Viewpoint: Low UK offshore bids come as no surprise

The winning bids revealed for contracts for difference (CfD) to supply offshore wind power in the UK were lower than most of us dared hope for. Are they in line, however, with the bids seen in Denmark, Germany and the Netherlands over the past year?

To compare these bids, we need to put them on the same level playing field. The industry standard is to use levelised cost of energy (LCOE).

As a basis for this, we use LCOE as seen at the start of wind-farm operation, defined in real terms in a single, relevant currency. We include the cost of developing the site before a contract is awarded, and the cost of the electrical connection to the grid-connection point onshore.

Breaking down the figures

When we do that, we get an LCOE of €77/MWh for Triton Knoll (compared with a CfD auction award of £74.75/MWh, about €84.90) and LCOE of €62/MWh for Hornsea 2 and Moray Firth (against CfD auction awards of £57.50/MWh or €65.31/MWh).

Triton Knoll is good site, and can reap the rewards of the LCOE savings that we have seen recently in Germany, Denmark and the Netherlands. The rules of auction mean that it probably had its bid raised up to this level by one or more biomass project with this price.

At Hornsea 2, Dong Energy can go big. Effectively the developer can build a (very) large extension of Hornsea 1. Standardisation across the whole area, and a designated supply chain producing and servicing the equipment can drive down LCOE.

Dong already knows the winds and waters, and it also knows the performance of the turbines. With such a large site, it is easier to hold spares in common and have all technicians use their know-how to install and operate these particular turbines as efficiently as possible.

Dong has also talked about reducing cost in the transmission link, which, at more than 100km, plays a significant cost role and could have an impact of as much as EUR1.50-EUR3.00/MWh, depending on the level of cost saving.

For Moray Firth, we think next-generation (10MW-plus) turbines may well need to be used to get the low LCOE implied by the winning auction bid. This will probably require a new marine-licensing application to raise the maximum allowable tip height.

If EDPR can finance the project without this new technology risk impacting significantly on the weighted average cost of capital (WACC), then an LCOE of €62/MWh is achievable.

Overall, the LCOE for the latest UK projects aligns with our expected range, and with the trajectory established by the projects bid and awarded over the past year. So why were the low numbers a surprise?

The answer is that, with three likely main bidders, the UK system looked like it may put less competitive pressure on bidders, constrain their technology choices, and expose them to more risk.

Technology is key

In those other markets, developers can benefit from some or all of: the government undertaking comprehensive site characterisation and other pre-development activities; and taking on the risk of the offshore electrical export system.

In the event, though, these fears proved unfounded. The levers the developers found to pull to achieve the awards in Kriegers Flak and Borssele 3 and 4, look to have been pulled just as hard for the UK.

In particular, the bidders are likely to have taken the same view regarding the availability of bigger, more cost-effective turbines as for the Danish and Dutch projects.

Giles Hundleby is a director of BVG Associates