OFFSHORE WIND TENDERS

Denmark’s tender model for development of offshore wind is being looked to as a shining example of how to drive down cost by removing risk. Sharp price competition is delivering record low bids. A common tender approach across Europe would further lower costs.

With an accepted bid price of just €49.9/MWh, the Kriegers Flak project in the Danish Baltic Sea will deliver power to the grid at the lowest price yet for offshore wind electricity. The winning bid for the Danish government project, from Swedish utility Vattenfall, was accepted in November 2016. It was 20% lower than Vattenfall’s bid for Denmark’s near-shore projects just two months earlier (although unlike Kriegers Flak that bid included the cost of transmitting the power to shore) and 50% less than Vattenfall’s winning bid in 2015 for another Danish offshore wind farm, the 406 MW Horns Rev 3 project.

Vattenfall and other players in the offshore wind market stress that the low prices are at least partially driven by Denmark’s tender model, in which the state is involved as a proactive participant. “The Danish model has shown its value in lowering the overall costs of offshore wind development by reducing the risk factor,” says Vattenfall’s Ole Bigum Nielsen. He praises the model’s transparency, as does competitor utility E.ON and offshore wind turbine supplier Siemens.

OPEN TO ALL COMERS

Denmark’s risk reduction approach to offshore wind development was embarked upon after the disappointment of receiving just one bid in 2015 for a concession contract. The new approach aims to create an attractive tender model that contains a strong competitive element. “We wanted to set conditions that would attract more bidders and introduce sharp price competition,” says Lisbeth Nielsen of the Danish Energy Agency (DEA).

The result is a model in which the Danish state identifies zones for offshore wind concessions, undertakes site studies and shares data on seabed conditions, tidal currents, the wind resource and deals with environmental concerns. The DEA further functions as a single source for the permits developers require from various authorities and takes care of the transmission infrastructure that links the wind plant into the onshore grid network.

A close “market dialogue” is maintained with all potential bidders. As part of the prequalification process, developers submit non-binding bids, after which they negotiate with the DEA to further minimise economic risks associated with the project. In this way the bidders contribute to the terms and conditions drawn up by the DEA for the final tender documents.

Of the 24 GW of consented offshore wind capacity in Europe not yet in construction, 78.1% is destined for the North Sea, 14.1% for the Baltic Sea, and 4.1% for the Atlantic Ocean, reports industry group WindEurope, with the Irish Sea and Mediterranean Sea accounting for the remainder

MARKET FORCES BETTER

While the Danish model is delivering low offshore wind prices, market players still see room for improvement. “The argument for the model is that if the state takes care of the basics, we avoid a situation where all developers undertake the same site identification and preparatory work. But if the authorities alone select the concession zones, the risk is that good sites may never be developed. With regard to pre-construction work, many of the players have tried it before and don’t necessarily have to start from square one every time,” says Ulrik Stridbæk from DONG Energy, a Danish utility.

Stridbæk also questions the wisdom of letting the state undertake the transmission connection, the cost of which represents a large share of the whole. If three to five large companies were to bid for the transmission rights, the resulting competition between them would deliver a cost benefit, Stridbæk believes.

DENMARK INSPIRES THE NETHERLANDS

The Danish model has attracted the interest of other countries, says the DEA’s Nielsen. Particularly the Netherlands, but also Germany and France are watching closely after news spread about the record low Kriegers Flak bid.

“Dutch politicians were inspired by Denmark and have developed their offshore wind market along similar lines. There are many similarities between the two models,” states the Dutch environment ministry. The only main difference is that the Netherlands does not pre-qualify bidders.

Britain pioneered the one-stop-shop permitting process for offshore wind, but otherwise its tender model has more competitive elements than the Danish and Dutch approaches. Developers of projects in British waters select their own sites, although within zones defined by seabed owner, the Crown Estate. They are also responsible for grid connection of projects, although subsequent delivery of offshore wind energy is undertaken by commercially run and privately owned offshore transmission operators.

In recent advice to the British government, the country’s Energy Technology Institute (ETI) says the cost of offshore wind can be further reduced if the state were to assume responsibility for some of the infrastructure development and construction. It is a concern, says the ETI’s Stuart Bradley, that offshore wind prices in Britain are half as high again as in Denmark. “What is impressive about the Danish model is that it creates strong competition among bidders and a much lower electricity price,” he says.

As with most major infrastructure development across Europe, offshore wind projects are state sponsored endeavours with different levels of government involvement. At one extreme, the British approach is to leave development entirely in the hands of the private sector, contrasting with Denmark’s hands-on involvement in resource assessment, seabed surveys and provision of all the transmission infrastructure. Germany lies between the two, partially paying for transmission. The more proactive the government, the more the costs are covered by the taxpayer rather than the electricity consumer and the lower the overall cost has become.

COMMON TENDER MODEL

In June 2016, countries bordering the North Sea signed a common declaration on offshore wind development, including tender models. The cooperation will likely lead to timely coordination of offshore wind projects in the North Sea region, with potential for a concerted approach to project development. Whether the deal can go one step further and result in a single tender model for Europe only time will tell. “We’d rather see a market convergence based on best practice and harmonising tender models,” says Stridbæk.

Both E.ON and Vattenfall are hoping for a European model with the same terms and conditions. It will promote transparency and further price reductions, says Bigum Nielsen. •

TEXT Regner Hansen