In a limbo dance – an analogy I’ve used before for the way the cost of successive offshore wind energy projects announced in 2016 have come in at lower and lower prices – a horizontal bar, the limbo bar, is placed atop two uprights. Contestants have to pass under the bar with their backs turned to the ground. Whoever knocks the bar off or falls is eliminated. After everyone has completed their turn, the bar is lowered and the contest continues. The contest ends when only one person can successfully ‘limbo’ under the bar.
The latest winner in the offshore wind energy limbo dance is a consortium consisting of Eneco, Diamond Generating Europe (a subsidiary of Mitsubishi Corporation), Van Oord and oil company Shell, which this week won the tender for the construction and operation of the Borssele 3 and 4 offshore windfarms in The Netherlands. The consortium won the tender with a bid – excluding transmission costs – of €54.50 per megawatt hour (MWh, €0.0545 per kilowatt hour). Announcing the results of the tender, the Dutch government said Borssele 3 and 4 would be constructed and operated with a subsidy of just €0.3 billion, far less than the originally anticipated subsidy of €5 billion. This means that the saving in subsidies originally intended for the windfarms is even greater than the saving achieved with Borssele 1 and 2, the results of the tenders for which were announced earlier this year. The winning bid of €0.0545 per kilowatt hour for Borssele 3 and 4 compares with the winning bid by Dong Energy for Borssele 1 of €0.0727 per kilowatt hour.
Announcing the result of the Borssele 3 and 4 tender, The Netherlands’ Minister of Economic Affairs Henk Kamp said: “If the electricity price develops as we expect, in 7.5 years’ time subsidies will no longer be required for the production of electricity from offshore windfarms. That brings the government’s aim for renewables to compete with fossil fuels without subsidy within reach.” That is terrific news, of course, as long as this latest round of projects really can be realised at such low prices.
Should we be worried that the price has fallen a bit too quickly, or that some of the bids for recent projects have been a tad optimistic? For an analysis of whether this might be the case, I suggest you read this from Giles Hundleby at BVG Associates, which suggests there might be cause for concern. Having long been accused of being ‘too expensive’ the last thing that offshore wind energy really needs is for one of the projects awarded this year to come in late or over budget.
In it, Mr Hundleby and his colleagues analyse Dong Energy’s bid for Borssele 1 and 2 and Vattenfall’s winning bid for Vesterhav in Denmark. Mr Hundleby and his colleagues have been doing some number crunching on both projects. They say they can see how Dong Energy did it, and when Vattenfall’s bid for Vesterhav was announced, it repeated the process. But when Vattenfall’s price of €50/MWh for Kriegers Flak (also in Denmark) was announced, although it was confident it would be able to come up with a similarly robust explanation of this seemingly crazily low price, there was a problem: it couldn’t.
“Whatever the explanation, I’m thinking the situation at Kriegers Flak is unique and that therefore a bid at this level is a one-off,” said Mr Hundleby. “With the Borssele 3 and 4 results coming along very soon, it won’t take long to prove me wrong (or right), but I’m betting that the result for these will be a lot closer to the Borssele 1 and 2 price than the Kriegers Flak price.” As it happens, we now know that the winning bid for Borssele 3 and 4 came in pretty close to Kriegers Flak.
As I noted here, a recent report from EY suggests that offshore wind (and gas-powered) energy projects experience significantly fewer delays and cost overruns than most other power and utility mega projects. Let’s hope that continues to be the case as the cost of offshore wind heads south, and the bar gets lower and lower.