The Netherlands has shown how to drive the cost of offshore wind down to previously unimagined levels: by “taking the risk out of projects”, they managed to achieve a historically low price. This paves the way to turning the European North Seas into a giant power generating region, writes freelance journalist Eric Marx for World Energy Focus. The European offshore wind model could be an example to the rest of the world.
While auctions in sunny countries like the United Arab Emirates achieve record-low solar power costs (3 cts/kWh), a windy European country, the Netherlands, has just broken a world record with an unprecedently low cost for offshore wind. In July, a tender for two offshore wind farms in the North Sea (Borssele 1 and 2), representing a combined 700MW of output, was awarded to Danish utility Dong Energy at €72.70 ($94.50) per MWh. This easily surpassed the Danish wind farm Horns Rev 3, awarded in 2015 to Sweden’s Vattenfall AB at a then-record-low cost €103 per MWh. According to the Dutch Ministry of Economic Affairs, additional connection fees for the offshore wind park are around €14/MWh.Â
Offshore wind has always been the most expensive kind of renewable energy. The latest levelised cost (LcoE) figures from Bloomberg New Energy Finance put offshore wind at $174/MWh, significantly more than onshore wind (average of $83), solar PV ($122) and coal or gas (which in a country like Germany have LCOEs of $106 and $118/MWh respectively). This makes the Dutch figure all the more impressive, even with connection fees included.
“There were a number of reasons for the low bid but the key one is that the Dutch government took a lot of the risk out of this project”
“With Borssele 1 and 2, we’re crossing the levelised cost of electricity mark of €100 per MWh for the first time and are reaching a critical industry milestone more than three years ahead of time,” Samuel Leupold, executive vice president and head of wind power at Dong Energy commented. Dong and the rest of the industry say the winning Borssele tender demonstrates the great potential of offshore wind. Indeed, they insist grid parity is in sight, proclaiming 2025 as the target date for offshore wind to finally competing on its own, without large subsidy support.
Tender model
Yet the question remains: can this cost reduction pace be sustained? Or is the Borssele project an outlier owing its low price to exceptional circumstances?
Dong, the world’s biggest developer and operator of offshore wind farms, might have put in a low bid to capture the market in order to muscle out the competition. There were also cyclical factors at work, such as low steel prices, access to low interest rates, and an oversupply of installation vessels. In addition, Borssele 1 and 2 are sited close to shore (22 kilometres) in shallow waters, affording planners lower logistical and transmission costs.
But experts agree that the key factor in bringing the price down was the business model used by the Dutch government. “There were a number of reasons for the low bid but the key one is that the Dutch government took a lot of the risk out of this project,” says Oliver Joy, the political affairs spokesperson at WindEurope, the European association of wind power producers. It shows, says Joy, what’s possible when technological innovation combines with clear regulatory signals.
To begin with, the Dutch put on the table a systematic roll-out plan of considerable size, with five auctions of 700MW a year up until 2020. The first Borssele tender is, by itself, now the largest offshore project in Europe, surpassing the London Array (630MW), off Kent in the outer Thames Estuary in the United Kingdom.
With 11 GW installed, Europe still accounts for more than 90% of all offshore wind installations in the world
Moreover, the Dutch government offered developers a 15-year subsidy period, five years longer than what is currently offered in the UK. The appointment of a single grid operator, Tennet, to build one standardised transmission system helped embolden contractors to take on more risk. And the Dutch government further simplified the process by performing all the environmental and geological studies before offering up the auction.
The Dutch model, based on the example of Denmark, identifies who can build the cheapest capacity on an already-developed offshore wind site, says Jerome Guillet of Green Giraffe, a company that specializes in renewable energy financing. “It limits project risk by merging into a single point the decision-making on the permits and contracting.”
Global ambitions
Offshore wind is on track to becoming a mainstream power, but only if it can further drive down costs. The industry believes this is possible. Michael Hannibal, CEO of Offshore Wind at Siemens’ Wind Power and Renewables Division, makes the point in the week following the Borssele announcement, his attitude buoyant for the good news it portends for the industry in Europe and beyond. “It is positive to see this downward trend, because this is what we have been promising,” says Hannibal, citing a 2025 goal that would see the industry deliver offshore energy at a price of €80 per MWh.
