When news broke last month that European oil majors BP and Total Energies had together locked down acreage off Germany that could house 7GW of offshore wind for the record-setting sum of €12.6bn ($13.6bn), headline writers started tapping superlatives. At first glance, this means a price tag of €1.8m per MW, making it the highest-priced offshore wind auction so far. Except that it wasn’t. Far from it. Here’s why.
Germany premiered a new auction set-up this summer, wherein developers compete on ‘willingness to pay’ to secure prime sites at sea. The leasing comes in the wake of a recent change to its offshore wind energy act that cleared the way for so-called ‘dynamic auctions’ – which come with the potential for negative bidding for non-investigated sites – and a phase-out for an earlier model that provided developers with subsidies for pre-investigated sites.
The auction – a launch pad toward the government’s goal of having 70GW of offshore wind in German waters by 2045, up from 8GW now – is the first price-point test for the new approach to be used for some of the world’s best acreage with wind speeds of 10 metres per second, relatively shallow waters averaging 40 metres deep, and manageable distances to established ports.
A question of 'payment plan'
Even with all this going for it, the acreage of the recent German auction was, in nominal terms, more than twice the price tag of leases in US’ New York Bight, which raked in $4.3bn for 7GW last year, and UK’s Leasing Round 4 with an estimated price of £5.3bn for 8GW. But this comparison ignores the timing of lease payments – and so the basic economic principle that a dollar today is worth more than a dollar tomorrow. Here, is where the picture of ‘price’ of acreage changes radically.
Through the lens of a proper benchmarking analysis, a clearer calculus on the German auction emerges. There are large differences between the timing of lease payment in Germany, the US and UK, with significant impacts on the present value of the total lease payments.
In the US, the bid price is paid immediately and so adds a substantial cost to the early stages of development. For the UK’s Round 4, by contrast, the payments are spread over the development phase, which will range from three to ten years, and the total amount will the longer the development period is. In Germany’s new auction scheme, 90% of the bid price is paid during a 20-year period after the wind farm enters into operation, which greatly reduces the amount in present value terms.
A lease price benchmarking tool provides comparable prices factoring in payment timing, that affords an arguably more accurate benchmarking across markets. Our analysis shows the German lease price in present value dropping to €0.70m/MW, showing it to be lower than present value in UK Round 4 and US New York Bight, both around €0.75m/MW.
This makes the German price lower than at first appearance. However, it’s important to note that both UK Round 4 and US New York Bight had record-setting prices that caused headlines at the time. Since then, projects on both sides of the Atlantic have struggled to make ends meet for their business cases.
Lease price 'value for money'
So, in this revised equation, how does the German auction look in ‘value for money terms’? Lease prices indicate how attractive developers perceive markets and sites to be, which hinges on a range of factors including the wind resource itself, costs and challenges of developing a site, as well as subsidy options, and straightforwardness of ‘route to market’.
Let’s circle back on our three-way comparison. The newly awarded German sites have wind speeds on par with the UK North Sea and faster than the US Atlantic off New York. In addition, the scale of transmission system to be paid for German projects is much smaller than for British and American ones.
True, there are no longer subsidies for offshore wind auction winners in Germany, unlike the contracts for difference auctions in the UK and the power purchase agreement (PPA) based model in the US. However, Berlin is aiming to develop new renewable plants at a pace in line with more ambitious energy transition plans, and a quickly emerging market for corporate PPAs would help provide a route to market.
Brace for more European lease auctions
The next four years will bring more gigascale auctions in Germany under the new scheme, including 2.5GW of non-investigated sites next year and 13.5GW of pre-investigated between 2024 and 2027.
Germany is not the only vanguard offshore wind market to phase out subsidies. The Netherlands has already done so, and earlier this year Denmark announced a pipeline of auctions totaling 9GW, where 6GW will be subsidy-free and 3GW is planned to use a dynamic auction model similar to that in German.
Developers looking to secure offshore wind in Northwestern Europe should prepare for heated competition in the coming lease auction – with or without qualitative criteria. When it comes to price, as we have seen in the string of multi-billion-dollar auctions in the US, UK and now Germany, everything is not always what it seems.
- Maria Holm Bohsen is Head of Research at Aegir Insights