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Dutch and Danish Auction Model Heralds Bright Future for Offshore Wind

offshore wind farm off the Welsh coast (photo Aaron)

Wind farm off the Welsh coast (Photo: Aaron)

Dong Energy has set a record low price for an offshore wind farm in the Netherlands. According to energy expert Mike Parr, the Dutch achieved this result thanks to their tendering model – following the Danes – offering a shovel-ready project to operators. UK wind farms are much more expensive because the UK lets operators carry out preparatory work by themselves. In any case, the future for offshore wind now looks bright.

The 700MW Dutch wind farm Borssele attracted headlines because of the low bid of €72.7/MWh by Dong. The farm is the first of 5 such farms (all 700MW in size) which will be auctioned by the Dutch state. The tender for the second wind farm (Borssele Wind Farm Sites III and IV) will be closed in the last week of September 2016. In 2017 2 more wind farms off the coast of the provinces of South Holland and North Holland will be auctioned.

The Dutch followed the Danish model by offering for auction a near-shore (22kms offshore in the case of Borssele) and shovel-ready project. This model will be followed for subsequent projects.

One claim made by the Dutch Ministry of Economic affairs that is worth giving further consideration is that “the 700 MW wind farm will generate 22.5% more electricity than anticipated”

This contrasts with the UK, where all bidders have to undertake their own environmental impact studies and obtain their own permits. Whilst this meets with current UK ideology of “letting markets decide”, it also means that UK offshore wind farms have costs closer to €144/MWh, roughly twice Dutch prices. That said, UK subjects seem happy enough to pay this.

Lower prices

Judging from the 38 bids that the Borssele project attracted, shovel ready projects appear to be popular with offshore developers. It is likely that the auctions to be held in September will attract similar levels of bidding and possibly even lower prices.

Where the Dutch and Danish approaches diverge is in the length of time the subsidy is in operation. In the case of the Netherlands it runs for 15 years, in the case of Denmark and taking the example of Kriegers Flak (current auction round) the conditions (quoting from the tender document are):  “The tenderer is to quote a kWh price to be paid for 30 TWh (corresponding to 50,000 full-load hours for 600 MW). The price tendered is to be a fixed “øre” amount (constant in current prices) and will not be indexed. “

Working on the basis of a capacity factor of around 50% this starts to look like 11 years (4 years less than the Dutch). Perhaps Denmark is a windier location?

More than anticipated

One claim made by the Dutch Ministry of Economic affairs that is worth giving further consideration is that “the 700 MW wind farm will generate 22.5% more electricity than anticipated”.

The possible reason for this (and thus the low bid price) is the step-change in wind turbine sizes. Until fairly recently, most offshore wind turbines were around 3.6MW in size. Anholt 2 uses 400MW worth of such wind turbines  (from Siemens). However, the offshore market seems to have switched to 8MW units, for example, the Vestas 8.3MW which will go in at Horns Rev 3. These wind turbines are twice the size of the old models and are also taller and thus sit in steadier winds. They are also probably cheaper to build on a per MW basis.

It will be interesting to see bid prices for the current Danish round and how prices look in later September/October for the on-going Dutch round

However, the only ones that have definitive information on the performance of such  wind turbines is Vestas (and others) and their customers (e.g. Vattenfall – Horns Rev 3). Perhaps not unreasonably, Vestas are not broadcasting details of the performance of the new 8MW-class machines. Nevertheless, the statement from the Dutch Ministry provides a clue. When offering “shovel ready” projects it is normal to undertake a wind survey of the site. Whilst wind varies from year to year, it strains credulity that, looking 15 years hence, the Dutch Ministry thinks there will be 22.5% more wind. Furthermore, 22.5% is a curiously exact figure.

Hypothetical conversation now follows:

Dutch Ministry to Dong: we really like your very low bid and we want to approve it, but frankly it seems un-realistic – are you really serious?

Dong to Dutch Ministry: yes we are serious and the reason the bid is low is due to our plan to use very large turbines which are cheaper per MW plus the fact that they generate far more power than the older ones. Indeed, we think they will generate 22.5% more energy than the older ones.

Of course the above is speculation. Nevertheless 22.5% more power has to come from somewhere and in the absence of more wind, that somewhere looks to be the  wind turbines themselves.

Good future

Working on the basis of a lifetime of 25 years for the wind farm and working on the basis of a €50/MWh for wholesale prices, it starts to look like costs of €63/MWh are feasible for offshore wind. This is a crude figure and does not include network connection costs, which Dutch transmission system operator Tennet puts at 1.4 cts/kWh (see here, in Dutch). This means that even including network costs the overall price will be well below €70/MWh. It will be interesting to see bid prices for the current Danish round and how prices look in later September/October for the on-going Dutch round.

It is clear that offshore wind prices are declining more quickly than forecast (at least in mainland Europe) and it is quite possible that the €70/MWh bid point will be breached this year. It would not be surprising to see Danish bids coming in under this (given that they have set €94 as the maximum bid price). This points to a very good future for European offshore wind.

by

Mike Parr is Director of energy consultancy PWR which undertakes research in the area of climate change and renewables for clients which include a G7 country and global corporations. See his author archive on Energy Post.

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