The UK has long been an example of how to build a strong offshore market.
But has it now made a major misstep? That is the discussion that has engulfed the European offshore wind sector after the UK’s latest seabed leasing round.
On Monday, The Crown Estate announced the winners of seabed sites for projects that could total up to 8GW. The winners were:
- RWE Renewables for the 3GW Sofia project
- BP and EnBW for two sites totalling up to 3GW
- Green Investment Group and Total for a 1.5GW site
- Cobra and Flotation Energy for a 480MW project
These wins underlined the attraction of offshore wind for oil giants, with BP and Total gaining a strong foothold in the UK market. There was great delight from the other winning bidders and UK government too.
But the attention has shifted to the £879m a year – or £111m per GW on average – that winning bidders will pay in option fees each year until they finalise their projects.
These fees used to be set at a fixed rate. This time, however, they rocketed to prices that critics say are unsustainable due to a new competitive bids process. It is the level of these fees that has caused concern for some in the industry.
The biggest critics so far have been trade associations.
Melanie Onn, deputy chief executive of RenewableUK, welcomed the strong demand for offshore wind, but said the high fees could “mean higher costs for developers and consumers”.
She also said they only went that high because of the limited capacity on offer: 8GW compared to 32GW in the previous leasing round in 2010.
Giles Dickson, chief executive of WindEurope, also said the UK was getting it “badly wrong” on fees as firms “shouldn’t have to pay large amounts for the right to develop offshore wind”. He called it a “new burden on consumers”.
And Martin Neubert, chief commercial officer at Ørsted, said high up-front fees would drive up development costs, and called on The Crown Estate to learn lessons for future seabed leasing rounds.
There are a few issues to unpick here.
First, the critics are right that option fees went up to a combined £879m a year this time due to huge demand for limited sites. It’s natural that offshore wind developers want The Crown Estate to release more sites, which it has promised to do. That will give long-term visibility and help the UK as it races for 40GW offshore wind by 2030.
On this we agree. The industry needs clarity on that long-term pipeline.
Second, we’ve seen comment about the fact The Crown Estate used sealed bids for the option fees, rather than a more transparent Ebay-style auction of the sort used in US offshore wind leasing rounds.
You can read more on that in this analysis by FTI Consulting’s Alon Carmel, which highlights how much more sealed bids cost developers.
On this point we understand the criticism. People want transparency over the market price of anything they buy. Sealed bidding robs them of that. However, we must remember the duties of The Crown Estate and developers in this.
The Crown Estate has duties to maximise returns for British taxpayers -- as 100% of its profits go to the UK Treasury -- and support the development and delivery of more offshore wind sites. Sealed bids enable it to do that. In a time when the public purse is being pummelled by Covid-19, can it do anything else?
Meanwhile, the developers proposing the option fees have a duty to set them at a level they believe will be sustainable. If oil and gas giants want to enter a competitive market like UK offshore wind then they must pay the price, and will likely be looking at how to pair these projects with other technologies or their existing operations.
We can judge better when we see more clarity on their planned projects.
Finally, will these fees drive up energy bills? The current consensus appears to be perhaps! It may push up strike prices in contracts for difference regime. But, by the time these project are ready, we may have moved beyond CfDs into a fully merchant market.
What we do know is this new cost will need innovation from financiers. We can almost hear them sharpening their pencils already.