First published at Inframation online (Mergermarket/Acuris) – behind paywall https://www.inframationnews.com/search/?q=jeremy+bowden. First article on UK offshore wind awards/second on inclusion of onshore wind in UK CfDs and third on rising German wind prices.
Record low awards helped by keen investors (written for Inframation/Mergermarket/Acuris 09/20, unedited)
The price of power from offshore wind keeps coming down, but the interest from investors has never been higher – with that competitive credit market helping keep costs down. The schemes planning to go ahead include the UK’s first unsubsidised tranche of offshore wind, providing the greatest challenge so far.
The UK’s contract-for-difference (CfD) awards on September 20th produced a new UK offshore wind record low of £39.65/MWh – a 66% cost reduction in less than five years (and 30% down on £57.50/MWh in 2017). A total of six 15-year offshore wind deals were awarded (see table), along with four remote island wind farms and two bioenergy projects (despite no working examples from previous auctions) – totalling 5.7GW. All 12 projects are due onstream by 2025, although an outstanding judicial review application against the auctions could still make them redundant (see below).
Offshore wind schemes in CfD Round 3
| Project | Owners | Capacity | Successful |
| Dogger Bank Creyke A | SSE, Equinor | 1200 | Yes |
| Dogger Bank Creyke B | SSE, Equinor | 1200 | Yes |
| Dogger Bank Teesside A | SSE, Equinor | 1200 | Yes |
| East Anglia 3 | Scottish Power/Iberdrola | 1400 | No |
| Sofia | Innogy | 1400 | Yes |
| Seagreen Phase One | SSE | 1075 | Partially (454MW) |
| Moray West | EDP, Engie | 950 | No |
| Inch Cape | Red Rock Power (SDIC Power) | 784 | No |
| Forthwind | Forthwind Ltd | 12 | Yes |
Source: BEIS, RenewablesUK
Renewable UK’s Director of Strategic Communications, Luke Clark, said the low bids made offshore wind “significantly cheaper than fossil fuel alternatives… We are confident we can meet and exceed 30GW [the Government’s current target] by 2030.” He added that the Government’s advisers (the Committee on Climate Change), had made it clear that cheap renewables would dominate decarbonisation over coming years, and offshore wind was proving up to the job.
Ben Backwell, head of the World Wind Energy Council, said: “Offshore wind is the easiest way to add large blocks of carbon free generation capacity at low cost… The prices we have seen in the most recent CfD round are a result of the long-term approach taken by the UK and its strategic appreciation of the role that offshore wind can play.”
Darryl Murphy, head of Infrastructure Debt at Aviva, emphasised the importance of the CfDs in de-risking investment. He expected the winners would move quickly to final investment decision and commence construction over the next 12 months, “which includes raising finance and ensuring the assumptions made in the auction bidding process remain valid so they can still deliver at the bid prices.”
Unsuccessful schemes include EDP (Energias de Portugal) and Engie’s Moray West windfarm, and these unsuccessful schemes could add to competitive pressure in the next round. Dan Finch, Moray West Director said: “Moray West will continue to develop the project in anticipation of the next auction round.” However, Murphy cautioned that unsuccessful parties “will need to consider carefully their ability to bid in future rounds.”
Cheap, green power
The winning bids are below the government’s own projections of about £48-£51MWh, and were widely welcomed, including by Mr Finch who said: “We also remain confident in the CfD process and recognise the mechanism’s importance in keeping prices down.” The clearing prices were close to current baseload market prices (on 20 September, the UK baseload spot price for winter 2020/1 was £55.7/MWh and summer 2021 was £44.6/MWh, according to Marex Spectron).
The prices are comparable with European offshore wind price benchmarks (a recent offshore wind auction in France that saw a CfD price of just €44/MWh, and projects in Germany and the Netherlands are going ahead without subsidies) – largely because UK developers face additional risks and costs in project development and connection, according to Cornwall insight.
