Will we see more subsidy-free bids in the future?

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Ilaria Valtimora
April 21, 2017
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This content is from our archive. Some formatting or links may be broken.
Will we see more subsidy-free bids in the future?

Over the last year, the offshore wind sector has been completely revolutionised.

Last July, Danish offshore giant Dong Energy won the tender to build the 700MW Borssele 1 and 2 schemes in Dutch waters with support at €72.70/MWh. Back then, it was praised as a milestone for the sector as, for the first time, it achieved a levelised cost of energy below €100/MWh in the offshore wind sector.

Four months later, Vattenfall won the tender to build the 600MW Kriegers Flak with a bid of €49.90/MWh, scoring a new record.

Well, the record that Dong Energy and EnBW have now achieved is impossible to beat. Last week, the results of Germany’s first offshore wind auction were announced, where Dong and German utility EnBW won the right to build three projects without subsidies.

Transmission operator Bundesnetzagentur awarded EnBW the right to develop its 900MW He Dreiht with no subsidy, andawarded Dong the right to build its 240MW Borkum West 2 and 240MW OWP West, without subsidies. A third project was also awarded to Dong, the 110MW Gode Wind 3, with a subsidy of €60/MWh.

The three projects awarded backing without subsidies are set to be the first offshore wind farms to entirely rely on market prices instead of government support. This means that the companies will receive their returns solely from the electricity generated by the wind farms.

There are a few assumptions which led to these zero bids.

First, the three projects are due to be commissioned by 2025, and so both companies believe the cost of generating electricity from these offshore wind farms by then will be lower than the wholesale power prices. This is even true when taking into account higher costs of capitals than are available now.

Second, those forecasts assume that rapid advances in offshore technology will continue, bringing bigger and more powerful wind turbines – potentially up to 15MW each – that help developers to reduce the cost of building projects because they can produce more electricity using fewer turbines.

Third, the continued growth of the sector means that, by 2025, Dong and EnBW will be able to build their wind farms close to existing wind farms, which could allow the two companies to combine the operations with them, further lowering costs.

So does this mean that we will now see all offshore wind subsidies go to zero? In our view, there a few considerations to make.

The first one involves the size of the two companies. Dong and EnBW strongly believe in a rapid advance in technology which would bring offshore wind costs to significantly fall.

Both companies also have strong engineering and technical resources available, which would potentially allow them to be directly in charge of any technology change. Zero-subsidy bids are definitely not everybody’s game, for now at least.

The boldest assumption of all, though, is that cost of energy for offshore wind would fall below forecast wholesale power prices in the next five years, at a level to allow the companies to create value for themselves and their investors.

That is bold because power prices are affected by many variables, including changes in governments and regulations, and a decade is a very long timeframe over which to predict what will happen. Also, fast-growing renewables sources like onshore wind and solar are set to bring electricity prices down and provide tough competition.

The cost reductions in offshore wind will need to be very significant to make these projects work but, with these three projects set to complete around 2025, they have eight years to address that.

We do not expect to see zero-subsidy bids winning every offshore auction, but these three bids send a strong message to those in the industry and beyond. This is a key step in the important shift that the industry must make to be viable with low or no subsidies.

Over the last year, we have become used to being surprised.

Over the last year, the offshore wind sector has been completely revolutionised.

Last July, Danish offshore giant Dong Energy won the tender to build the 700MW Borssele 1 and 2 schemes in Dutch waters with support at €72.70/MWh. Back then, it was praised as a milestone for the sector as, for the first time, it achieved a levelised cost of energy below €100/MWh in the offshore wind sector.

Four months later, Vattenfall won the tender to build the 600MW Kriegers Flak with a bid of €49.90/MWh, scoring a new record.

Well, the record that Dong Energy and EnBW have now achieved is impossible to beat. Last week, the results of Germany’s first offshore wind auction were announced, where Dong and German utility EnBW won the right to build three projects without subsidies.

Transmission operator Bundesnetzagentur awarded EnBW the right to develop its 900MW He Dreiht with no subsidy, andawarded Dong the right to build its 240MW Borkum West 2 and 240MW OWP West, without subsidies. A third project was also awarded to Dong, the 110MW Gode Wind 3, with a subsidy of €60/MWh.

The three projects awarded backing without subsidies are set to be the first offshore wind farms to entirely rely on market prices instead of government support. This means that the companies will receive their returns solely from the electricity generated by the wind farms.

There are a few assumptions which led to these zero bids.

First, the three projects are due to be commissioned by 2025, and so both companies believe the cost of generating electricity from these offshore wind farms by then will be lower than the wholesale power prices. This is even true when taking into account higher costs of capitals than are available now.

Second, those forecasts assume that rapid advances in offshore technology will continue, bringing bigger and more powerful wind turbines – potentially up to 15MW each – that help developers to reduce the cost of building projects because they can produce more electricity using fewer turbines.

Third, the continued growth of the sector means that, by 2025, Dong and EnBW will be able to build their wind farms close to existing wind farms, which could allow the two companies to combine the operations with them, further lowering costs.

So does this mean that we will now see all offshore wind subsidies go to zero? In our view, there a few considerations to make.