Siemens will soon approach an average €100 price point, ahead of its own 2020 target date, and has long played a role internationally in markets like China where it has a licensing agreement with Shanghai Electric to deliver 4 MW turbines. Japan is also viable, says Hannibal, with the help of floating platforms developed in Europe in deep-sea locations off Portugal and Scotland.
With 11 GW installed, Europe still accounts for more than 90% of all offshore wind installations in the world, with the remainder located largely in China, followed by Japan and South Korea.
The offshore wind industry makes relentless efforts to bring costs down, for example by increasing the size of turbines. Yet conditions are also becoming more challenging
Siemens entered the Japanese waters in 2015 with a semi-offshore 3MW turbine, but it’s in China where the market is more evolved, having passed the 1GW mark at the close of 2015. China now stands as the fourth largest market globally, a testament to governmental support, but also in Hannibal’s estimation a reflection of the viability of the European offshore model.
The key, says Hannibal, is “predictable” long-term support. “Look at the incentive regime behind Borssele,” adds Hannibal. “It stretched over many years … and that’s really what we are requesting, predictability.”
The “central scenario” from the European Wind Energy Association (EWEA) shows that by 2030 offshore wind capacity in Europe can be expanded to 66 GW, able to deliver 5% of total European electricity demand. For the countries around the North Seas, the contribution of offshore wind to their electricity mix would be considerably higher.
Wind-Connector
The offshore wind industry makes relentless efforts to bring costs down, for example by increasing the size of turbines. Yet conditions are also becoming more challenging. In order to find suitable areas, new capacity has to be located farther out to sea.
Of new deployments in the UK, Germany, Denmark and the Netherlands, an estimated 40% will be installed far offshore, according to forecasting by the Dutch research program on Far and Large Offshore Wind energy (FLOW).
FLOW was created, in part, to accelerate “far offshore” deployments, and according to its director, Ernst van Zuylen, the five-year R&D effort is succeeding. “We were surprised by the Borssele outcome,” says Van Zuylen, but even for projects sited in more challenging waters he predicts average costs in the €7 cent kWh range before 2030.
This would be an island in the middle of the North Sea, which would connect far offshore wind farms and transmit the electricity over direct current cables to the surrounding countries
Suction bucket jackets and concrete gravity-based foundations could reduce the need for hydraulic drilling of costly steel in waters deeper than 50 meters. There are now floating platforms for housing maintenance crews, as well as floating turbines, per six 5MW turbines being tested by Statoil 24 km off the coast of Scotland.
Still further gains could be had in linking several offshore wind farms with onshore grids in different countries. The Dutch offshore grid operator, Tennet, is now pushing several programs in this direction, including a meshed grid concept that has the backing of nine North Sea partner countries, as well as a hub-and-spoke island dubbed “Wind Connector”.
This would be an island in the middle of the North Sea, which would connect far offshore wind farms and transmit the electricity over direct current cables to the surrounding countries. But that’s probably still a few decades ahead. What is clear after the latest results is that the North Sea countries will continue to pursue their offshore wind ambitions vigorously. They may serve as inspiration to the rest of the world.
Editor’s Note
This article was first published by World Energy Focus, a free monthly magazine published by Energy Post. You can register here to get free access.
