Sector pacesetter Orsted, and industry bodies Renewable UK and WindEurope claimed Britain's seabed landlord The Crown Estate was driving up the cost of developing offshore wind, as they criticised the outcome of the latest auction for new leases.

The Crown Estate awarded almost 8GW-worth of projects preferred bidder status in its eagerly-awaited Round 4, with oil giants BP and Total notable among the winners alongside utility RWE, netting payments worth billions of pounds in the process.

The lease round – which grants developers exclusive access to advance projects in areas off England and Wales – was the first run using so-called “option fees” that awards zones based on bids for annual payments in the early stages of development.

Recharge revealed in 2019 how the switch from a previous system of fixed fees for leases had caused uproar, with claims that it would results in winners that had the deepest pockets rather than necessarily project know-how.

Orsted, which has led the UK's historic offshore wind growth but left the auction empty-handed, claimed the prices paid for the leases risk reversing a decade of cost-reduction in the sector, and said the Crown Estate needs to learn lessons for future rounds.

Excessive costs for seabed risks driving unsustainable financial returns for developers.

Deputy CEO Martin Neubert said: “The UK leasing round 4 confirms that the UK is an attractive market and clearly demonstrates that appetite in this leasing round by far exceeded supply, resulting in unsustainably high front-end costs.

“Europe has an abundance of seabed area, enough to expand offshore wind to more than 400 GW and reach net zero by 2050. Excessive costs for seabed risks driving unsustainable financial returns for developers and passing higher energy costs on to future energy consumers.”

Demand outstripped supply

British industry body RenewableUK said after the outcome of Round 4 was announced on Monday: “The industry had warned that the limited number of sites available and high demand risked an auction that resulted in very high bids.”

It said that the Crown Estate had agreed payments totalling £879m ($1.2bn) per year, or £111m per gigawatt per year, that “represent a very significant sum for developers. In comparison, developing and constructing a 1GW offshore wind farm currently requires investment of around £2.5bn.

“The nearly 8GW awarded in this fourth Leasing Round is significantly lower than the 32GW secured in the third leasing round held in 2010,” RenewableUK added.

The organisation’s deputy CEO Melanie Onn said: “The result of this leasing round shows that while demand for new offshore wind projects has never been higher, too few sites were made available to meet this demand.

“Any auction run on that basis will inevitably lead to high fees like these, and our concern is that this could ultimately mean higher costs for developers and consumers.”

Any auction run on that basis will inevitably lead to high fees like these.

WindEurope CEO Giles Dickson said the UK had been a successful trailblazer for the offshore wind sector, “but now with their new seabed leasing auction, they’re getting it badly wrong.

“Bidders shouldn’t have to pay large amounts for the right to develop offshore wind. And they’re making so little capacity available, that developers are having to pay huge amounts to win the auction. The developers will have to pass on these costs, so it’s a big new burden on consumers with no additional benefits,” said Dickson.

'Vote of confidence'

The Crown Estate on Monday hailed the process as a success and “a major vote of confidence in the UK’s green economy and net zero ambitions”.

The organisation's CEO Dan Labbad said: “Round 4 offers a major boost for the UK’s green economy and subject to environmental assessments, these projects have the potential to create new jobs and deliver green and affordable energy to millions more homes.”

But Recharge has reported over the last year how the offshore wind industry faces big challenges as it attempts to rapidly build out capacity, initially to meet a 40GW goal by 2030 that is four times what's in place now, and up to 100GW by mid-century under some forecasts.

Those challenges include a grid connection system that was labelled “not fit for purpose” by RWE last year, and environmental opposition that has held up consenting of several major projects.

Labbad said: “The task now is to work together across the sector, to coordinate the development we need offshore, in a way which is sensitive to the importance of biodiversity in our precious marine environment and brings new employment opportunities and growth to a range of communities across country.”

High price worth paying?

Analysts said the prices paid in Round 4 reflects the eagerness of players to establish positions in the large UK market.

Soeren Lassen, Wood Mackenzie's head of offshore wind research, said: “For players with large balance sheets and high offshore wind ambitions, the UK R4 was hard to ignore. That is reflected in the high prices.

“While the high prices are making some question if the competition is pushing the industry too far, and while there are still uncertainties about how these projects will look once they are built more than seven years from now, it is important to acknowledge that the outcome of this tender is a clear and strong testament to the attractiveness and potential of the offshore wind sector.”

“Pipelines are key in establishing a global market position, as they enable learning and cost reduction to be transferred from project to project,” added Bruce Valpy, managing director of specialist research group BVG Associates.

“BP and EnBW have both expressed intent to play on the global stage, which needs boldness, which is what we have seen here.”

But Valpy warned: “The outcome of The Crown Estate’s process, however, risks adding excessively to consumer bills, which we believe will need careful consideration.”

The BVG chief also questioned how quickly transmission upgrades will be completed to enable some of the projects to be connected.

Wind

Unsustainable returns: Orsted and industry groups slam Crown Estate over UK offshore wind Round 4