Opinion: Offshore wind auctions – why price is no longer king

With falling subsidy needs, governments and auction authorities need non-price factors to support long-term climate ambitions, prevent inferior wind farms and safeguard national reputations.

If cost is king in auctions, it becomes a race to the bottom, argues Rob van der Hage

Several countries are beginning to emphasise qualitative parameters recognising sustainability and the environment in determining offshore wind lease recipients as the industry matures. 

While bids based on pure price still dominate most lease auctions, mature offshore wind countries are beginning to emphasise non-price factors – relating to system integration, sustainability and decarbonisation – to determine lease outcomes.  

Citing “a recognition of the deployment challenges currently faced by the renewable energy industry,”  the UK government said it may consider giving greater emphasis to certain non-price factors, such as sustainability, capacity building, innovation that addresses skills gaps, system flexibility and operability in upcoming contract for differences (CfD) auctions, adding that future offshore wind applicants would have to balance overall costs in the bidding – a strategic shift for developers 

And the UK isn’t alone. Germany, Norway and Denmark have started to give more emphasis toward sustainability and environmental attributes in their offshore wind bid requirements – a course long trailblazed by the Dutch.   

The lessons learned to reach this point have been hard-earned and, at times, painful for auction authorities.  

Coin-toss to determine auction

In 2021, a number of developers vying for the Thor offshore wind farm submitted identical bids for capacity and price. 

As a result, the winner was selected by a coin-toss, which could be considered a missed opportunity for authorities to improve the quality of their offshore wind farms. 

When a steep decline in subsidy price in the Netherlands would have resulted in multiple zero-subsidy bids, authorities quickly realised they needed another mechanism other than cost to decide tenders. Authorities had to slightly delay and amend the tender system in 2017 for Hollandse Kust Zuid into a zero-subsidy tender with qualitative criteria.

And while these non-price factors were initially focused on innovation, recent announcements demonstrate that strong and substantive non-price factors, such as ecological impact, system integration and broader sustainability, are gaining importance as evidenced in the criteria for the upcoming Dutch IJmuiden Ver 4GW tender targeted for the fourth quarter.  

As environmental impacts and grid integration challenges have become greater areas of concern, authorities are beginning to challenge the developers to help find solutions to safeguard a longer-term pipeline of offshore wind tenders.

Denmark’s recent announcement in its call for tenders made it clear that it will prioritize sustainability and ecological impact. In fact, the country will establish an ‘ocean nature fund’ to mitigate negative environmental impacts from wind projects.  

If cost remains king, it’s a race to the bottom 

As cost competitiveness will likely always remain a central element of successful offshore wind bids, there is a concern for the industry’s long-term prospects if cost remains king because competitions may well result in a race to the bottom where the industry and the supply chain cannibalise themselves. 

With greater emphasis on sustainability and innovation, there will be significant impact on job creation, emissions reductions, turbine recyclability, marine ecology, local stakeholders and the grid. 

Successfully delivering on the new parameters will not only benefit the winners in the offshore wind sector, but also offer broader societal benefits, like marine ecology and system integration. 

Clearly, the non-price trend will only become greater going forward. 

With upcoming auctions in the second half of this year in Taiwan, Lithuania, Spain and the US, offshore wind developers need to employ a long-term perspective. 

These are capital intensive projects and also the non-price differentiators require significant resources and investments, however these investments are expected to create competitive advantages for developers across the globe.  

Prepare early – and invest

Therefore, it is recommended to prepare early and invest resources, build partnerships, support innovations with a longer-term view than one auction round to tackle the challenges (and have better chances of winning tenders at the same time) that are expected to also develop in less mature offshore wind markets at some point.   

Rewarding future offshore wind bid proposals that include environmental impacts will be a better way of developing an industry than was done decades ago for oil and gas, for example. These non-price factors will ultimately make offshore wind more sustainable for generations to come.

Rob van der Hage is consulting partner, offshore renewables, EMEA, at ERM