Renewables: using auctions in a bid to drive down costs

In an effort to drive down the costs of green energy and reduce the cost burden associated with the Energiewende, Germany has moved to an auction-based system for funding of large scale renewables, in place of the feed-in-tariff mechanism (which is retained for small- scale schemes). Following a programme of pilot tenders for ground-mounted PV in 2015 and 2016, which included a novel cross-border auction open to (and won by) PV schemes in Denmark, the new auction based funding regime for renewables has been in place since the beginning of 2017.

The results of the first auction for offshore wind projects were announced by the network regulator, the Budesnetzagentur, on 13 April and the exercise appears to have been a success, with award prices far below expectations. “The auction has unlocked medium and long-term cost reduction potential, which will lead to a reduction in funding to an extent that had not been expected,” said Jochen Homann, Bundesnetzagentur president, commenting on the outcome of the auction. “This is good news for all electricity consumers who contribute to funding renewable energy through the renewable energy surcharge,” he said, but cautioned that it remains to be seen whether prices in the next auction, to be held in a year, will be as low.

For the April auction, bids (deadline 3 April 2017) were eligible from offshore wind farm projects in the North and Baltic Seas for which consent had been granted or was close to being granted before August 2016 and which will be put into operation after 31 December 2020. There were also conditions relating to the location of the wind farms. The total capacity up for auction was 1550 MW. The bids do not take account of grid connection, which in the German North Sea is the responsibility of grid operator Tennet.

The winning bidders, projects, bid price and planned commissioning dates were as follows:

• EnBW, He Dreiht (900 MW), bid = zero, 2025;
• Dong Energy, OWP West (240 MW), bid = zero, 2024;
• Dong Energy, Borkum Riffgrund West 2 (240 MW), bid = zero, 2024;
• Dong Energy, Gode Wind 3 (110 MW), bid = 60 euro per MWh, 2024.

The zero bids essentially mean that the project developers are willing to build the wind farms without any government subsidy (on top of the wholesale electricity price), which can be seen as reflecting significant progress in anticipated cost reductions for offshore wind technology. The total capacity bid, 1490 MW, all in the North Sea, was just below the target volume of 1550 MW. The average weighted award price was 0.44 ct/kWh.

Path clears for EnBW

Following the acceptance of its bid, EnBW commented that “the path is now clear for one of the largest offshore projects planned in Europe”.

With a commissioning date of 2025 EnBW says its He Dreiht wind farm will “benefit from rapidly advancing technological developments and the further professionalisation of the wind energy sector”. There will also be synergies and costs savings arising from its proximity to two existing EnBW wind farm projects in the North Sea, Albatros and Hohe See. In combination, these factors ensure that He Dreiht will offer “particularly low electricity generation costs” and can be realised and operated without government subsidies, says EnBW.

According to Dirk Güsewell, the manager responsible for the expansion of renewable energies at EnBW: “The plans were based on comprehensive market analyses and intensive discussions with the supplier industry, which is working on numerous new technological developments and is fully focussed on achieving cost efficient solutions. The assumptions regarding electricity prices that were used as the basis for our bid were thus set at a moderate level. The anticipated returns are considerably above our capital costs and thus remain attractive.” He pointed out that the outcome of the German auction confirms the cost trends for offshore wind projects seen in the latest invitations to tender in Denmark and Holland.

“We have set a clear signal for the direction in which offshore technology is headed with our successful bid”, Dirk Güsewell said. “Offshore wind farms are power plants at sea that can be refinanced in future on the electricity market and thus even without funding and additional economic costs can also make an important contribution to the Energiewende and the security of supply in an energy system based on renewable energies. The results of the auction are the best advertising for this concept. The reduction in the expansion targets for offshore wind, as agreed in the recent past in Germany, should thus be urgently reviewed.”

DONG looks to 13-15 MW turbines

DONG Energy submitted six projects in the auction. It says it will take final investment decisions on its three winning projects in 2021.

