On July 12, the German Bundesnetzagentur (Federal Network Agency) announced that major energy companies BP and TotalEnergies had been the winners following its offshore windpower auctions for non-centrally pre-investigated sites. The auction (Ausschreibungsrunde 2023 - Phase 1) was the first dynamic (negative) bidding process in Germany and covered four offshore wind zones with a combined capacity of 7GW.
The process differs from the traditional contracts for difference bidding process, where a government will issue a call for tender in order to procure a certain capacity of wind-generated electricity. Developers would then submit their bids with a price per unit of electricity at which they are able to realise the project. Bids are then evaluated on the basis of price, alongside other criteria such as innovation, before a power purchase agreement is signed.
While the dynamic bidding process in Germany generated a total of €12.6 billion in proceeds for the government, industry players have raised concerns over how the auction will impact the strained offshore wind market.
Major energy companies secure acreage with high-value bids
Three 2 GW areas were available in the North Sea: N-11.1, N-12.1, N-12.2 and one 1GW capacity area in the Baltic Sea: O-2.2. BP secured areas N-11.1 and N 12.2 for a total of €3.66 billion and €3.12 billion respectively. Meanwhile, TotalEnergies secured the final North Sea area (N-12.1) for a total of €3.75 billion and the sole Baltic Sea area (O-2.2) for a total of €2.07 billion.
The bidding period closed on June 1 with the FNA receiving eight zero-subsidy bids for the North Sea areas and nine for the Baltic Sea area. This meant the dynamic auction bidding stage was triggered. Through hourly electronic meetings, bidders initially had to offer €30,000 per MWh in the first round with bids rising by that amount until bidders dropped out. Once this happened bids rose in €15,000 increments. In all N-11.1 went through 64 bidding rounds, N-12.1 went through 65, N-12.2 went through 55 and O.2.2 went through the most at 72 bidding rounds.
This dynamic bidding process was designed to differentiate between bidders due to several zero-subsidy bids being received in the first stage. Essentially, this meant that the sole criterion for winning the auction was the amount that developers were willing to pay. As both auction winners are traditionally oil and gas companies (therefore also marking the entrance of O&G operators into the German wind market), they have significantly more cash that enables them to win auctions of this design with the potential to out-price wind developers.
From the German Government's point of view, the high value of the secured bids means additional support to decarbonisation efforts within Germany and a significant investment in the development and maintenance of the offshore grid - a cost which would otherwise have gone to the consumer. In all, the total €12.6 billion will be split with 90% going towards funding grid connection costs, 5% to protecting marine biodiversity and 5% to support environmentally friendly fishing.
But critics of the auction feel that it may cause more harm than good to the offshore wind industry as a whole.
Fears negative bidding will create additional costs throughout the industry
Wind Europe responded to the award announcement with concern. In a statement, it said, “Negative bidding creates additional costs for offshore wind developers. These costs must be passed on. Either to the supply chain which is already struggling with inflation and surging input costs. Or to the consumers who already face higher electricity prices and living costs.
“Crucially the European Union wants to strengthen its energy security with competitive and home-grown renewables. The EU needs as much new wind energy capacity as it can get, as fast as it can get it. All the money paid in negative bidding is money our companies cannot invest in other wind energy projects.
“European Governments should therefore not follow the German example of negative bidding.”
Further criticism came from Danish company Ørsted which had decided to exit the auction process at an undisclosed time. Chief Executive Mads Nipper had been vocal in expressing his concerns about the process and how it would ultimately lead to increased costs for consumers. He stated on LinkedIn that Ørsted “very deliberately chose not to pay record high concession prices for new offshore projects in Germany.” In a Reuters report from February this year, he also expressed the worry that the process could attract bidders who may not be experienced or financially disciplined enough to ultimately develop the projects they win.
The general sentiment from critics of the process seems to be that with margins already incredibly thin in the offshore wind market, with many challenges and difficulties ahead especially in relation to the supply chain, developers paying incredibly high prices for developments will not be helpful to the industry moving forward.
A number of proposals were reportedly made during the auction design process which could have alleviated some subsequent concerns. These included a limit on bid amounts, further qualitative criteria and rewards for innovation. None of these concepts was ultimately adopted, however, with the industry calling for changes in future auctions to protect the supply chain they may be factored in during subsequent processes.
More auctions to come in German offshore wind
There will be further auctions in 2023 with an upcoming tender for 1.8 GW on centrally pre-developed sites due in the summer. This will not be auctioned under the same dynamic design, however. It includes non-priced criteria including the proportion of electricity from renewable energy sources in the manufacture of wind turbines, the proportion of trainees, the use of environmentally friendly foundation methods and the scope of long-term electricity supplies to third parties. This auction means that Germany will be awarding a total of 8.8 GW from 2023 auctions which is more than the country's current installed capacity.
In order to meet the 2030 commissioning target for the first auction, Germany has work to do in bringing its offshore wind supply chain up to the capabilities required to meet those capacities. Further industrial capacity will be needed for the construction of wind turbines and foundations and more installation vessels will be required. This is alongside an increase in infrastructure including ports, grids and a skilled workforce. Following the negative bidding process, it is feared that all of this will come at a further cost to supply chain companies who are working to ever-tightening margins.
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