The first one involves the size of the two companies. Dong and EnBW strongly believe in a rapid advance in technology which would bring offshore wind costs to significantly fall.

Both companies also have strong engineering and technical resources available, which would potentially allow them to be directly in charge of any technology change. Zero-subsidy bids are definitely not everybody’s game, for now at least.

The boldest assumption of all, though, is that cost of energy for offshore wind would fall below forecast wholesale power prices in the next five years, at a level to allow the companies to create value for themselves and their investors.

That is bold because power prices are affected by many variables, including changes in governments and regulations, and a decade is a very long timeframe over which to predict what will happen. Also, fast-growing renewables sources like onshore wind and solar are set to bring electricity prices down and provide tough competition.

The cost reductions in offshore wind will need to be very significant to make these projects work but, with these three projects set to complete around 2025, they have eight years to address that.

We do not expect to see zero-subsidy bids winning every offshore auction, but these three bids send a strong message to those in the industry and beyond. This is a key step in the important shift that the industry must make to be viable with low or no subsidies.

Over the last year, we have become used to being surprised.

Over the last year, the offshore wind sector has been completely revolutionised.

Last July, Danish offshore giant Dong Energy won the tender to build the 700MW Borssele 1 and 2 schemes in Dutch waters with support at €72.70/MWh. Back then, it was praised as a milestone for the sector as, for the first time, it achieved a levelised cost of energy below €100/MWh in the offshore wind sector.

Four months later, Vattenfall won the tender to build the 600MW Kriegers Flak with a bid of €49.90/MWh, scoring a new record.

Well, the record that Dong Energy and EnBW have now achieved is impossible to beat. Last week, the results of Germany’s first offshore wind auction were announced, where Dong and German utility EnBW won the right to build three projects without subsidies.

Transmission operator Bundesnetzagentur awarded EnBW the right to develop its 900MW He Dreiht with no subsidy, andawarded Dong the right to build its 240MW Borkum West 2 and 240MW OWP West, without subsidies. A third project was also awarded to Dong, the 110MW Gode Wind 3, with a subsidy of €60/MWh.

The three projects awarded backing without subsidies are set to be the first offshore wind farms to entirely rely on market prices instead of government support. This means that the companies will receive their returns solely from the electricity generated by the wind farms.

There are a few assumptions which led to these zero bids.

First, the three projects are due to be commissioned by 2025, and so both companies believe the cost of generating electricity from these offshore wind farms by then will be lower than the wholesale power prices. This is even true when taking into account higher costs of capitals than are available now.

Second, those forecasts assume that rapid advances in offshore technology will continue, bringing bigger and more powerful wind turbines – potentially up to 15MW each – that help developers to reduce the cost of building projects because they can produce more electricity using fewer turbines.

Third, the continued growth of the sector means that, by 2025, Dong and EnBW will be able to build their wind farms close to existing wind farms, which could allow the two companies to combine the operations with them, further lowering costs.

So does this mean that we will now see all offshore wind subsidies go to zero? In our view, there a few considerations to make.

The first one involves the size of the two companies. Dong and EnBW strongly believe in a rapid advance in technology which would bring offshore wind costs to significantly fall.

Both companies also have strong engineering and technical resources available, which would potentially allow them to be directly in charge of any technology change. Zero-subsidy bids are definitely not everybody’s game, for now at least.

The boldest assumption of all, though, is that cost of energy for offshore wind would fall below forecast wholesale power prices in the next five years, at a level to allow the companies to create value for themselves and their investors.

That is bold because power prices are affected by many variables, including changes in governments and regulations, and a decade is a very long timeframe over which to predict what will happen. Also, fast-growing renewables sources like onshore wind and solar are set to bring electricity prices down and provide tough competition.

The cost reductions in offshore wind will need to be very significant to make these projects work but, with these three projects set to complete around 2025, they have eight years to address that.

We do not expect to see zero-subsidy bids winning every offshore auction, but these three bids send a strong message to those in the industry and beyond. This is a key step in the important shift that the industry must make to be viable with low or no subsidies.

Over the last year, we have become used to being surprised.

Over the last year, the offshore wind sector has been completely revolutionised.

Last July, Danish offshore giant Dong Energy won the tender to build the 700MW Borssele 1 and 2 schemes in Dutch waters with support at €72.70/MWh. Back then, it was praised as a milestone for the sector as, for the first time, it achieved a levelised cost of energy below €100/MWh in the offshore wind sector.

Four months later, Vattenfall won the tender to build the 600MW Kriegers Flak with a bid of €49.90/MWh, scoring a new record.

Well, the record that Dong Energy and EnBW have now achieved is impossible to beat. Last week, the results of Germany’s first offshore wind auction were announced, where Dong and German utility EnBW won the right to build three projects without subsidies.

Transmission operator Bundesnetzagentur awarded EnBW the right to develop its 900MW He Dreiht with no subsidy, andawarded Dong the right to build its 240MW Borkum West 2 and 240MW OWP West, without subsidies. A third project was also awarded to Dong, the 110MW Gode Wind 3, with a subsidy of €60/MWh.