Among the factors contributing to the low bids were larger turbines and the winning locations’ high wind speeds, with the three Equinor/SSE projects well offshore in the Dogger Bank zone. Longer term plans envisage wind generation in the area expanding rapidly, making it a key renewable generation centre for northwest Europe. Project extensions are also allowing developers to share costs across projects (Iberdrola/Scottish Power’s unsuccessful 1.4GW East Anglia Three project, is near East Anglia One, which is currently coming onstream with a 2015 price of £119/MWh). Costs were also lowered by more efficient installation and utilities leaning on suppliers to reduce prices, while their costs fall due to economies of scale.
Financing key, and interest ample
Financing costs are being kept down by strong demand for such risk-free low carbon assets, which lowers the cost of debt and equity investments in the projects (in an already low-interest environment). For example, Iberdrola recently sold a 40% stake in East Anglia 1 to Macquarie’s Green Investment Group, and similar deals are likely to be encouraged by this week’s decision by 140 banks with $47 trillion in assets to align with the Paris goals.
Mr Murphy expects the latest schemes will generate a lot of interest from investors: “both in terms of financial equity investors who can offer a means for developers to recycle capital along, and through ample liquidity in debt financing…. We have seen older schemes refinanced into a bank and institutional market. Structures have been dominated by commercial bank debt, with ECA [export credit agency] financing where possible… The current successful schemes are likely to test the liquidity of the market and the possible role of institutional debt during construction.”
He said strong demand may mean the winning bidders can sell equity stakes at a premium, which would encourage divestment: “The sale of equity stakes is likely to be a very attractive proposition, especially if there is a premium to the sale which developers may have already considered as part of their investment thesis at the bid stage,” said Mr Murphy.
The developers had to consider all factors in their bids, including financing and investment. “A consideration of the financing and investment strategy upfront has been critical. Previously, the approach to financing and secondary investment from financial equity investors has been something that has occurred post auction process,” he added.
Equinor said its three Dogger Bank projects are expected to trigger a total capital investment of about £9 billion between 2020 and 2026. “The joint venture will be seeking non-recourse project financing to fund the Dogger Bank development. A preliminary market sounding of potential lenders has demonstrated very strong interest for UK offshore wind assets.”
“These projects provide predictability, and we expect strong interest, although we are currently getting feedback,” said an Equinor spokesperson. He said some investors were more interested because of the low carbon aspect of the investment, but that it depended on the investor, and that he couldn’t comment on Dogger Bank specifically. Regarding customer stakes, he said it was too early to speculate, although “those with in interest would have an opportunity to make an investment.” He was non-committal over whether Equinor would bid in the next round, but said it would be of interest as “offshore wind is an area where we want to be a global leader.”
Equinor and its partner SEE are planning for final investment decision for the first of their three projects during 2020 and first power generation is planned for 2023.
Challenges for first ever UK unsubsidised offshore wind capacity
SSE’s Seagreen has a CfD, but only for 41% (454MW) of its proposed 1075MW output, and so, if it goes ahead, this would be the first time UK offshore wind capacity has had to rely only on market prices – although there may be potential for term sales at fixed prices close to the CfD bid levels, which would act as a natural hedge against price swings.
The company said plans were in place to progress financing and an equity stake sell-down to move towards a final investment decision on Seagreen in early 2020. “Seagreen’s CfD provides price certainty for over 40% of the project, which we expect to support the project’s ability to secure financing. We are exploring the potential for achieving price stability for the remaining output, including PPAs,” said an SSE spokesperson.
However, while Aviva’s Murphy couldn’t comment on the individual project, he did say that more broadly, a PPA may be an option for output not covered by a CfD, “but it would be hard to see large investment appetite on a purely merchant basis”.
SSE Renewables was unsuccessful in securing a contract for its Shetland onshore Viking Wind Farm (up to 457MW), but says it remains committed to delivering it, dependent on securing a grid connection: “Central to progressing this project is the result of Ofgem’s consultation on Scottish Hydro Electric Power Distribution’s proposed contribution towards the new transmission link for Shetland,” it said.
The next round is the fourth, and began 19 September for award in 2021. “Ahead of the CfD results, the Crown Estate announced new areas of the seabed which will be opened up for new offshore wind farms,” said Clark. As well as losing bids from this round, additional competition may come from European oil majors, under pressure from shareholders to show how they plan to align their businesses with global efforts to cut emissions.
The low prices encouraged calls to expand renewable award capacity limits: “Looking beyond this Allocation Round, we believe the UK Government must raise its ambition above 30GW of offshore wind by 2030. Only by doing so can the country set itself on the right path towards future carbon budgets and meeting the challenge set by Government to achieve net zero emissions by 2050,” said Jim Smith, Managing Director of SSE Renewables.
Legal challenge
Questions remain over the outcome of the Banks Group Judicial Review on the exclusion of onshore wind from this round, and its impact on the CfDs just awarded. The challenge led to a 2-week extension of the third-round bidding time to end-August. Banks Renewables currently operates 224MW of onshore wind capacity, and has two consented onshore wind farms in Scotland with a combined capacity of 150MW that were not permitted to compete.
Many have encouraged the government to widen the auctions to include other renewables: “[Renewable UK] has urged Government to support the widest possible range of low-cost renewables including onshore wind and solar, as well as innovative technologies like tidal and floating offshore wind, which will help us accelerate achieving net zero,” said Clark.
Cornwall Insight also suggested that, given the low prices, the government may want to consider if the grouping of technologies in future auctions should be reviewed, as well as “reconsidering the balance of technologies and the ultimate system design for net zero.”
There have been legal challenges to the government’s policies before, including the recent ECJ ruling against the UK Capacity Market. . . .
UK includes Onshore wind and Solar in CfDs (Written Feb 2020 for Inframation).
Onshore wind farms are the cheapest but often the most politically sensitive renewable energy technology for the UK government. Their re-inclusion under the Contracts for Difference scheme alongside solar in February is good news for long-term investors, with some caveats, reports Jeremy Bowden
In mid-February, the UK government completed a dramatic U-turn by re-opening eligibility for UK onshore wind and solar projects to apply for guaranteed prices under the Contracts for Difference scheme.
Onshore wind has proved to be the cheapest form of renewable power in the UK but it was removed from the subsidy process (Renewable Obligation Certificate qualification, ended April 2016) under the 2015 Conservative government.
The adoption of a net-zero target by 2050 by the subsequent Conservative administration last year left policymakers with little choice but to re-embrace the lowest cost renewable options.
“The change in government policy has to be seen as a direct consequence of the legally binding Net Zero target for 2050,” says a source with knowledge of the market. “In order to achieve this ambitious target every existing, and several not yet existing, technologies must be used to their fullest effect.”
The onshore wind ban did have hidden benefits – without it, offshore wind may not have had the opportunity to make the great strides it has. Indeed, offshore wind has arguably been so successful as a second-generation green technology, that the UK government is now considering creating its own bidding pot so that it doesn’t eclipse other new technologies (see below).
The change has to be seen as a direct consequence of the legally binding Net Zero target for 2050
The focus now though, for investors looking at the UK, will return to missed opportunities in onshore wind and also solar.
Several mothballed onshore wind or solar projects could bid in the next CfD round in 2021, says Ross Fairley, Partner and Head of Renewable Energy at Burges Salmon. He said the demand for renewable PPAs had led to an uptake in developers pulling together pipelines of onshore wind and solar projects over the last two years “and [the inclusion in CfDs] will be welcome news.”
Scottish Power is one such developer which had already identified up to 100 sites across Scotland and Ireland to build new onshore wind, “with perhaps 3GW of capacity in Scotland alone,” in anticipation of the UK government move, he says.
However, these projects, and onshore wind and solar more generally, will still have to get past tough planning laws, including local engagement plans and environmental surveys, which could add to costs and delay projects.
New technology pot
Onshore wind and solar have been reinstated into pot 1 of the UK government’s CfD system – which is the lowest cost pot.
Other, less established technologies go in pot 2, but because offshore wind has come down so much in price over recent years, Fairley says it was now expected to have its own pot in 2021 – which should provide further room for other technologies.
