@pinaki_kkkm Can you please follow us so we can DM? Thank you!
BP, Total swoop in pricey UK offshore wind auction
Oil majors competed in a recent auction of UK Crown Estate seabed leases, and were among those making "very high bids" for the chance to develop offshore wind, while new option fees were said to be crowding out traditional wind developers.
Consortia led by BP and Total secured more than half of the 8 gigawatts (GW) in offshore wind project leases auctioned under the Crown Estate's Offshore Wind Leasing Round 4. The selected bidders will now move on to environmental assessments before making final investment decisions.
BP's consortium with German utility Energie Baden-Württemberg (EnBW) won a bid to develop two 1.5-GW projects under 60-year leases for British crown-owned seabed at two locations in the Irish Sea, while a joint venture between French oil major Total and Macquarie's Green investment Group (GIG) won the bid to develop 1.5 GW off the coast of Humberside on the east coast of England.
The pair of projects could give BP a foothold in the UK offshore wind market. "The 3 GW of projects mark the companies' entry to the UK's offshore wind power sector and are expected to meet BP's 8-10% returns aim, with the assets hoped to be operational in seven years," according to an IHS Markit energy technical report.
While the auctions mark success for BP and Total, the overall size of the auction disappointed industry trade group WindEurope, which thinks that the UK offshore wind industry has more potential.
The Crown Estate, which manages the sovereign's property portfolio, promised to lease the seabed areas for offshore wind in November 2017, securing the goodwill of potential investors.
The UK government also incentivized investment by increasing Contracts for Difference (CfD) and capacity targets for offshore wind. It raised the target of 30 GW under its 2019 Offshore Wind Sector Deal to a proposed 40 GW to meet expected energy demand amid coal and nuclear power decommissioning by 2050. The nation already has 10 GW of offshore wind operational.
While UK government policies contributed to the UK installing the most offshore wind capacity of any country yet, according to IHS Markit, the wind industry says the 8 GW auctioned was "too little" given such a national capacity target.
Even before the auction, wind industry groups such as WindEurope warned of "very high bids" because the capacity on offer was much smaller than the Crown Estate's 32-GW third leasing round in 2010.
Commentators foresaw that high demand for such projects from new entrants could raise prices. "Are there enough projects to feed BP and others crowding into those [renewable] markets?" Energy Industries Council (EIC) CEO Stuart Broadley asked at an 11 January online event.
"I think there are going to be many businesses in countries around the world wanting to participate in those already commoditized, easy markets, if you like, such as wind and solar," he said.
"It's easy for companies to make a strategy or a statement, as they now start to strategize and participate in green businesses, but where are all those businesses going to be? And if everybody crowds in, will the margins reduce, and will the premiums to get into those businesses increase? In the end, shareholders may not be happy," said Broadley.
The leasing round also introduced a new bidding system that makes investors pay an annual, upfront "option fee" for a project during the estimated 10-year planning process prior to operation or CfD auctions, said WindEurope. The option fees add up to £8.8 billion (US$12 billion) in total for the auction's bidders, of which BP and its partner will shoulder £462 million (US$637 million).
The option fees mean these offshore wind developers in the UK are paying a premium. "This is the first time anywhere in Europe that a bidding process to set 'option fees' has been used in the leasing process for offshore wind farms. Previously the Crown Estate had set fixed annual fees once the wind farm entered into operation," said WindEurope Communications Manager Christoph Zipf in a statement.
WindEurope CEO Giles Dickson added that fee-burdened developers will have to pass on these costs to consumers, making wind power expensive and undermining its expansion right when it should be taking off.
Starting with discussions in 2019, BP has followed rivals like Shell and Total into the offshore wind sector. Commenting on the new Irish Sea projects, BP's Chief Executive for Alternative Energy, Dev Sanyal, noted they are in shallow waters near the coast, keeping transmission costs and environmental impacts down. BP said in a statement on the auction that the plan affirms its goal to become a net-zero company by 2050.
BP made headlines last month in the US when New York State selected its partnership with Norwegian state-owned oil company Equinor to supply 3.3 GW from two offshore wind projects, Empire Wind 2 and Beacon Wind 1, and build industrial facilities related to offshore wind at two New York ports. The state is looking to make New York into a hub for offshore wind.
Meanwhile, Total's successful bid for the 1.5-GW offshore wind project aligns with its focus on renewables and its own net-zero emissions goal for 2050, Senior Vice President Renewables Julien Pouget said in a statement on the auction. The major also recently announced a name change to TotalEnergie.
With its own bid, Total is adding to its 1.1-GW Seagreen project off Scotland's eastern coast and a floating wind project in the Celtic Sea. Its partner GIG is already involved in nearly 50% of the UK's offshore wind capacity, according to IHS Markit analysts.
Total's growing renewable pipeline includes a significant amount of solar in the US and Spain. It signed a headline-making agreement with the Spanish developer Ignis to develop 3.3 GW of Spanish solar power in September. Last week, it acquired 2.2 GW of battery-linked solar projects in Texas from MAP RE/ES and SunChase Power, adding to the 1.6 GW of solar power it is developing the US in partnership with 174 Power Global.
Shell not left behind
Shell is taking a different approach to other majors in the competitive European offshore wind market. It capitalized on floating wind technology that can be installed in deeper waters, usually found 35-60 kilometers offshore, when it acquired a majority stake in the 300-MW Emerald Project in Irish waters last month.
Shell then continued signing offshore wind deals. On 8 February, its CrossWind joint venture agreed to supply wind energy to e-commerce giant Amazon via a power purchase agreement with its 380-MW Hollandse Kust Noord wind farm, currently under construction in the North Sea off Amsterdam. The wind farm project partners won a Dutch government subsidy-free tender in July 2020.
The Anglo-Dutch major plans to use the offshore wind farm's energy to produce green hydrogen in Rotterdam through its role in the NortH2 venture that includes Equinor, gas network operator Gasunie, and Groningen Seaports, according to a statement. It also cited hydrogen from offshore wind as a key element of its plan to reach net-zero emissions by 2050.
- Affordable, clean energy for all Africans? IEA says it’s a simple equation
- IRENA report offers proposal for renewables’ price cannibalization headache
- A half-century of countries with floating offshore wind by mid-century?
- Equinor eyes 1-GW Norwegian floating offshore wind farm to help decarbonize oil production, cut costs
- Indonesia prepares “grand” renewables strategy; doubts remain over policy design, execution
- BP bets big on renewables, green hydrogen in Australia’s Pilbara
- Fossil fuel boom profits not being taxed to fund transition: study
- China restricts solar, wind power projects in inland waters, cites flood control