German offshore wind to enter new era as 7 GW auction closes

Read the full article in S&P Global

This article notes that Germany's biggest ever offshore wind auction is to close June 1 with 7 GW of capacity on offer in a process likely to attract some of Europe's largest utilities, developers and oil majors.

Three 2-GW wind farms in the North Sea and a 1-GW concession in the Baltic Sea are being tendered.

For the first time, the auction is for areas of the seabed without any previous site investigation, but concessions include a grid connection guarantee for 2030.

At stake is investment of up to €20 billion ($21 billion), based on recent capital expenditure costs for 900-MW offshore wind projects in Germany as well as larger ones elsewhere in the North Sea.

Despite the recent inflationary pressure in the sector, multiple bidders are likely to offer to build projects without subsidies, continuing a trend of zero-subsidy bids that spans Germany, the Netherlands and Denmark.

The maximum bid price for state support is capped at €62/MWh.

Alon says that rising costs “will make it harder but I still think there will be enough bidders willing to do it on [a zero-subsidy] basis.”

In case of multiple zero bids, a second round “dynamic bid” phase is designed in a similar way to offshore wind lease auctions in the US, with companies paying for the concession.

Avoiding ‘winner’s curse’

Alon said: This kind of price discovery means developers “get to see what the market view of the value is before committing to paying something.”

It also avoids situations like in the UK in 2021 where BP and EnBW paid significantly more than their competitors for seabed leases because prices were not transparent.

Alon adds that price discovery in auctions “means you’re less likely to overpay and to fall into the trap of winner's curse.”

For now, the timing of the dynamic bid process is unknown.

Alon finishes with “it would be rational to … give people a significant period of time to do their homework and business case modelling.” Adding it could take three or four months for companies to properly value a project.