The move could incentivise “new developing technologies which could not only increase generation in the coming decades but also produce jobs and new industries in the UK such as floating wind and tidal,” says Fairley.
Floating wind, wave, tidal, geothermal and other new technologies would still all be competing with one another in pot 2. Some may emerge faster than others, such as floating wind. One example here is the 96MW Erebus floating wind project offshore Wales, in which Total acquired an 80% stake in mid-March from developer Simply Blue Energy.
The key for floating wind will be whether the projects are ready to bid in 2021, says Fairley, with planning permission required, among other things.
Questioning CfD
With recent CfD bid awards at close to or even below anticipated market prices, many have questioned its long-term appeal when compared to the growth in merchant and corporate PPA options.
But the advantages are still evident.
CfDs represent an inflation-indexed, long term revenue stream that is a proven bankable basis for long term financing, says James Pay, a Partner at Clifford Chance. In comparison, he says that corporate PPAs are currently hard to come by “and often smaller in size than the bigger projects that are being planned”.
Obtaining a CfD may drive greater equity sale value even if the power price is a bit lower
CfD’s inflation indexation is attractive to some institutional investors whose liabilities are similarly indexed, such as pension funds, “so securing a CfD may facilitate not just obtaining long-term leverage, but also attracting lower cost of capital co-investors,” says Pay.
“If an investor has a lower cost of capital they may be willing to pay more for the same equity stake than, say, a private equity fund seeking higher returns – so obtaining a CfD may drive greater equity sale value even if the power price is a bit lower than market price at a given moment in time.”
For most onshore wind and solar projects, the government’s CfD is still the soundest basis to move forward, depending on award price.
“In comparison, how many AA or better rated consumers are there, who currently have the appetite for their own PPA, and can guarantee off-taking all of the power from a wind-farm that has not even had a foundation built yet, for a period of 10-15 years, starting in, say, three years’ time?” asks Holland.
Dampening PPAs
Securing a CfD in the current UK market for any renewable energy technology is not a given, though.
Many onshore wind and solar projects may now edge further along through development in preparation for bidding but switch to a PPA if they fail to achieve it. This was the case for the Seagreen wind project offshore Scotland, which was awarded only a partial CfD in last year’s auction and secured a PPA for the remainder.
But the reintroduction of CfDs for onshore wind and solar in the UK could also have a dampening effect on the growth of corporate PPAs.
European markets with established subsidy programs tend to see limited corporate PPAs, says Tundermann, so historically, “we would generally expect the inclusion of onshore wind and solar in the UK subsidy regime to decrease corporate purchasing opportunities. That said, we’ve heard conflicting information from developers – those with an appetite for merchant exposure may very well eschew CfD auctions that they expect to clear at a discount to expected forward pricing.”
“Either way, we will continue to see the emergence of new commercial structures. It’s a landscape that is constantly evolving, which is further catalysed by growing corporate demand for renewables. To the extent [the inclusion] brings more supply to the market, then it could have broad benefits across the board.”
Curtailment pay
Until now CfDs offered compensation when wind farms are asked to shut down if there is too much power.
But Tundermann notes that from 2021 there would be new rules removing curtailment compensation from CfD awards, which would “serve to level the playing field between contracting forms”, by adding more price-curtailment risk to CfD projects.
Competing wind projects will need to adjust their financial models to account for potential lost CfD revenue during periods of curtailment that may involve raising offer prices – which could, along with planning issues, leave bids disappointingly high in 2021.
One option is to incorporate storage (batteries or hydrogen) to capture the energy that would otherwise have been “spilled” during a curtailed interval, says Tundermann. This would add considerably to cost, but could also generate alternative revenue streams.
As wind capacity rises, so will curtailments (while market prices are likely to be increasingly depressed during these periods), making this a key consideration for the industry going forward, and probably a bullish influence on prices to set against cost declines elsewhere.
ends
Third article:
German government introduces reforms to encourage failing onshore wind sector (written October 2019 for Inframation).
Germany’s wind sector is going through a disappointing phase, failing to award much of the capacity offered in recent auctions, while the price of successful schemes is on the rise. In response, the new coalition government has reaffirmed its commitment to wind and modified cumbersome permitting rules – although this may not be enough to meet wind installation and carbon reduction targets.
A flawed auction design and difficulties in obtaining licences for turbine construction have discouraged investors and led to sinking participation volumes in Germany’s last five onshore wind tenders – the last, in October, awarded only 204MW out of 675MW on offer, and previous rounds this year had similar results (see table). The German infrastructure regulator, the Bundesnetzagentur or BNetzA, said this was insufficient to either ensure competition or deliver on wind capacity targets. The next auction is for 500MW on 1st December.
Table 1. Recent German onshore wind auction results.
| Round (date) | Total offered | Total awarded | Average price (€/kWh) | Highest/Lowest bids | Number of bidders |
| October | 675 | 204 | 0.062 | 0.0619/0.062 | 25 |
| September | 500 | 176 | 0.062 | 0.0619/0.062 | 21 |
| August | 650 | 208 | 0.062 | 0.0619/0.062 | 32 |
| May | 650 | 270 | 0.0613 | 0.054/0.062 | 35 |
| February | 700 | 476 | 0.0611 | 0.0524/0.062 | 67 |
Source: BNetzA.
The prices are up on 2018, when May’s award was made at an average price of €0.057/kWh, and up sharply compared to 2016, when about 1GW was awarded at just €0.0428/kWh on average (which was a decrease of about 25% on 2015 prices). They are also much higher than the latest UK offshore wind prices (at current exchange rates), despite their offshore location and additional risks and costs in project development and connection. Part of this is down to scale, with larger arrays and turbines being used, and part down to cheaper finance and lower perceived planning/operational risks, according to Cornwall Insight.
Planning problems
BNetzA said the main factor deterring bidders is citizen opposition and the wind farm permitting process in Germany, which has been getting longer and more likely to incur legal challenges. “The difficult situation regarding approvals for the construction of wind energy plants on land by the responsible state authorities continues to have a decisive influence on the tender procedure and result,” said a BNetzA spokesperson.
As a result, trade body, WindEurope, says 11GW of onshore wind projects are now stuck in various stages of permitting, with at least 750MW halted due to legal challenges. The situation has already cut the amount of onshore wind capacity additions, with onshore turbine construction falling to 287MW in the first half of 2019 – down 82% on the same period in 2018. This is the lowest level in nearly two decades, and well below what’s needed to meet renewable targets. The stalled supply chain is problematic for turbine manufacturers in Germany, including Gamesa, Vestas, Siemens and Nordex, which rely on a steady stream of orders to maintain profitable operation.
In response to the lack of awards and rising prices, Germany’s Energy minister, Peter Altmaier, and his state-level colleagues have introduced a set of legal reforms, which they hope will set the country back on track to meet its renewable power expansion goals. The announcement in September, comprised 18 measures to be introduced before the end of 2020 to tackle the planning issues and reduce the additional costs/risks associated with the sector.
The new rules seek, primarily, to reassure local populations, and include a minimum distance of 1km between wind farms and residential areas, although this could limit total onshore wind capacity to 63GW, according to a government study, unless regions opt out of the rule – which effectively leaves the success of a significant slice of national climate policy in the hands of Germany’s regional (federal state) and local governments.
The national government has also re-affirmed its commitment to renewables – including a planned rise in offshore wind capacity to 20GW by 2020, up from a target of 15 GW currently (offshore wind avoids the onshore planning issues). There will also be an extra 8GW of wind and solar power from 2019 to 2021, adding to regular power auctions, which is “aimed to speed achievement of a 65% share for clean power in the nation’s energy mix by 2030,” according to the Energy Ministry. New turbines should also be built in step with the expansion of electricity networks – although with many key routes blocked (see below) it is unclear how this will proceed.
Dr Maximilion Boemke, a partner at law-firm Watson Farley & Williams LLP, said he was sceptical that the government moves would make much difference. “There is a collision of two policies,” he said, with EU local environmental protection laws effectively blocking renewable capacity in the form of onshore wind farms and emissions goals. “Even though the German government has decided to speed up procedures, it has only limited moving space because of EU regulations,” which permitting authorities and courts must take into consideration.
“Unless the rules are changed at the EU level, then I’m sceptical whether the new German rules will speed up the entire procedures – it will help, but we need to decide what is the priority…” He said this debate is going on In Germany now, “and in the end, I think it will go in favour of wind farms – Germany needs the energy to replace [power] plants being shut now… It is critical to solve this issue as onshore wind is the backbone of the German renewable system.”
Small, local bidders
While the UK’s offshore wind awards were dominated by large utilities and energy companies, most of the bidders in Germany’s onshore wind auctions were pension funds and citizen or local government/private groups, such as Bürgerenergiegesellschaft Windpark Schale GmbH, and Blomberg.Wind.Energie. GmbH. Full lists of successful bidders can be found on the BNetzA award webpages (see table). The small size and controversy over such farms may well have put off larger bidders, and may also have reduced enthusiasm to finance on green grounds, which was said to be a factor in helping lower prices in the UK’s recent offshore wind CfD awards.
There are energy infrastructure investment funds involved in German onshore wind, with some considering expansion, according to Dr Boemke, although he doubted that the new rules had made much difference to the investment climate. “Investors struggle with the permitting procedure. It is an issue with banks, although they will still finance – but developers really need to have the permits in place and binding before they go into the auction process, which is why we’re not seeing so many bidders,” he said.
Nevertheless, the new rules have coincided with a major push from Morgan Stanley Infrastructure Partners (MSIP). In early October, following their announcement, Morgan Staley revealed plans to take over German wind power company PNE AG, at a premium of 31% to share price. The merchant bank already has a purchase agreement concluded for 11% of shares of the largest investor group, and the offer is supported by PNE’s management and supervisory board. The planned offer is not reliant on debt financing.
Morgan Stanley says there will be “strong support of the business strategy, in particular with respect to financing… Both parties believe that private ownership will provide the Management Board of PNE with an environment to effectively execute its strategy in the best interest of the Company and all of its stakeholders.” MS intends to support and accelerate PNE’s build-up of a large and diversified portfolio of renewables assets, especially in its core markets of Germany and France.
Uneven spread
Most of the awarded onshore wind capacity goes to the windier northern and western German states, and recent auctions were no exception. For example, September’s round saw the largest share of the auctioned volume, about 64 MW, going to four bidders in Germany’s most populous state, North Rhine-Westphalia, with six more with a combined capacity of 30.2MW in Schleswig-Holstein, which borders Denmark.
This is significant because the planning threats extend beyond the wind farms themselves, with local communities and environmentalist successfully blocking the building of transmission lines from the windier north to the industrial south. By the first quarter of 2019, just 1,087 km of the planned 3,600 km of power lines had been completed, which is a major obstacle in German plans to transition to a low carbon system. Dr Boemke said the new German policies were unlikely to tackle this problem, but that it needed to be resolved for wind expansion plans to work.
Transmission problems and an increased reliance on intermittent renewables, along with Germany’s nuclear phase out, brought the country close to blackouts this summer, which were only avoided thanks to short-term imports from neighbouring countries. The tight and inflexible German supply situation has seen the cost of short-term “balancing energy” skyrocket, with prices surging from €64 in 2017 to €37,856 in 2019 – a price that could also provide opportunities for investors (primarily batteries or other fast reaction/short duration power). The situation means German electricity prices are 45% above the European average, while green taxes account for a massive 54% of household electricity prices, according to McKinsey – although new government plans will switch the tax burden across to sectors still emitting carbon.
There could be additional power supply problems from aging wind turbines, as subsidy terms expire. From 2020, wind turbines with a total capacity of 4,000 MW will drop out of the state subsidy scheme, set up under Germany’s Renewable Energy Law (EEG). If this becomes unprofitable, old capacity could also be lost, and with new wind capacity failing to be built, Germany may need to take far more substantial measures than those seen in September to ensure it meets its wind power and carbon reduction targets. But even this may be insufficient, unless there is action at EU level.