No bids in the Danish offshore wind tender –  no surprises?

In April of this year, the DEA launched the country’s largest ever offshore wind tender, ~6 GW with the North Sea A1, A2 and A3 sites offering half of the capacity. The auction structure saw the country take a step away from bidding on a strike price for revenue support scheme, after the contested Thor auction in 2021, which ended up being decided based on five parties finishing equal, due to all submitting the minimum bid possible.

Instead, the auction design was changed to include negative bidding, a feature seen in the German tender system, whereby the deciding auction metric is effectively a concession payment to the government over the 30-year lease period. Another notable change to the auction design, was the requirement to include the Danish government as a 20% shareholder in the project. Although this could be seen as a somewhat common practice in Denmark, since this structure is standard in offshore gas exploration contracts, it is radically new for offshore wind (and where the revenue model is quite different).

Denmark remains one of the world leaders in the energy transition and has been a pioneer in the offshore wind sector since its inception. It is clear, that the DEA wanted to push the boundaries of future auction designs – since neighbouring Germany seemed to be so successful with its revenue generating approach. But long-term market risk is becoming one of the biggest risks for the sector. Even in markets with a strong industrial base, the depth of the market of investment grade offtakers able to sign long term power purchase agreements is becoming shallower. A quick back-of-the-envelope calculation before the start of the auction – similar to one we did – would have shown that based on the current levelized cost of electricity for offshore wind and the current 10yr PPA prices that can be secured in Denmark, the project returns are simply too low for any credible offshore wind developer to reach FID. There simply is not enough demand at the right long-term price on the basis of today’s price expectations (this it not to say there will not be in future, but such capital intensive infrastructure investment decisions need to be driven by a degree of revenue certainty).

Regulators pushing the boundaries of auctions are vital to the evolution of the industry and eliminating excessive returns by running competitive auctions. But assuming that bidders are still willing to commit significant  expenditure at times when equipment and capital costs have gone up and the price of electricity has reduced is wishful thinking – and can put projects, and thereby government decarbonisation targets, at risk. The results – or lack thereof – have ultimately set back Denmark’s plans to reach their emissions reduction targets and it is unclear how long we will need to wait until the auction structure can be revised. One thing is for sure, other governments planning similar offshore wind auctions will/should take note of this to avoid facing a similar fate and provide a competitively awarded contract for difference scheme or at least a level of floor that reduces merchant risk exposure and provides long-term certainty for such large capital investment decisions. In the end this is also in consumer interests as a de-risked project will attract a lower cost of capital, resulting in a more competitively priced green electron in the long run.

Green Giraffe Advisory has recently opened an office in Copenhagen covering the Nordic market. If you want to speak to us about this Danish offshore wind tender, how to make your projects bankable or any other topic pertaining to the energy transition in the Nordics, then please reach out. We’d be happy arrange a meeting with you. We promise you frank and independent advice.