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Michael Hogan says
While this is a terrific milestone and should be studied for its wider implications, it is important for those of us searching for the pathway to a fully decarbonized power sector at a reasonable cost to consumers to deal with facts not happy fiction. And the fact is that it’s a fiction to imply that the risk in this project was made to disappear like the magician’s assistant in a puff of smoke. Dong are certainly taking less risk, but all of that risk has simply been shifted to Dutch taxpayers and Dutch consumers. That bet may or may not pay off, and frankly they are the parties least able to assess or manage the likely outcome. This is a viable model for commercializing immature technologies like offshore wind and should be exploited for the time being. But in the long term it is not a sustainable model. It was precisely this “heads I win tails you loose” investment model for the power generation industry that we intended to replace over the past 20-30 years, and it is precisely this sort of inequitable risk/reward allocation that the incumbent fossil generators are seeking as they campaign for the long-term “taking the risk out of investment” capacity mechanisms. We need to find the way to utilize models like this Dutch success as a transitional phase where necessary and appropriate without losing sight of the larger challenge of preserving an equitable, affordable and low-carbon power system. That will not be achieved by a return to the days of cozy arrangements between energy companies and governments that saddle consumers with huge costs and risks that may or may not prove to be needed or cost-effective.
Csaba says
It seems you have not understood the change in risk assessment of the projects. The dutch and danes have done more in the pre-project stage. If the pre-project information and if the results shows that it is possible to go ahead (a with lot of information how it could/should be done), the risks decreased alot and not to the expense of the taxpayer!
Michael Hogan says
Oh believe me, I understand that all too well. I was a power project developer for nearly 25 years, and a very successful one. The work done by the governments pre-tender, as described in the article, is work any developer would do prior to proceeding – in this case it was simply done (and paid for) by the Dutch & Danish governments. The risk profile at final investment decision point will not therefore be materially different from what it would have been otherwise. The risk that the work that was done was poorly carried out or simply turns out to be wrong – as it often does in such analyses even with the best of practitioners given the enormous uncertainties involved – is still being borne by the Dutch & Danish taxpayers and consumers rather than by project developers. And there are whole categories of risks at larger scale – how much new capacity is actually required, of what kind, when and what is the most cost-effective solution – that have nothing to do with geological or marine studies, and all of these are being borne by taxpayers & consumers for decades to come. That’s absolutely fine and even essential for the early stages of the offshore build-out, given the immature nature of the technology, but my point is that it is not a sustainable model in the long run if we remain committed to an equitable, cost-effective transition to a low-carbon power system. I understand all of that very well thank you very much.
Mike Parr says
Mr Hogan: we have as “models” two contrasting approaches to off-shore wind farm development: the UK’s and the Dutch/Danish approach. The UK approach has delivered prices (Euro120? Euro140?/MWh) which are close to twice those of the recent Dutch auction. Taking UK wholesale at Euro52/MWh and Dutch prices at Euro45, UK subjects are paying (just on the headline price) 2.3x CfD price whilst the Dutch pay 1.61x of what amounts to a CfD price. Even taking into account the 10 years vs 15 years there is still a price discrepancy of Euro110 per MWh (Euro120x10 yrs vs Euro72.7×15 yrs). The only people paying for this price discrepancy will be electricity customers in the UK. There are now, very good wind records in the area that the Dutch are auctioning – not least because it sits very close to existing Belgian off-shore farms. The Dutch also have extremely good existing seabed records – the latter can be seen as sunk costs. Using existing information to get a better deal for Dutch electricity consumers thus seems a rational and reasonable thing to do. For clarity, the UK approach is for EACH bidder to undertake its own seabed/environmental/wind studies – prior to bidding. This is stupidity writ large and we can clearly see the results on costs (UK vs NL/Dk). Are you arguing that this is a good approach towards off-shore development? What are you arguing for?
Michael Hogan says
I was simply responding to the article, which does touch on the pre-construction phase aspects you seem to be very focused on but that constitutes both a very small part of the article and, ultimately, leads to measurable but relatively small improvements in project economics. The issues raised in the article – which is what I was responding to – have to do with “making risk go away” by offering longer term government-guaranteed financial commitments and suggesting that this may be the magical solution that unlocks the future of an offshore wind undustry that could supply, say, 66GW of capacity from the North Sea by 2030. The current approaches are useful and appropriate for the current pre-commercial phase of development – and it would seem that the Danish & Dutch processes are reducing costs, though the advantage of having existing data on sites is more dumb luck than magic and represents a limited opportunity that apparently is not available to the UK – but there is no magic about them that suddenly changes the inherent costs, risks and benefits of offshore wind. That will come from the hard work of RDD&D, work that will be facilitated by the current support policies. The sustainable model for an electricity market that equitably delivers something close to 100% reliable, zero-carbon energy considering all of the costs and risks involved, however they may be borne and recovered, continues to be a work in progress, but this is not it. So I wasn’t taking a position on the question you pose – the Danish/Dutch model may have clear advantages over the UK model that go beyond taking advantage of pre-existing marine & meteorological data for a specific patch of North Sea real estate, I just don’t know enough of the details to say one way or the other – I was responding to the article, which was largely about something else.
