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Denmark's recent offshore wind farm tender highlighted a "pay to
play" trend first seen in the UK, signaling developers' hunger to
build offshore wind.
German utility and developer RWE is set to build the 1 GW Thor
wind farm in the North Sea west of Nissum Fjord by December
2027.
RWE's company Thor Wind Farm I/S won the tendered concession
after an unusual lottery process following identical bid amounts,
Danish Energy Agency said on 1 December. UK utility
and developer SSE Renewables was the other bidder at the identical
amount.
The agency said the deal marked the world's first offshore wind
farm to be constructed with revenue payments to the state, although
the UK has similarly charged for seabed leases.
The winning bidder will have to pay some of the electricity
revenues to the state whenever the average spot price for
electricity in western Denmark rises above its near-zero bid during
the 20-year symmetrical Contract-for-Difference (CfD) contract.
After that, the wind farm will run on commercial terms for the rest
of its lifetime.
As Holger Nikolaj Jensen, a senior manager for financial
services firm KPMG Denmark's energy advisory explained to
NZBD, this means that the concession deal both subsidizes
and requires payments.
If the average spot price in a quarter is below the bid price of
$0.000015 per kWh (kr0.0001 per kWh), RWE receives the difference
as a subsidy until it reaches a $988 million (kr6.5 billion) cap,
whereas if the average spot price is above the bid price, RWE must
pay the difference back to the state in 'negative subsidy' until a
cap of $430 million (kr2.8 billion) is reached, he said.
PPAs, hydrogen driving offshore wind
The Danish tender's scope included an offshore substation and
cables, so Danish officials suggested the developer had made
additional financial commitments. "This is very promising for
future tendering procedures for offshore wind energy and the green
transition," Danish Energy Agency Director-General Kristoffer
Böttzauw said.
The strong market for power purchase agreements (PPAs) seems to
be a driver in developers' willingness to pay. "Basically, they are
considering these extra costs just to be able to get the license to
operate and produce for 30 years. It is a cost they are willing to
pay in order to get the best offshore wind sites," IHS Markit's
Senior Research Analyst Diego Ortiz Garcia told NZBD.
"What is clear is that developers are very interested in
developing merchant projects to be able to supply or sign deals on
the side. Either PPAs or, in the future, hydrogen electrolyzers,"
he said.
While Germany and the Netherlands have recently seen even lower,
zero-subsidy tenders, the developers did not pay anything in
exchange for development rights, said Garcia.
The UK, however, held a state auction for six offshore wind
seabed leases that saw winning bidders agree to pay almost the
same amount to secure seabed lease licenses as the winner of the
Danish offshore wind tender will in revenue. "If you take a step
back, it is actually similar to what happened last year in the UK
with a different framework. In the end, the developers are willing
to pay considerable amounts of money just to get the licenses to
operate," Garcia said.
In the UK auction, a coalition of BP and German utility Energie
Baden-Württemberg (EnBW) agreed to pay about $424 million (€376
million), according to IHS Markit analysts' estimates, to secure seabed
leases to develop two offshore wind farms of 1.5 GW each.
Utility net-zero targets
The Thor project will be RWE's second offshore wind farm off the
Danish coast, the other being 207-MW Rødsand 2 offshore project,
operating off Lolland Island since 2010.
The Thor offshore wind farm, with an estimated price tag of
$2.36 billion (Kr15.5 billion), is part of RWE's nearly $57 billion
investment plan. RWE plans to triple its offshore wind capacity
from 2.4 GW to 8 GW by 2030, becoming carbon neutral by 2040.
Likewise its rival in the bidding SSE plans to invest $16.63
billion (£12.5 billion) to add 4 GW of installed renewable capacity
by 2026, targeting its own 2050 net-zero deadline.
Denmark's parliament last year put the country on track to reach
net-zero by 2050. In line with this, it set a course for 70%
emissions reduction by 2030 below 1990 levels in the Danish Climate Act. It aims to
expand the 50% renewable energy in its current electricity mix to
100% by 2050.
Denmark transitions from oil economy
Two more large offshore wind farms are set to be built alongide
Thor in Denmark by 2030 to reach a total capacity of 2.4 GW. This
was provided for under the 2018 Energy Agreement that intends to
ensure the oil-producing state's green energy transition.
Ultimately, Denmark will build not only the three offshore wind
farms, but also an artificial island 80 kilometers from the coast
to serve as a distribution hub for offshore wind power.
In July, Denmark announced it would stop issuing new licenses
for oil and gas exploration including planned licensing bid rounds,
and to stop production from existing wells by 2050.
Denmark has been the EU's largest oil producer in the past,
though experiencing declining reserves since 2005. The country now
has a growing renewable machinery manufacturing sector, according
to IHS Markit's territory report. Pre-pandemic economic
growth was boosted by demand for its renewables-related machinery,
which grew 5.5% year on year in 2019.
Posted 03 December 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability
