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Oil majors’ shadow looms over latest US offshore wind lease auction

09 May 2022 Keiron Greenhalgh

The latest US government auction of offshore wind seabed rights on 11 May is expected to attract deep pockets, including oil majors on the path to net-zero involved in a record-setting bidding war in a February lease sale.

Another bidding war could price out all but the heftiest wallets, industry leaders said this week, with some calling for price caps so that perspective on wider energy transition and net-zero goals isn't lost.

February's auction of lease areas off the coast of New York and New Jersey attracted total high bids of $4.37 billion, the loftiest total for an auction of rights in US waters in any energy sector since 2008. It included a $1.1-billion bid for just one lease.

But Ørsted CEO Mads Nipper on 29 April warned governments against killing the golden goose of offshore wind during the company's first-quarter 2022 earnings call, as well as undermining their net-zero ambitions.

Authorities must avoid the mistake of "monetizing offshore wind" and instead "deliver society a win," where they are reaping the socioeconomic benefits of a rapid buildout of the sector, the head of the world's biggest offshore wind developer warned.

When developers pay substantial fees to secure seabed rights from lease auctions, he said, such costs will eventually end up being imposed on consumers. In addition, he said, such costs risk blunting the industry's ability to effectively deliver on policy objectives.

At the same time, he warned, it exerts further pressure on supply chains and the ability to invest in ramping up capacity during a period of rising inflation and costs.

Fierce bidding expected

Still, Ørsted is on the list of approved bidders for the US Bureau of Ocean Energy Management's (BOEM) 11 May Central Atlantic lease sale, alongside units of long-time developers such as Avangrid (a unit of Spain's Iberdrola) and Ocean Winds, a joint venture of Portugal's EDP Renewables and France's ENGIE. Unlike EDP Renewables and ENGIE, Ørsted did not take part in February's auction of New York Bight rights.

Dennis Wamsted, an energy analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), said that despite Nipper's 29 April comments Ørsted is likely to continue participating in US lease sales, particularly with so many on the horizon.

The ferocity of bidding in February's auction turned out to be unexpected, Wamsted said, but the cost of every part of building an offshore wind farm—as with any other energy transition capital investment—has risen. So, whether this will lead to a relative de-escalation of lease interest and prices on 11 May is one of the many questions to be answered.

Bidding for the leases off the coast of South Carolina and North Carolina will be spirited in the latest part of the Biden administration's push to build 30 GW of offshore wind capacity by 2030, he said, especially with the stacked line up of qualified bidders. Those qualified participants—with no fewer than five winning bidders from the New York Bight auction—include units of oil majors BP, Shell, and TotalEnergies.

Monied European, Middle Eastern, and Asian bidders are also represented in the form of subsidiaries of Germany's RWE, Japan's JERA (a joint venture between Tokyo Electric Power and Chubu Electric Power), and state-owned UAE energy company Masdar. RWE made a big splash on its US offshore wind space debut in February by teaming up with the UK's National Grid on the biggest bid—an eye-watering $1.1 billion.

The two lease areas on offer in the Carolina Long Bay auction are slightly bigger than the most modest of the February New York areas at 54,937 and 55,154 acres, respectively. That relatively compact 43,056-acre plot of seabed (which was estimated to be able to offer some 523 MW of capacity) still managed to attract a high bid of $285 million.

Samantha Bobo, S&P Global Commodity Insights ENR senior research analyst, told Net-Zero Business Daily on 5 May she was "anticipating fierce competition like we saw in February and, while the wind resource isn't as good the farther south you move, I would not be surprised if we saw similarly bullish prices."

Atlantic leases are prime (and pricey) locations for offshore assets because winds are the strongest in the region during the afternoon and early evening, concurrent to peak demand, said Wamsted. In addition, some of the problems with building onshore assets are obviated because there are fewer transmission line obstacles, compared with the densely populated Mid-Atlantic and northeastern states, he said. When transmission lines can come ashore at existing connections to the grid such as retired coal-fired or nuclear plants, the path is smoother yet, he added.

Because renewable projects' price tags are less costly to develop than an oil field, the industry's lower barriers to entry have attracted oil majors, Gianni Chianetta, CEO of the US-based Global Solar Council, toldNet-Zero Business Daily earlier this week.

Oil majors' entry into the offshore wind realm is a good thing on balance, said Wamsted, because such companies wouldn't enter the field of play without knowing they could make a profit. Deeper pockets don't necessarily mean a company will make more money though, he said, especially with costs increasing across the board, and not just in terms of seabed leases.