Pete says
It seems you assume that the Dutch government provides a U.S. style loan guarantee. However, this is not the case. The only garantuee is that the winner of the tender gets a fixed price per produced kWh. If the windturbines break, or wind conditions are not as good as expected this is the problem of the project developer, but not for the Dutch tax payer.
Bas says
@Michael,
“it’s a fiction … the risk … was made to disappear … that risk has simply been shifted to Dutch taxpayers … consumers. ”
Dutch government researched the situation at the sea bottom, etc. thoroughly, which they must do for other reasons too, such as improved coastal defense (e.g. the sand motor), shipping lanes, etc.
So the risk for the bidder is minimal.
When bidders have to do it, as in UK, they cannot spend the money nor have the time, to do that as thoroughly. So they take a substantial risk margin which explains the much higher prices of UK offshore bids. So UK consumers & taxpayers pay more!
This is an economic solution for all, incl. Dutch citizens (l’m one).
Michael Hogan says
Again, you seem to have missed the main points o the article and thus the points I was referring to. The article touched only fleetingly on what the Dutch are doing differently pre-construction, an rightfully so since the incremental economic benefit of what you describe, when all is said and done, is measurable but small – at the end of the day the underlying risk remains, though it may have been reduced somewhat (though a good developer would do do the same work and financiers will not dramatically change their risk premiums based on who did the work). The main thrust of the article is about contracting strategies – longer term government guarantees of project economics, which is also the principal source of net risk transfer, and that was the main thrust of my comment.
Bas says
@Michael
“…at the end of the day the underlying risk remains, though it may have been reduced somewhat…”
Given the thorough study of the situation before the bidding process, I hardly see any risks left for Dutch tax & rate payers.
So which risks??
Michael Hogan says
Yikes, it’s the same risk that ALWAYS remains after studying something like sub-marine conditions, subsurface geology or forecasts or offshore meteorological conditions – the risk that you missed something or got something wrong. I’ve done this for over a quarter century – I’ve seen the best consultants in the world make mistakes that cost tens and even hundreds of millions of dollars. I’ve seen entire fleets of new power plants built on the basis of what turned out to be deeply flawed meteorological studies and demand forecasts by the word’s leading consultancies. Just because the government did the work doesn’t mean the risk is materially less – some might even say it’s just the opposite. You’re displaying a dangerous level of naivete with that question.
Csaba says
Well, I am among those not so intelligent and naive. If you pay €72.70 ($94.50) per MWh delivered and nothing for energy not delivered; what are the additional risks for tax payers? I don’t understand how company mistakes in this case will end up to be paid by the tax payer.
Bas says
@Michael,
Knowing my govt. you can be sure that all data about the situation at the wind farm*) delivered with the tender by Dutch government, is delivered under the condition that no liabilitiy is accepted. Even if the data is totally wrong…
It’s nearly impossible for Dong to launch any succesful claim under Dutch Law.
I assume that Dong has signed for the application of the Dutch law before they were allowed to bid (as usual)…
Read also Csaba’s comment.
There are fundamental differences between US and Dutch law.
____
*) Detailed data concerning the wind situation, cables, wreckages. etc at the bottom, the depth of the sea at different places, the cable concentration point, etc.
Bas says
“…cozy arrangements between energy companies and governments that saddle consumers with huge costs and risks…” Totally wrong.
