Europe’s renewable energy industry is used to breaking records for generating more power from low carbon sources but recent developments point to even more dramatic days to come.
Vattenfall, the Swedish energy group, and Norway’s Statoil were among the companies that took the market by surprise in late 2017, when they bid in the world’s first exclusively subsidy-free offshore wind auction, held by the Dutch government.
Many had thought the auction would be “too challenging” for offshore wind farm developers given the delivery date of 2022.
The Dutch auction result is not a freak however since there were similar landmark bids in a German offshore wind auction in April 2017, when Orsted, the Danish energy giant previously known as Dong Energy also offered to build schemes by 2024 that would rely on market power prices alone.
Subsidy Free Wind
The German and Dutch auctions have given policymakers across the continent hope that the industry’s reliance on government-guaranteed electricity prices could soon come to an end.
Such subsidies are funded through consumer and industry energy bills. But investors, analysts and developers are yet to be convinced that subsidy-free offshore wind farms will become the “new normal”.
There is also some scepticism about whether all of the subsidy-free bids submitted will be delivered. Orsted’s chief executive, Henrik Poulsen, has acknowledged investor concerns during an investor call in April, shortly after the German auction:
We are . . . well aware that our zero-subsidy bid may have come earlier than what the market has expected
Orsted has said it will not have to make a final investment decision on the German projects until 2021. Although there is a financial penalty of €59m associated with pulling out, Mr Poulsen stressed that:
Should the business case . . . not prove attractive in four years from now, we will abandon the projects and write off the value of the bid bond.
Making it pay
Developers who have made subsidy-free bids are relying on rises in wholesale power prices, further dramatic cost reductions in the industry and continued developments in wind turbine technology.
The world’s biggest and most powerful turbines, at 8MW each, have recently been installed off the coast at Liverpool, whilst we will shortly see 10MW blades being installed in Germany and GE is working on a 12MW turbine.
For the wind farm developers, the attraction of bigger turbines is that they reduce the quantity of foundations , cables and other infrastructure. In the case of Vattenfall’s subsidy-free bid, the site involved is close to another of the company’s offshore wind farms, creating the opportunity for cost efficiencies.
Corporate windfalls and sharing the risk
Vattenfall believe the risks of subsidy-free projects can be reduced by striking long-term power supply contracts with large companies, known in the industry as corporate power purchase agreements (PPA).
These are growing in popularity in Europe, as large companies seek to reduce their carbon emissions and their energy bills. However, bankers say the corporate PPA market in Europe is not yet as developed as in the US.
Some in the sector have warned that existing investors in offshore wind farms, such as pension and infrastructure funds, are unlikely to want to take on the kind of exposure to market prices that subsidy-free bids entail.
Vattenfall said that for now at least, subsidy-free bids will depend on “specific conditions that you might have on specific projects”, such as wind and seabed conditions at a certain site, the distance to shore and whether a PPA market is developing in that country.
We must ask whether we will we start to see subsidy free bids in other markets? Most probably not – in markets such as the UK, subsidy-free bids are fu rther off because developers have to meet certain costs, such as connecting projects to the electricity grid. As a contrast, this is met by the grid operator in Holland.
Gone with the Wind
But optimists argue that, while subsidy-free offshore wind may still be the exception rather than the rule, the break with government funding is finally in sight, even if it may come for other forms of renewable energy first.
The first solar power farm in the UK to be built without government support was opened in September and analysts suggest subsidy-free onshore wind projects in Britain are close. According to Allan Baker, Global Head of Power at Société Générale:
It is clear that costs are now getting to a point where renewable projects, including offshore wind projects, based wholly on market prices are becoming possible
With developers betting that power prices will rise as existing coal and nuclear plants are closed – along with aggressive rises in carbon prices – a world in which renewable power is the equal to existing technologies looks to be in sight. As Jimmy Dean said, “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination”