Commodities 2021: Over 40 GW of European renewable capacity set to be auctioned in 2021

Renewable energy developers are set to compete for dozens of gigawatts worth of government contracts to build new renewable energy plants in Europe during 2021, teeing up a bumper year for the industry at a time of increasing focus on reaching EU climate targets.

More than 40 GW of new wind and solar photovoltaic capacity is scheduled to come to auction in 10 of the largest renewables markets on the continent next year, according to an analysis by S&P Global Market Intelligence and S&P Global Platts. Scheduled bidding processes include the largest ever auction round in the UK and some of the first tenders held in Spain's red-hot renewables market in almost four years.

The tenders will provide ample opportunity for utilities, oil companies and other investors to build out their project pipelines.

Power producers including Enel and Iberdrola have already announced major new investment plans that require an acceleration of their green energy buildout. And oil majors like BP PLC, Royal Dutch Shell PLC and Total SE are stepping up their pursuit of large-scale projects to meet their own decarbonization targets amid increasing investor pressure.

In the 10 countries analyzed, at least 13 GW of solar and more than 30 GW of onshore and offshore wind capacity will likely come to auction over the next 12 months. In total, the new volumes would equate to 15% of the installed capacity across the three technologies for those countries, although some of the projects will not be awarded until after 2021 and many will take much longer to build.

Auction schedules could change and the volumes on offer in some of the tenders are only provisional. There are also some countries that are scheduled to hold onshore renewables auctions but have not yet published planned volumes, including the Netherlands, Portugal, Denmark and Ireland.

The tenders come as countries continue to ramp up their renewable energy targets in light of higher EU ambitions to cut greenhouse gas emissions. They also show that governments are unlikely to rely entirely on markets to deliver that green buildout, despite focus in the industry shifting increasingly away from state-run procurement toward merchant development backed by contracts with corporate energy buyers.

Offshore dominant

The largest share of new capacity could come from a handful of offshore wind auctions planned in six countries. Together, those tenders could increase the current capacity of turbines spinning off European shores by two-thirds, although many of the projects would not be installed until the end of the decade.

One of the most-watched tenders of the year is set to play out in the UK, where the government is planning to award contracts for difference (CfDs) for about 12 GW of new onshore and offshore plants — twice the volume on offer during the country's last round, which saw prices drop to record lows.

The renewables industry overall has matured to the point where developers are now comfortable bidding at or below wholesale price levels to secure development rights. The Netherlands and Germany have previously awarded offshore wind projects at zero subsidy, and a solar tender in Portugal this year ended with most winners paying the state to secure grid connections, rather than the other way around.

That makes it likely the next 40 GW of renewables contracts will be the cheapest 40 GW ever procured in Europe.

In the UK at least, competition is set to be intense again: As much as 17 GW of projects could be eligible to bid in the upcoming round, according to Cornwall Insight, a consultancy.

"It is clear the industry is gearing up for the opportunity provided by the [CfD auction], especially when compared to alternative subsidy-free options," Lucy Dolton, an analyst at Cornwall Insight, said in November.

OFFSHORE WIND PIPELINE: PLANNED AUCTIONS

Data as of Dec. 8. Eligible offshore wind projects as of Nov. 25, 2020 according to RenewableUK

Source: S&P Global Platts and S&P Global Market Intelligence research

Floating wind debut

At least 5 GW of approved offshore wind capacity are lined up to compete in the UK while close to another 5 GW are nearing approval, according to trade association RenewableUK. And for the first time since 2015, there are several gigawatts of onshore wind and solar projects expected to bid, after the government decided to reverse its policy of excluding more mature technologies from subsidies.

Across Europe, the coming year will also see the first wave of tenders for floating offshore wind parks. Used in deeper waters, they have only been deployed at demonstration sites so far, although developers are itching to build larger plants.

Specific floating projects will be tendered in France and Norway in 2021, and developers can also bid them into the UK's CfD round, where they will compete with other less established technologies.

Spain roars back

Spain, which has emerged as one of the most lively unsubsidized markets in Europe, is set to hold its first annual tenders for onshore renewables since 2017. The government has relaunched auctions in a bid to reach its 2030 climate targets, which require doubling the share of renewable sources in total energy consumption and will see almost 20 GW of capacity auctioned by 2025.

The last three tenders held in the country led to the installation of a combined 7 GW of new capacity up until 2020. But since then, new projects — most of them merchant plants backed by power purchase agreements with utilities or corporates — have lagged far behind what is needed to meet the 2030 obligations.

The two biggest power generators in the country, Iberdrola and Enel-owned Endesa, have played down the importance of auctions, which they see mainly as a gateway for smaller competitors without the wherewithal to finance projects on their balance sheets. Still, Endesa CEO José Bogas told investors in November that the utility plans to participate.

RENEWABLE ENERGY AUCTION TRACKER, 2021

Data as of Dec. 8. Some volumes and dates subject to change and depending on draft auction frameworks

Source: S&P Global Platts and S&P Global Market Intelligence research

Insufficient interest concern

In some markets, regulators are more likely to worry about a lack of competition. Onshore wind tenders in Germany have been heavily undersubscribed, as developers have seen their projects held up by lawsuits and lengthy bureaucratic procedures. The government is now mulling payments for local communities to increase acceptance for new projects, and recently passed measures to speed up grid expansion so that more plants can be connected.

The growth engine behind Europe's early renewables buildout, Germany is now hoping to propel wind and solar into a post-subsidy era where state contracts are awarded at or below wholesale market prices. For offshore wind, the government recently rejected calls from the industry to switch to UK-style CfDs, opting instead to randomly allocate awards in the event of multiple zero-subsidy bids.

Developers in neighboring France have also been rankled by recent policy proposals, decrying a plan floated by the French government to renegotiate existing solar power contracts for some older plants. Similar retroactive cuts to subsidies caused investor confidence to evaporate in Spain after the last financial crisis.

Still, more countries are launching auction programs. Germany has said it wants to auction 40 GW of new renewables by 2025 but is now revising its plans to take into account the EU's higher emissions cuts. Meanwhile, Brussels has even said it could introduce regular bloc-wide renewables tenders from 2021.

That means industry groups are left to only increase their installation forecasts, even amid the disruption caused by the coronavirus pandemic. SolarPower Europe said on Dec. 15 that it expects annual solar additions to surpass 35 GW by 2024.

"The next few years we will see very steep growth because of the many tenders we are seeing," said Michael Schmela, the group's executive advisor and head of market intelligence.

-- Yannic Rack, S&P Global Market Intelligence. Additional reporting by Camilla Naschert, Alex Blackburne, Andreas Franke and Henry Edwardes-Evans