How power price risk affects offshore projects

Welcome to the Summer of Merchant Risk. It isn’t as fun as the Summer of Love that people in San Francisco enjoyed 50 years ago. The number of hippy hairdos that we counted at last week’s Offshore Wind Energy 2017 conference in London came in at a big fat zero. But the fun topic of merchant risk was never far from the panel sessions.

Jerome Guillet, managing director at Green Giraffe, underlined its importance during a panel discussion on Wednesday about cutting the cost of capital for offshore wind projects.

He said: “Merchant risk is going to emerge as a really big issue that people struggle with. It’s a risk that nobody likes. It’s a risk that people have lost money on. It’s also a risk that people are willing to take and the question is who’s best placed to price it.”

The issue of merchant risk rocketed up the agenda at this year’s event as a result of Dong Energy and EnBW’s winning bids in the German government’s offshore auction in April with ‘zero-subsidy’ developments. This means that when these four projects are completed they will have to rely solely on the prices they can get selling their electricity on the open market. Dong plans to complete its trio in 2024.

They based these bids on two main assumptions: manufacturers will keep building larger and more efficient turbines that can drive down the cost of producing electricity at offshore wind farms; and that power prices will rise over the next seven years. The first of these challenges is in the hands of the wind sector, but the second isn’t. This will affect how firms price the risk when they bid in new offshore auctions.

“Will you just increase IRRs to take the risk or will you take very low assumptions to minimise the risk? The whole industry is grappling with the question and whoever finds the smartest solution will have an edge for the next tenders, or whoever makes the biggest mistake will win the tender… It is the biggest question right now in the bidding strategy for all these projects,” Guillet said.

Christina Sorensen, senior partner at Copenhagen Infrastructure Partners, said she could not generalise on how happy investors would be willing to take on merchant prices as they would have different appetites for risk. However, she added that the sector has already been cost-competitive even with government support.

“Just because you have a feed-in tariff for a number of years, that doesn’t mean [the project is] not competitive,” she said.

Samuel Leupold, executive vice president of wind power at Dong Energy, said that another key factor behind the zero-subsidy bid was that the German government had offered a 30-year contract as part of its auction regime. This would give the industry certainty that support for offshore wind would be there for the long-term.

We see the logic behind these ‘zero-subsidy’ bids. Now it is up to other firms to work out how much merchant price risk they want to take. And we will only truly know the wisdom of their decisions in seven years.

Welcome to the Summer of Merchant Risk. It isn’t as fun as the Summer of Love that people in San Francisco enjoyed 50 years ago. The number of hippy hairdos that we counted at last week’s Offshore Wind Energy 2017 conference in London came in at a big fat zero. But the fun topic of merchant risk was never far from the panel sessions.

Jerome Guillet, managing director at Green Giraffe, underlined its importance during a panel discussion on Wednesday about cutting the cost of capital for offshore wind projects.

He said: “Merchant risk is going to emerge as a really big issue that people struggle with. It’s a risk that nobody likes. It’s a risk that people have lost money on. It’s also a risk that people are willing to take and the question is who’s best placed to price it.”

The issue of merchant risk rocketed up the agenda at this year’s event as a result of Dong Energy and EnBW’s winning bids in the German government’s offshore auction in April with ‘zero-subsidy’ developments. This means that when these four projects are completed they will have to rely solely on the prices they can get selling their electricity on the open market. Dong plans to complete its trio in 2024.

They based these bids on two main assumptions: manufacturers will keep building larger and more efficient turbines that can drive down the cost of producing electricity at offshore wind farms; and that power prices will rise over the next seven years. The first of these challenges is in the hands of the wind sector, but the second isn’t. This will affect how firms price the risk when they bid in new offshore auctions.

“Will you just increase IRRs to take the risk or will you take very low assumptions to minimise the risk? The whole industry is grappling with the question and whoever finds the smartest solution will have an edge for the next tenders, or whoever makes the biggest mistake will win the tender… It is the biggest question right now in the bidding strategy for all these projects,” Guillet said.

Christina Sorensen, senior partner at Copenhagen Infrastructure Partners, said she could not generalise on how happy investors would be willing to take on merchant prices as they would have different appetites for risk. However, she added that the sector has already been cost-competitive even with government support.

“Just because you have a feed-in tariff for a number of years, that doesn’t mean [the project is] not competitive,” she said.

Samuel Leupold, executive vice president of wind power at Dong Energy, said that another key factor behind the zero-subsidy bid was that the German government had offered a 30-year contract as part of its auction regime. This would give the industry certainty that support for offshore wind would be there for the long-term.

We see the logic behind these ‘zero-subsidy’ bids. Now it is up to other firms to work out how much merchant price risk they want to take. And we will only truly know the wisdom of their decisions in seven years.

Welcome to the Summer of Merchant Risk. It isn’t as fun as the Summer of Love that people in San Francisco enjoyed 50 years ago. The number of hippy hairdos that we counted at last week’s Offshore Wind Energy 2017 conference in London came in at a big fat zero. But the fun topic of merchant risk was never far from the panel sessions.

Jerome Guillet, managing director at Green Giraffe, underlined its importance during a panel discussion on Wednesday about cutting the cost of capital for offshore wind projects.

He said: “Merchant risk is going to emerge as a really big issue that people struggle with. It’s a risk that nobody likes. It’s a risk that people have lost money on. It’s also a risk that people are willing to take and the question is who’s best placed to price it.”

The issue of merchant risk rocketed up the agenda at this year’s event as a result of Dong Energy and EnBW’s winning bids in the German government’s offshore auction in April with ‘zero-subsidy’ developments. This means that when these four projects are completed they will have to rely solely on the prices they can get selling their electricity on the open market. Dong plans to complete its trio in 2024.

They based these bids on two main assumptions: manufacturers will keep building larger and more efficient turbines that can drive down the cost of producing electricity at offshore wind farms; and that power prices will rise over the next seven years. The first of these challenges is in the hands of the wind sector, but the second isn’t. This will affect how firms price the risk when they bid in new offshore auctions.

“Will you just increase IRRs to take the risk or will you take very low assumptions to minimise the risk? The whole industry is grappling with the question and whoever finds the smartest solution will have an edge for the next tenders, or whoever makes the biggest mistake will win the tender… It is the biggest question right now in the bidding strategy for all these projects,” Guillet said.

Christina Sorensen, senior partner at Copenhagen Infrastructure Partners, said she could not generalise on how happy investors would be willing to take on merchant prices as they would have different appetites for risk. However, she added that the sector has already been cost-competitive even with government support.

“Just because you have a feed-in tariff for a number of years, that doesn’t mean [the project is] not competitive,” she said.

Samuel Leupold, executive vice president of wind power at Dong Energy, said that another key factor behind the zero-subsidy bid was that the German government had offered a 30-year contract as part of its auction regime. This would give the industry certainty that support for offshore wind would be there for the long-term.

We see the logic behind these ‘zero-subsidy’ bids. Now it is up to other firms to work out how much merchant price risk they want to take. And we will only truly know the wisdom of their decisions in seven years.