Samuel Leupold, executive vice president and CEO of wind power at DONG Energy, said: “We’re pleased with being awarded three projects in the first of two German auction rounds, and we have good opportunities to add further capacity to our winning projects in next year’s German auction. The zero subsidy bid is a breakthrough for the cost competitiveness of offshore wind and it demonstrates the technology’s massive global growth potential as a cornerstone in the economically viable shift to green energy systems.”

However, “it’s important to note that the zero bid is enabled by a number of circumstances in this auction”, he added. “Most important, the realisation window is extended to 2024. This allows developers to apply the next generation turbine technology, which will support a major step down in costs. Also, the bid reflects the fact that grid connection is not included... Financial discipline is key to us. We are of course reflecting the project’s exposure to market risk in the cost of capital applied. We see a solid value creation potential in this German project portfolio and will now begin to further mature the projects towards a final investment decision in 2021.”

“Making green energy cheaper than black has for years been part of DONG Energy’s strategic ambition,” said Volker Malmen, DONG Energy country manager in Germany. “Offshore wind is fully capable of replacing retiring power plants and becoming the backbone of Germany’s energy transition.”

He expressed the hope that the auction’s “encouraging results will inspire an accelerated and higher volume build-out of offshore wind in Germany and motivate the electrification of transportation and heating.”

For its projects DONG Energy will be responsible for the turbines, array cables and offshore substation.

DONG Energy, which is committed to completely phasing out coal in all its power stations by 2023, currently has 902 MW of offshore wind in operation in German waters – Gode Wind 1 & 2 and Borkum Riffgrund 1 – and another 450 MW under construction at Borkum Riffgrund 2, which is expected to be commissioned in 2019. In total, DONG Energy operates around 3600 MW of offshore wind capacity across Germany, UK and Denmark and has a further 3800 MW under construction.

Among cost-drivers enabling the zero subsidy bid DONG Energy identifies the following:

• Platform change: Significantly bigger turbines – probably 13-15 MW – will be on the market by 2024. With bigger turbines, the developer can increase electricity production while at the same time reduce the number of turbine positions. This contributes significantly to cost reductions during construction (fewer towers and array cables, and lower costs for installation vessels and manpower) as well as during a lifetime of operations and maintenance.
• Scale: OWP West and Borkum Riffgrund West 2 will be combined into one large- scale project with the option of adding additional volume in next year’s auction to further increase the total size of the project.
• Location: The projects benefit from average wind speeds of more than 10 m/s, which is among the highest wind speeds measured across DONG Energy’s portfolio of wind farms. Also, the projects are located next to DONG Energy’s Borkum Riffgrund 1&2 which means that operations and maintenance can be done from DONG Energy’s existing O&M hub in Norddeich.
• Extended lifetime: The German authorities have approved the possibility of extending the operational lifetime of the assets from 25 to 30 years.
• Not full scope: As already noted, developers were not bidding for the grid connection in the German auction, which means that grid connection is not included in the bid price.

“The above drivers deliver a cost-of-electricity below our forecasted wholesale power price and will allow us to create value and meet our return requirements at the expected market prices without subsidies”, says DONG Energy. “Compared to German power price forecasts available from leading research firms, we consider our price forecast to be relatively conservative. We have applied a higher cost-of-capital than in previous projects to reflect the potential increase in market price exposure.”

The cost reductions required for a German project without subsidies are fully feasible, DONG Energy believes, both technically and commercially. Towards the final investment decision in 2021, DONG Energy says it will monitor the key factors that will determine long-term power prices in Germany, including: the impact of EU actions to reinvigorate the European carbon trading scheme; the phase-out of conventional and nuclear capacity; the future role of coal in Europe; and the build- out of onshore transmission grids.

Second auction

A second auction for existing German offshore wind farm projects is scheduled for 1 April 2018. The total capacity to be auctioned will again be 1550 MW, plus the 60 MW not awarded in the April 2017 auction. The total capacity available in the second auction will therefore be 1610 MW. This includes a minimum of 500 MW to be awarded as required by the German Offshore Wind Energy Act for offshore wind farms in the Baltic Sea. Bids can be placed in the second auction for projects that were not awarded funding in the first auction, says auction organiser Bundesnetzagentur.