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Market awaits record low prices as UK starts offshore wind showdown

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An offshore wind farm in Liverpool Bay developed by Denmark's Ørsted.
Source: Ørsted

Several of Europe's largest utilities are battling it out in a renewable energy auction in the U.K. that began on Aug. 9, with as much as 6 GW of new offshore wind capacity up for grabs.

Bidding in the third allocation round of the U.K.'s contracts for difference, or CfD, tender is open until Aug. 15, with the winners set to be announced in September. Offshore wind projects being developed by the likes of Iberdrola SA, Innogy SE, EDP - Energias de Portugal SA, Engie SA, Equinor ASA and SSE PLC are among those competing for 15-year fixed-price contracts from the government.

While the auction is open to a range of renewable energy technologies — excluding established sectors like onshore wind and solar photovoltaic but including, for the first time, wind projects on remote British islands — the low price ceiling set by the government for offshore wind means the technology is expected to be the overriding victor.

In the auction, developers bid at the level at which they will sell power from their projects, known as a strike price, with the lowest prices awarded contracts. For those looking to commission in 2023/2024, strike prices cannot go higher than £56/MWh in 2011/2012 currency, while for 2024/2025 projects, the ceiling is £53/MWh.

The eventual price of offshore wind contracts from 2019's auction will represent a CfD price decrease of more than two-thirds in just five years. In 2014, the U.K. government was handing out contracts outside of an auction environment at £150/MWh and £140/MWh.

"I would be surprised by nothing," Emma Pinchbeck, deputy chief executive at trade association RenewableUK, said when asked about where the price will land for the third allocation round. "I think we're all expecting prices to go lower; how much lower is up for debate."

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Offshore wind's dramatic cost reduction in the U.K. is part of a wider sectoral trend that also encompasses other European markets, with France recently running an offshore wind auction that resulted in a CfD price of just €44/MWh, and tenders in Germany and the Netherlands ushering in projects on a zero-subsidy basis.

In the U.K.'s case, the low strike prices that are expected for offshore wind mean the government is unlikely to dip too far into the £65 million budget it has earmarked for round three, since its contribution is the difference between the market price of electricity and a project's strike price.

Indeed, some expect bids to come in close to, or even below, the government's reference prices — the estimates used in the CfD to forecast the future market price of electricity. For offshore wind, reference prices start at £48.13/MWh for 2023/2024, increasing to £51.23/MWh by 2026/2027.

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In this scenario, the financial budget becomes "much less relevant, and is quite likely not to be what ultimately clears the auction," said Daniel Radov, a director at Nera Economic Consulting, who worked on competitor analysis and bid strategy with two offshore wind bidders in the run-up to the auction.

Because there is little risk of the budget being met, a 6-GW capacity cap has been introduced for the first time in round three, limiting the number of projects that can come away with CfDs and ensuring competitive tension for future rounds.

Alistair Phillips-Davies, chief executive of British utility SSE, which has interests in more than 5 GW of wind farms competing for CfDs, had called in July for an increase in the cap, particularly in light of the government's net-zero legislation. The auction would be more competitive than originally anticipated because the amount of eligible offshore wind capacity had increased since the cap was set, he argued in a letter to Chris Skidmore, a former U.K. energy minister.

'Very competitive bidding'

In total, nearly 10 GW of offshore wind projects could be gearing up to bid in CfD round three, according to an analysis by S&P Global Market Intelligence, including wind farms owned by some of Europe's largest electric utilities.

"Some of these are really big projects, bigger than 1 GW," said Ronan Lambe, legal director at the law firm Pinsent Masons. "That allows for some serious economies of scale and probably points to some very competitive bidding."

Indeed, SSE's portfolio alone includes three 1,200-MW sites in the Dogger Bank zone — situated between 125 km and 290 km off the east coast of England — as part of a joint venture with Norway's Equinor, and a further two projects off the coast of Scotland with another 1,500 MW. The company may not bid all phases into the auction due to timing constraints, according to analysts at Jefferies.

ScottishPower Renewables (UK) Ltd., the U.K. arm of Spain's Iberdrola, is likely to bid with its 1,200-MW East Anglia Three project, whose sister site East Anglia One was successful in 2015's CfD auction and is expected to enter full operation in 2020.

Two of the winners from CfD round two Germany's Innogy and a joint venture between Portugal's EDP and France's Engie — will be looking to repeat their success in round three. The former is pitching Sofia, a 1,400-MW project also located in the Dogger Bank zone, while the latter is likely to bid in the 950-MW Moray West wind farm after the two companies combined their offshore wind businesses earlier this year.

The sole non-utility bidder in the running is Red Rock Power Ltd. — owned by China's SDIC Power Holdings Co. Ltd. — which is developing the roughly 784-MW Inch Cape project in Scotland. The third auction may also see certain smaller floating wind projects submit bids, but it remains to be seen whether these can compete on price with fixed-bottom projects.