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Offshore Wind Journal

Subsidy-free bids prove benefits of cost reduction and auction approach

Thu 20 Apr 2017

Subsidy-free bids prove benefits of cost reduction and auction approach
Frank Mastiaux: “offshore technology has made a quantum leap in terms of efficiency to qualify as a driver of the German Energiewende”

Germany’s electricity grid regulator, the Bundesnetzagentur or BNetzA, has approved bids to build what will be the first offshore windfarms anywhere that will be developed without subsidies

 

The cost of offshore wind energy has been falling steeply, as recent rounds of tenders in Denmark and The Netherlands have demonstrated, but the power purchase agreements awarded by the BNetzA to EnBW and Dong Energy were remarkable.

The bids were “far below expectations,” said BNetzA president Jochen Homann. They are well below the market price for power in Germany, which has fallen 3.8 per cent this year to €30.10 per megawatt hour (MWh), according to broker data compiled by Bloomberg New Energy Finance (BNEF). What this means is that EnBW and Dong Energy believe they can sell the electricity they generate from the offshore windfarms at a profit, without government support.

“This is a big warning shot across the bows for other renewables,” David Hostert, a wind energy analyst at BNEF, told Bloomberg. “Three of the four winning bids are practically merchant-risk projects that will mostly rely on the wholesale power market.” The zero subsidy bids also demonstrate the key role that auctions are playing in driving down the cost of offshore wind energy.

In what was Germany’s first competitive auction for offshore wind, EnBW secured approval for the 900 megawatt (MW) He Dreiht offshore windfarm with a bid price that reflects the market rate and did not therefore include a feed-in tariff. For its part, Dong Energy has been approved to build the remaining 590MW of capacity in the first auction, which was sufficient for the Borkum Riffgrund West 2, OWP West and Gode Wind 3 windfarms, the first two of which were also secured with zero subsidies.

Describing the award of the power purchase agreements, EnBW’s CEO Frank Mastiaux said, “Offshore technology has made a quantum leap in terms of efficiency to qualify as a driver of the German Energiewende. We are extremely pleased with this result. EnBW is already one of the leading developers and operators of offshore windfarms in Germany. We already operate two offshore windfarms with a capacity of around 336MW and plan to realise two further windfarms with around 610MW of generating capacity by 2019.

“As announced at our press conference for the annual report in March, we will push forward the expansion of renewable energy as a strategic focus of our company in the period beyond 2020. We have laid the foundations for sustainable growth in the period beyond 2020 by gaining approval for He Dreiht.

“Our bid demonstrates that integrating offshore technology into the market by the middle of the next decade is possible and that offshore wind energy can make a significant contribution towards Germany meeting its energy and climate policy targets. He Dreiht thus demonstrates our clear commitment to the further responsible and cost-efficient expansion of offshore wind energy and symbolises our contribution to the Energiewende,” he said.

The auction process saw various projects of differing sizes, which will be connected to the grid in the period 2021 to 2025, competing against each other. He Dreiht is due to be connected up to the grid in 2025. The time scale for the project thus enabled EnBW to take into account in its bid expected technological developments over the next few years.

As highlighted above, two of the three contracts to build offshore windfarms awarded to Dong Energy will also see windfarms built without subsidies. Dong Energy submitted bids for six projects and won with the following three projects, which have a total capacity of 590MW: OWP West (240MW); Borkum Riffgrund West 2 (240MW); Gode Wind 3 (110MW). The three projects are due to be commissioned in 2024, subject to a final investment decision (FID) by Dong Energy in 2021.

Samuel Leupold, executive vice president and CEO of wind power at Dong Energy, said, “We are pleased with being awarded three projects in the first of two German auction rounds, and we have good opportunities to add further capacity to our winning projects in next year’s auction. Today’s results contribute to our ambition of driving profitable growth by adding approximately 5 gigawatts (GW) of additional capacity by 2025.” The Gode Wind 3 project was awarded based on a bid price of €60 per MWh.

Mr Leupold said, “The zero subsidy bid is a breakthrough for the cost competitiveness of offshore wind, and it demonstrates the technology’s massive global growth potential as a cornerstone in the economically viable shift to green energy systems. Cheaper clean energy will benefit governments and consumers – and not least help meet the Paris COP21 targets to fight climate change.

“It is important to note that the zero bid is enabled by a number of circumstances in this auction. Most notably, the realisation window is extended to 2024. This allows developers to apply the next-generation turbine technology, which will support a major reduction in costs. Also, the bid reflects the fact that grid connection is not included.”

Mr Leupold continued, “Financial discipline is key to us. We are of course reflecting the project’s exposure to market risk in the cost of capital applied. We see a solid value creation potential in this German project portfolio and will now begin to further mature the projects towards an FID in 2021.”

Volker Malmen, country manager for Dong Energy in Germany, said, “Offshore wind is fully capable of replacing retiring power plants and becoming the backbone of Germany’s energy transition. I hope that today’s encouraging results will inspire an accelerated and higher volume build-out of offshore wind in Germany and motivate the electrification of transportation and heating.”

Dong Energy will be responsible for the turbines, array cables and offshore substation, while grid operator TenneT will be responsible for construction, operation and ownership of the onshore substation and the export cable.

Explaining its ability to make zero subsidy bids for the power purchase agreements, Dong Energy said there were a number of cost drivers enabling the process. The first was that, by the time the projects are actually built, significantly larger turbines – probably in the 13–15 megawatt (MW) range – will be on the market.

“With larger turbines, the developer can increase electricity production while at the same time reduce the number of turbine positions. This contributes significantly to cost reduction during construction (fewer towers and array cables and lower costs for installation vessels and manpower) as well as during a lifetime of operations and maintenance.”

The next cost-reduction opportunity is a result of scale: OWP West and Borkum Riffgrund West 2 that Dong Energy successfully bid for will be combined into one large-scale project with the option of adding additional volume in next year’s auction to further increase the total size of the project.

The third is location – the projects benefit from average wind speeds of more than 10 m/s, which is among the highest wind speeds measured across Dong Energy’s portfolio of windfarms. The projects are also located next to Dong Energy’s Borkum Riffgrund 1 and 2 offshore windfarms, which means that operations and maintenance can be done from Dong Energy’s existing O&M hub in Norddeich.

The fourth cost benefit is extended lifetime – the German authorities have approved a possible extension to the operational lifetime of the asset from 25 to 30 years – and the last is that developers were not bidding for the grid connection in the German auction, which means that grid connection is not included in the bid price.

“The above drivers deliver a cost of electricity below our forecasted wholesale power price and will allow us to create value and meet our return requirements at the expected market prices without subsidies. Compared to German power price forecasts available from leading research firms, we consider our price forecast to be relatively conservative,” said Dong Energy. “We have applied a higher cost of capital than in previous projects to reflect the potential increase in market price exposure. The cost reductions required for a German project without subsidies are fully feasible, both technically and commercially.”

Dong Energy said it would monitor the key factors that will determine long-term power prices in Germany with a view to a final investment decision in 2021. These factors include the impact of EU action to reinvigorate the European carbon trading scheme, the phase-out of conventional and nuclear capacity, the future role of coal in Europe and the build-out of onshore transmission grids.

 

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