Offshore wind execs push for bidding reform as Europe prepares for 2024 auctions

Offshore wind executives are calling on European governments to make crucial alterations to auction rules as the industry prepares for a flurry of new bidding processes in 2024.

As much as 50 GW of offshore wind capacity will be up for auction this year in Europe, according to an analysis by S&P Global Commodity Insights, but a new environment of higher project costs has complicated companies' decisions when bidding into auctions.

Against that backdrop is a Europe-wide debate around auction design, with the industry warning against the use of uncapped financial bidding and urging countries to factor in nonprice criteria.

Calls are also growing louder for governments to include contractual guardrails that protect companies from rising costs, to avoid more major projects coming unstuck under continuing inflationary pressure.

"The opportunity space globally has become ... so big," said Martin Neubert, chief investment officer and partner at Danish investor Copenhagen Infrastructure Partners P/S. "We will see oversubscribed auctions certainly, but there is also going to be a competition [to establish what are] the most attractive [auction] frameworks in times of uncertainty and volatility in energy markets, in macroeconomics, in geopolitics."

Yet, executives said some of 2024's auctions may come too soon for any redesigns to take effect. As such, the prospect of multibillion-euro bids still looms large, potentially putting further pressure on the supply chain.

READ: European offshore wind set for pivotal 2024 as auction road map nears 50 GW

Auction pipeline

In the pipeline of 2024 auctions, the UK, Germany and Denmark have the potential to deliver the largest amount of new capacity — but arguably the UK has the most riding on it.

The next round of the UK's contracts for difference (CFD) program will follow an auction in 2023 that failed to receive even a single offshore wind bid, with developers unable to square rising project costs with the auction's low bid ceiling.

"Frankly, that was the result we were hoping for," said Mark Giulianotti, head of Europe at Corio Generation Ltd., an offshore wind developer backed by Macquarie Asset Management Inc.

"The worst thing that could have happened was someone actually bidding, or one or two [projects] actually going in," Giulianotti said in an interview. "The government needed that firm messaging from the market."

The CFD auction washout prompted the UK to increase the offshore wind bid ceiling for 2024's auction by 66%, from £44/MWh to £73/MWh in 2012 prices.

2023 is "the year where we see an adjustment to ... synchronize costs with revenues going forward," said Neubert, who joined CIP in 2023 after more than a decade at Ørsted A/S, the world's largest offshore wind developer.

Ireland's first offshore wind auction, which awarded contracts at €86.05/MWh in 2023, as well as the pricing levels seen in New York's recent bidding process, similarly suggest higher project costs are starting to be factored in, Neubert said in an interview.

Uncapped bidding 'insane'

As developers grapple with the market's new cost realities, some governments have embarked on auction designs that executives claim could exacerbate the industry's problems.

Germany awarded 7 GW of new offshore wind capacity to BP PLC and TotalEnergies SE in a 2023 auction that included an uncapped financial bidding phase, with the oil majors' winning offers amounting to a combined €12.6 billion.

The setup of awarding auctions simply to the higher bidder has been criticized for piling further pressure on a supply chain that is already under significant strain, while potentially raising electricity prices for consumers in the future. The European Commission said it may also "increase the risk for full and timely delivery" of projects.

In structuring auctions in this way, governments "have become greedy," according to Grzegorz Gorski, COO of Ocean Winds SL, the offshore wind joint venture between Engie SA and EDP Renováveis SA.

"If [they] can cash a few billion [euros, they think], why not? And then you have some new entrants who are ready to pay these billions as an entry ticket to the industry," Gorski said in an interview.

The Netherlands is set to go down a similar path to Germany in 2024, despite being one of the first countries in Europe to apply nonprice criteria in an offshore wind tender.

The Dutch government has significantly increased the maximum financial bid in its upcoming IJmuiden Ver auctions — comprising two 2-GW sites — on the basis that it would be too hard to distinguish between bids based on qualitative factors.

As such, financial bids in IJmuiden Ver will be capped at €420 million per year, which would equate to €16.8 billion per site over the course of the 40-year permit.

"The cap is so high that [the auction is] practically uncapped," Gorski said. "It's insane."

Explaining the rationale, a spokesperson for RVO, the Dutch enterprise agency, said it is unlikely that any bids will meet the cap and that setting it so high avoids having to select a winner by the drawing of lots like in Denmark's Thor tender in 2021.

The financial bid accounts for 30% of the total award criteria in IJmuiden Ver with nonprice factors making up the rest. However, it is expected that all "serious bidders" will score maximum points on the nonprice elements, the spokesperson said.

As inspiration for what a more sustainable auction framework looks like, Giulianotti pointed to Scotland's seabed leasing round in 2022, which combined capped financial bidding with nonprice factors and required developers to invest in the offshore wind supply chain.

Scotland's hybrid approach showed that the "government is selling seabed and getting a decent return and potentially has funds available to assist supply chain manufacturing, et cetera, but also it's not uncapped," Giulianotti said.

Indexation on wishlists

Developers are also calling on European countries to learn from the project setbacks in 2023 and ensure that newly awarded offshore wind contracts are indexed to inflation.

"And especially indexation in the period between the award and [final investment decision], because this is when we are exposed," Gorski said.

But indexation is just one item on a long wishlist for executives when it comes to auction design. Some are also calling for longer contracts.

In the UK, developers are awarded CFDs for 15 years, even though assumptions around the life of a wind farm have increased substantially since the framework was introduced nearly a decade ago, according to Danielle Lane, head of offshore development for the UK and Ireland at RWE AG.

"We're now in a position where we're talking about lifetime of wind farms of 30 to 40 years," Lane said in an interview. "And that means the CFD tenor only covers half of the production of the wind farm, which was not what was originally envisaged."

Extending the length of contracts would "suppress the pricing of the CFD because you don't need to have such a high CFD price to get your certainty of your revenue," Lane said.

All eyes on Germany

Auction design remains high on the list of priorities for European energy lawmakers, but some players think that the next wave of tenders might come too soon for material alterations to take effect.

"Many of the auctions that are currently in the market were set 12 to 24 months ago, and they're not necessarily ... reflecting the current issues that we have," Giulianotti said.

Corio's Brigg Vind consortium has already decided against participating in Norway's 1.5-GW Sørlige Nordsjø II tender, for instance, which is due to take place in February. In a statement, Brigg Vind pointed to "the prevailing cost structure, market conditions, timeline, contract for difference terms and other regulatory factors" as being behind its decision to bow out of the process.

The Norwegian auction, as well as those awaiting award in France, where frameworks were also set some time ago, "are potentially going to struggle," Giulianotti said.

The future of offshore wind auctions in Europe may eventually hinge on Germany — Europe's largest economy, the third-largest offshore wind market in the world, and an influential member of the European Union.

Germany is set to auction 8 GW of new capacity in 2024, starting in the summer.

"If Germany changes the rules and adapts to [the European Commission's] package of recommendations, it will happen everywhere," Gorski said. "If Germany ignores, which I am afraid of, it will be like many recommendations: empty."