The announcement that Dong Energy has won the rights to develop the Borselle 1 & 2 offshore wind projects in the Netherlands did not come as a surprise to many observers: the Danish utility is the undisputed world leader in offshore wind development. However, the price at which it did so, €72.70 per megawatt-hour, was an astonishing achievement. With wholesale power prices around €35-40 this still represents a significant subsidy, however it is still by far the cheapest offshore wind tender to date and may encourage other governments to be bolder in their visions for growth.
Dominic Szanto, head of offshore wind advisory at JLL Energy & Infrastructure said “This is the result of a well-designed and highly-competitive auction process by the Dutch government. I would expect organisations in other countries planning to expand offshore wind to follow suit”.
The Dutch tender process was announced in 2013 with the government setting out a roadmap which would increase its offshore wind capacity from 1,000 to 4,500 megawatts by 2023 as part of a broad plan to bolster its electricity generation whilst reducing carbon emissions. Five offshore wind farm zones, including Borselle 1 & 2, were set out with a plan to auction these over a five-year period.
Szanto says: “Crucially, the Dutch government established a clear strategy, and also provided the subsidy, relevant planning permits, technical data and a connection to the Dutch electricity grid. This significantly reduced risk and allowed Dong to smash the floor with its bid.”
Conversely, the most recent UK offshore wind allocation process, run in 2009, has so far delivered relatively few projects. German utility E.ON is constructing the 400 megawatt Rampion project in the English Channel, whilst two other projects are due to commence construction in the next year, but this is far from the 32,000 gigawatts which was allocated.
“The UK system required developers to run the entire permitting and grid connection process, without certainty of getting economic support for the project”, says Szanto. “This has meant some developers, IPPs and utilities investing hundreds of millions into development processes and getting nothing in return.”
There are still approximately 8 gigawatts of capacity in the UK which has been permitted but has no economic support. In November 2015, the then-energy secretary Amber Rudd announced £730 million of support for up to 4 gigawatts of offshore wind, however there has still been no announcement of when this auction will occur. Anticipated in November 2016, it is likely budgets will have to be considered in light of Brexit, the closure of DECC and subsequent incorporation of Energy within BIS and the state of the economy. There is some evidence that new Prime Minister Theresa May wants to support infrastructure growth, having already supported Treasury-backed bonds for new projects.
Previous auctions run in 2014 resulted in winning tenders of £114-119 per megawatt-hour which, on a like for like basis, is around 40% more expensive than the Dutch auction. “I would not expect the UK auctions to be as cheap as in the Netherlands”, says Szanto, “The Borselle site is economically attractive, with good wind speeds, shallow water, and elements of early development were de-risked by government. However, this sets clear expectations of price reductions. The results of the Dutch process will give comfort to a UK government which is likely to be keen to demonstrate that the UK can be competitive in a post-Brexit world.”
To discuss offshore wind, please contact Dominic Szanto at JLL.