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Subsidy-free offshore wind proves massive benefits of auction approach

Tue 18 Apr 2017 by David Foxwell

Subsidy-free offshore wind proves massive benefits of auction approach

The announcement last week that Germany’s electricity grid regulator, the Bundesnetzagentur, or BNetzA, has approved bids to build the first offshore windfarms anywhere that will be developed without subsidies is another huge step forward for the offshore wind energy industry.

The announcement also demonstrates the key role that auctions are playing in driving down the cost of offshore wind energy. Of the contracts awarded by the BNetzA to EnBW and Dong Energy last week, three out of four were based on bids that did not include a subsidy.

The bids were “far below expectations,” said BNetzA president Jochen Homann, and are well below the market price for power in Germany, which has fallen 3.8 per cent this year to €30.10 a megawatt-hour, according to broker data compiled by Bloomberg New Energy Finance (BNEF). This means 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.”

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: the OWP West and Borkum Riffgrund West 2 Dong Energy successfully bid for will be combined into one large-scale project with the option of adding volume in next year’s auction to increase the total size of the project.

The third is location – the projects benefit from average wind speeds of more than 10m/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 which 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
  • The build-out of onshore transmission grids.