The three projects awarded backing without subsidies are set to be the first offshore wind farms to entirely rely on market prices instead of government support. This means that the companies will receive their returns solely from the electricity generated by the wind farms.

There are a few assumptions which led to these zero bids.

First, the three projects are due to be commissioned by 2025, and so both companies believe the cost of generating electricity from these offshore wind farms by then will be lower than the wholesale power prices. This is even true when taking into account higher costs of capitals than are available now.

Second, those forecasts assume that rapid advances in offshore technology will continue, bringing bigger and more powerful wind turbines – potentially up to 15MW each – that help developers to reduce the cost of building projects because they can produce more electricity using fewer turbines.

Third, the continued growth of the sector means that, by 2025, Dong and EnBW will be able to build their wind farms close to existing wind farms, which could allow the two companies to combine the operations with them, further lowering costs.

So does this mean that we will now see all offshore wind subsidies go to zero? In our view, there a few considerations to make.

The first one involves the size of the two companies. Dong and EnBW strongly believe in a rapid advance in technology which would bring offshore wind costs to significantly fall.

Both companies also have strong engineering and technical resources available, which would potentially allow them to be directly in charge of any technology change. Zero-subsidy bids are definitely not everybody’s game, for now at least.

The boldest assumption of all, though, is that cost of energy for offshore wind would fall below forecast wholesale power prices in the next five years, at a level to allow the companies to create value for themselves and their investors.

That is bold because power prices are affected by many variables, including changes in governments and regulations, and a decade is a very long timeframe over which to predict what will happen. Also, fast-growing renewables sources like onshore wind and solar are set to bring electricity prices down and provide tough competition.

The cost reductions in offshore wind will need to be very significant to make these projects work but, with these three projects set to complete around 2025, they have eight years to address that.

We do not expect to see zero-subsidy bids winning every offshore auction, but these three bids send a strong message to those in the industry and beyond. This is a key step in the important shift that the industry must make to be viable with low or no subsidies.

Over the last year, we have become used to being surprised.

Over the last year, the offshore wind sector has been completely revolutionised.

Last July, Danish offshore giant Dong Energy won the tender to build the 700MW Borssele 1 and 2 schemes in Dutch waters with support at €72.70/MWh. Back then, it was praised as a milestone for the sector as, for the first time, it achieved a levelised cost of energy below €100/MWh in the offshore wind sector.

Four months later, Vattenfall won the tender to build the 600MW Kriegers Flak with a bid of €49.90/MWh, scoring a new record.

Well, the record that Dong Energy and EnBW have now achieved is impossible to beat. Last week, the results of Germany’s first offshore wind auction were announced, where Dong and German utility EnBW won the right to build three projects without subsidies.

Transmission operator Bundesnetzagentur awarded EnBW the right to develop its 900MW He Dreiht with no subsidy, andawarded Dong the right to build its 240MW Borkum West 2 and 240MW OWP West, without subsidies. A third project was also awarded to Dong, the 110MW Gode Wind 3, with a subsidy of €60/MWh.

The three projects awarded backing without subsidies are set to be the first offshore wind farms to entirely rely on market prices instead of government support. This means that the companies will receive their returns solely from the electricity generated by the wind farms.

There are a few assumptions which led to these zero bids.

First, the three projects are due to be commissioned by 2025, and so both companies believe the cost of generating electricity from these offshore wind farms by then will be lower than the wholesale power prices. This is even true when taking into account higher costs of capitals than are available now.

Second, those forecasts assume that rapid advances in offshore technology will continue, bringing bigger and more powerful wind turbines – potentially up to 15MW each – that help developers to reduce the cost of building projects because they can produce more electricity using fewer turbines.

Third, the continued growth of the sector means that, by 2025, Dong and EnBW will be able to build their wind farms close to existing wind farms, which could allow the two companies to combine the operations with them, further lowering costs.

So does this mean that we will now see all offshore wind subsidies go to zero? In our view, there a few considerations to make.

The first one involves the size of the two companies. Dong and EnBW strongly believe in a rapid advance in technology which would bring offshore wind costs to significantly fall.

Both companies also have strong engineering and technical resources available, which would potentially allow them to be directly in charge of any technology change. Zero-subsidy bids are definitely not everybody’s game, for now at least.

The boldest assumption of all, though, is that cost of energy for offshore wind would fall below forecast wholesale power prices in the next five years, at a level to allow the companies to create value for themselves and their investors.

That is bold because power prices are affected by many variables, including changes in governments and regulations, and a decade is a very long timeframe over which to predict what will happen. Also, fast-growing renewables sources like onshore wind and solar are set to bring electricity prices down and provide tough competition.

The cost reductions in offshore wind will need to be very significant to make these projects work but, with these three projects set to complete around 2025, they have eight years to address that.

We do not expect to see zero-subsidy bids winning every offshore auction, but these three bids send a strong message to those in the industry and beyond. This is a key step in the important shift that the industry must make to be viable with low or no subsidies.

Over the last year, we have become used to being surprised.

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Not a member yet?

Become a member of the 6,500-strong A Word About Wind community today, and gain access to our premium content, exclusive lead generation and investment opportunities.