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Denmark’s offshore wind tender continues “negative subsidy” trend

03 December 2021 Cristina Brooks

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.

Denmark's state-owned grid operator revealed plans to build a pipeline to export Danish hydrogen produced with electrolyzers in April.

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


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