Michael,
As the EU bidding rules apply, cozy arrangements are impossible here (except with fraud, which is possible in South and East EU countries but not in NL, Germany, etc).
In the EU, governments are obliged to follow the EU bidding rules if they want to assign something worth more than a few million to private companies.
That procedure is fully transparent and bidders who lost can start a legal procedure if they feel it was unjustified (and it occurs!).
The rules:
1. The intention is publized at the EU, so every porssible party can know about the opportunity and can communicate they are interested.
2. All interested parties then get a Request For Information (RFI).
In response they have to submit info based on which govt can conclude whether a party is qualified (=for sure able to execute the assignment). All evaluation criteria are stated in the RFI together with their weight.
Some are 100% such as: “prepared to accept the work under Dutch law”. if not the party won’t send a response as it knows it will be out according to the RFI rules.
3. Only the parties which qualified in the RFI phase get a Request for Proposal/Bid (RFP). Again the RFP states the evaluation criteria of proposals together with the value assigned to each criterium.
The proposal / bid which gets the most points get the order.
The bid evaluation procedure excludes as far as possible, emotions at govt.
Most legal procedures are about the assignment of the points. Rejected bidders feel that their bid got incorrectly less points (at some criteria).
4. Usually the contract is send with the RFP to the bidders and the bidders have to agree or indicate which changes they want.
Usually any proposed change may cost them evaluation points = less chance to win. When a change is accepted (e.g. because it’s an improvement), then all bidders are notified and get the opportunity to adapt their proposal to the new circumstances if they want.
5. If any bidder feels the rejection of his bid was unjustified he can start a legal procedure (usually arbitrage, but escalation to the courtroom is always op). Though Dutch law implies that the court will judge using reasonable arguements (which is the reason most US companies want Dutch law when contracting with Dutch firms) it takes some more months.
There were 38bids for the Borssele offshore wind farm, so if anything happened not to the rules at least one of the rejected bidders would have started a legal procedure. Especially since there were powerful bidders such as Shell.
I know this because I did tender management for governmental organisations as well as bid management for private companies.
As bid manager I found the EU rules tedious. Which I didn’t like as they excluded gaining emotional benefits as a bidder.
As tender manager I always lived with a fear that some evaluation criterium was forgotten in the RFP/RFI, as such mistake can imply a delay of months because every bidder then has to get the opportunity to adapt his bid and during that time someone of the evaluation team my leak info about the other bids. Such leakage implies that the whole procedure has to start again…
Mike Parr says
I agree with the main points made in the article. However, with respect to the cost of a MWh from off-shore (specifically Dutch and Danish offshore) I part company with this writer and others. You cannot just take into account the auction price pf Euro72.7. This lasts for 15 years and the wind farm will have a minimum life of 25. (by the way – the Danes offer – roughly 11 years). After that the farm is at the tender mercies of the wholesale market. Based on a current wholsale price of Euro45/MWh – the price over the guesstimated life of the farm is more like Euro63/MWh. I have no doubt that given the Dutch “pipeline” prices will continue to decline. Finally, I don’t believe for one second that Dong bid low to muscle out competition (& thus perhaps compromise profits) – for a couple of reasons a) it now knows in detail the performance of the new 8MW class of wind turbines b)one of its shareholders is Goldman Sacks – not a company known for wishing to see returns on investment compromised.
Bas says
Mike,
This year Dutch whole sale price av. at ~€30/KWh following Germany where the price decreased towards ~€29/MWh.
Little chance our prices will increase as next year another new interconnection with Germany will become operational.
Furthermore we will tender additional offshore wind, etc.
Official Dutch government prediction for 2035 (so after the 15 years with guaranteed prices) is: €29/MWh.
When you correct for that the av. price is €60/MWh.
Bas says
EU study found that 20MW wind turbines are feasible.
For onshore wind the transportation problems (blades in 3 parts, etc), etc. may then be so costly that offshore wind becomes cheaper than onshore wind (~3cnt/KWh).
Especially when offshore operate with large special designed vessels which streamline the installation process at sea further.