grants support for 20 years, while the UK and Netherlands offer only 15. Danish offshore aid is limited to 50,000 full load hours of electricity produced, which translates into a support period of about 13 years.

Doubts about ultra-low prices

Although the industry expects winning bids to plunge in the German and UK tenders, there are doubts about the sustainability of rock-bottom offshore prices.

Vattenfall chief executive Magnus Hall told Recharge late last year that prices won’t continue to fall rapidly as the industry is running out of ways to cut costs further. His company put a huge amount of effort into finding cost savings in project logistics, and has benefited from larger and more efficient turbines.

Starting electricity production before wind farms have been fully completed also increases the efficiency of projects.

“It is becoming more and more difficult to find cost savings and you come down to a more natural situation where you will see tough competition from everybody,” Hall said.

It is becoming more and more difficult to find cost savings and you come down to a more natural situation where you will see tough competition
Magnus Hall, Vattenfall

Some offshore experts believe that Vattenfall already went too far with its ultra-low Kriegers Flak bid.

At least one knowledgeable European industry official, who wished to remain nameless, told Recharge that he doesn’t consider it to be realistic. And in a February webcast, Dong Energy chief executive Henrik Poulsen issued some words of caution.

“You could argue that irresponsible players who might submit bids that are not value-creating over time will eventually be weeded out,” Poulsen said, pointing out that the construction of large offshore arrays can cost $1.4bn-2.8bn.

“So even if you have a large balance sheet, or whatever ownership structure you may have, there is a limit to how far you can go in terms of undertaking value-destroying activities at that scale. It may take some time for that to play out, and that weed-out to happen, but for the longer term there is a limit to the amount of irrationality that can survive in an industry.”

Still, Poulsen added that Dong expects that even larger turbines, faster installation cycles, more specialist vessels and foundations will, in time, push prices down further.

“It might be possible that a new turbine generation becomes available, with the potential to make projects cheaper,” says Catrin Jung-Draschil, head of portfolio and business development in Vattenfall’s wind division. “But to bet on that also poses a higher risk as it is not known when a new turbine generation will really be available. There is also a risk in how steel prices will develop [and influence turbine prices].”

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Siemens has already said it is working on a new generation of offshore machines with a capacity of 10MW or more for the post-2020 period, while rival MHI Vestas this year unveiled an uprated 9MW version of its V164-8.0 offshore turbine.

Despite the uncertainty regarding how fast the next super-size turbine generation will hit the water, or how steel prices may develop, Jung-Draschil rejects the notion that Vattenfall may not have created a financial buffer if something goes wrong during construction.

“We still have contingency built in, but we calculate that on a basis of the risk profile of each project,” she says. “But the situation may get tougher for smaller developers with less experience that could find it more difficult to assess the risks.”

It is generally believed that smaller or pure-play developers that don’t have state backing (such as Dong, Vattenfall and EnBW) or very large balance sheets (such as E.ON, RWE and Shell) may fall victim to the enormous downward price pressures. But analysts say small developers could team up with big financial institutions or pension funds, which are hungry for large infrastructure investments.

The political impact

It seems it was only yesterday that an offshore wind price of €100/MWh was a dream. But with prices as low as half of that in what feels like the blink of an eye, governments around the world are expected to pay closer attention to the technology.

The outgoing Dutch government made it clear that it would like to boost its offshore expansion to beyond 1GW a year post-2023, while the UK could be persuaded to abandon its expensive plans for a nuclear renaissance.

Meanwhile, Asian countries such as Taiwan have started to get serious about offshore, while the US is beginning the process of industrialising the sector.

In short, low prices in the German and UK tenders would let the world know that offshore wind’s recent cost reductions are here to stay. And this could prove to be vital as the industry expands beyond its northern European base.

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