Offshore wind developers see ripe conditions for zero-subsidy bids

Project efficiency gains, supportive funding markets, and growing demand from corporate customers will support zero-subsidy projects in the coming years but electrification growth is required longer term, leading developers told the 2018 Offshore Wind Europe conference.

Last month, the UK government set maximum offshore wind prices of 56 pounds/MWh (62.8 euros/MWh, $71.4/MWh) and 53 pounds/MWh for projects to be commissioned in 2023/24 and 2024/25. 

The price cap includes offshore transmission costs and confirms zero-subsidy or market-comparable prices are being achieved in all of Europe’s main offshore markets.

In March, Sweden's Vattenfall was awarded the 350 MW Hollandse Kust I and II project in the Netherlands at a zero-subsidy price. A year earlier, Denmark’s Orsted and Germany’s ENBW had become the first offshore wind power developers to acquire concessions at unsubsidized prices, bidding prices of zero euros per MWh to win projects in German waters.

     Central, Western European (CWE) power prices

                                (Click image to enlarge)

Source: European Commission Quarterly Electricity Market Report.

Turbine innovations, installation learnings and growing economies of scale are driving down offshore wind costs and emboldening developers to take on wider market price risks.

"Taking merchant risk is a huge step for any organization, it's one that we were confident doing because we do it in other markets, in other technologies," Danielle Lane, Director of Portfolio and Transactions & UK Country Manager at Vattenfall, told the conference on November 27.

"Turbine development has been a key driver, but it's also about the risk the developer is facing and willing to take," Lane said.

New records

Rising wind turbine capacities are driving down wind costs while larger projects are spurring economies of scale and series.

Supply chain buildout in mature markets such as the UK is helping to accelerate installation efficiency while developers are investing in onshore operations hubs to minimize installation and maintenance costs.

This summer, E.ON and Equinor (formerly Statoil) performed the fastest ever installation of offshore wind turbines for their 360 MW Arkona wind farm project in the German Baltic Sea. Construction was completed within three months, including loading, weather-led downtimes and technical maintenance. The plant will start commercial operations in 2019.

Supply chain efficiencies are continuing to improve and new records will be set going forward, Pal Coldevin, Head of New Energy Project Development at Equinor, told the conference.

"[Arkona] is the current record- I'm sure it will be beaten again. These incremental steps are the ones that drive the so-called zero-subsidy bids," Coldevin said.

          Owners' share of installed offshore capacity at end of 2017

                                                        (Click image to enlarge)

Source: WindEurope

Favorable market conditions are also supporting the drive towards lower costs, Bart Oberink, Head of Bid Management at Innogy, said.

"Interest costs, the cost of oil, vessel availability,...they are all extremely favorable at the moment," Oberink said.

Zero-subsidy bids expose developers to long-term trends in wholesale power prices and the procurement of power purchase agreements [PPAs] will be key in the short to medium term. Corporate demand for renewable energy is growing, deepening the pool of offtakers.

In July, Vattenfall signed a long-term PPA with Global healthcare company Novo Nordisk and biological solutions group Novozymes for its 600 MW Kriegers Flak project in Denmark, awarded in 2016 at a price of 49.9 euros/MWh.

Going forward, the electrification of heat and transport sectors will be needed to support power demand and prices, developers warned.

Growing renewable energy capacity will initially put downward pressure on the wholesale power market and demand will need to rise to support prices, Oberink said.

"For those markets where we have achieved zero [subsidy] bids, it will only be sustainable if we continue to also electrify demand," he said.

An increasing global focus on climate change should spur carbon pricing mechanisms which provide greater support for renewable energy prices, Coldevin said.

"These kind of mechanisms will drive development, in a proper way," he said.

Funding power

Developers with larger balance sheets will continue to dominate competitive offshore wind tenders as the industry moves into merchant risk pricing and larger projects, the operators said.

On November 28, Denmark's Orsted raised its 2025 offshore wind capacity target by 3 GW to 15 GW. Orsted plans gross investments of 200 billion Danish krone ($30.4 billion) in 2019-2025, of which 75%-85% will be on offshore projects, the company said.

Vattenfall, Innogy and Equinor all see themselves as well-placed in this highly competitive environment, they said.

"From a commercial point of view, we have done merchant risk in oil and gas for quite some time," Coldevin said.

"We are developing our competencies and capacities in this respect," he noted.

In July, Equinor acquired energy trading company Danske Commodities, one of Europe’s largest short-term electricity traders. Equinor plans to invest 15 to 20% of its capital expenditure in new energy solutions by 2030.

Oberink predicts there will be a further consolidation of offshore wind developers going forward as companies look to optimize equipment and financing terms and procure sufficient supply bases.

"Obviously there will also be smaller equity players coming in, but joining the lead developers that will drive this initial phase of development in merchant risk markets," he said.

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