Turbine prices are on the rise. Henrik Andersen, CEO of Vestas, said during the company's first-quarter 2022 earnings presentation on 1 May that the global turbine sales leader's average selling price for its order intake in the period was €1.01/MW ($1.07/MW), compared with €0.86/MW in the fourth quarter of 2021. Steel prices and chartering costs are also on the up too.

Pause for thought

Despite optimism for the upcoming US auction, the deep pockets of oil majors and state-owned Persian Gulf entities such as Masdar are giving existing players pause for thought.

Long-time renewables developer wpd on 6 May said it was exiting the offshore wind space, selling out to Global Infrastructure Partners (GIP). The German company, which has developed around 7 GW of capacity over the past 20 years in the offshore wind space, is sticking to onshore wind and solar from now on, it said. GIP, on the other hand, with around $81 billion under management in the infrastructure space, has the deep pockets to compete.

Two days earlier, US utility Eversource initiated a "strategic review" of its offshore wind investment portfolio. Its options include the sale of all or part of its 50% interest in its offshore wind joint venture with Ørsted, the New England-based firm said.

Eversource CEO Joe Nolan made no bones about the reason. "In light of the record-setting prices in the recent federal lease auction for tracts around the New York Bight and an evolving landscape, we are conducting a fulsome review of our interest in the joint venture with Ørsted," he said. Eversource expects to complete its review by the end of 2022 at the latest.

The company's partnership with Ørsted includes three contracted projects with a total capacity of approximately 1,758 MW, as well as up to 175,000 acres of offshore wind area not allocated to a specific project. The three projects are the 130-MW South Fork Wind expected to enter service in late 2023, the 704-MW Revolution Wind project off the coast of Rhode Island, and the 924-MW Sunrise Wind project in New York waters. The latter two are expected to begin shipping power in 2025. Revolution Wind has contracts to provide power to the states of Rhode Island (400 MW) and Connecticut (304 MW).

Offshore wind is going to have an impact on the US East Coast power sector that until now has been underestimated, Wamsted said, especially in relatively small markets such as Rhode Island and Connecticut.

ISO-New England, the region's grid operator, is predicting total power demand will remain little changed. In 2030, when multiple gigawatts of offshore wind will be online, the impact on the region's power infrastructure, markets, and players will be substantial, he said. For instance, New England won't need the proposed gas pipelines that have run into many a roadblock over the past few years, he noted.

Price caps?

The US is playing catch-up with Europe on offshore wind and it can learn from Europe's experiences, according to observers. Nipper, for one, is a fan of auction price caps. His stance is reflected widely across Europe.

At the US-EU Energy Council High-Level Business Forum on Offshore Wind in New Jersey on 27 April, industry trade body WindEurope said the set-up of auctions makes a big difference. Introducing a price cap for seabed leasing auctions ensure that "new offshore wind volumes are delivered at the lowest cost for consumers and taxpayers," it said.

During the Ørsted earnings call, Nipper compared the structuring of the recent ScotWind auction with that of other auctions around the globe. "What we saw in ScotWind was … a very, very large allocation of seabed with a clear and absolutely acceptable price cap," he said, adding that this took some of the pressure off bidders.

If mechanisms such as price caps aren't introduced, Nipper said, the "necessary investments" for the greening of the power sector and society in general are less likely to take place. Inflation in bidding is forcing "some of the industry players that have previously been very aggressive on price in our industry" to reconsider their focus, he said.

In Scotland, Ørsted will embark on its first floating wind farm in a joint venture with Italy's Falck Renewables and Spanish developer BlueFloat Energy. Meanwhile, joint ventures involving units of Iberdrola plan to build a combined 7 GW of floating and fixed capacity.

More US auctions on tap in 2022

US floating wind plans are at an even earlier stage, but future leases are on tap for areas close to the 11 May auction and along the US West Coast, where fixed-bottom prospects are dimmer due to a quick drop off in the US Continental Shelf.

On 27 April, BOEM published calls for information and nominations for possible leasing in areas off the coast of Oregon plus the Central Atlantic (Maryland, Virginia, and North Carolina). BOEM is seeking information on six areas in the Central Atlantic comprising almost 3.9 million acres. The Oregon call, the first of its type off the state's coast, requests information on two areas that comprise around 1,158,400 acres.

Before it holds auctions for these areas, BOEM is scheduled to hold northern and central California lease sales later this year.

Posted 09 May 2022 by Keiron Greenhalgh, Senior Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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