By contracting to deliver electricity at prevailing wholesale prices, the successful bidders in the recent German offshore wind auctions, DONG and EnBW, must be expecting to make a better return based on the (uncertain) future electricity prices between 2025 and 2055 than from a fixed bet on the CAPEX of offshore wind in 2025 and the OPEX over 2025 to 2055.
We have calculated the LCOE of wind farms coming into operation in 2025 at all the sites, taking into account site specific characteristics, our expectation of available technology (most notably 13MW+ turbines), and statements from the winning bidders DONG and EnBW.
If we consider the two neighbouring DONG sites (OWP West and Borkum Rifgrund 2 West) together, we calculate an average LCOE (in today’s terms) of just over €51/MWh at 6% cost of capital (real, pre-tax WACC or project return rate). The graph below shows how returns vary according to the wholesale electricity prices (note the line goes through the point at €51/MWh and 6% return noted above):
If the generated electricity were to be sold at an average price just under €31/MWh, the project return rate will be 0%. If it could be sold at €60/MWh, then returns increase to 8%.
Relying on wholesale prices for wind generation, leaves the developers open to the risk of only being able to achieve very low or even negative prices if good wind conditions (high generation) coincides with low demand .Germany has already seen negative electricity prices for short periods in 2015, 2016 and 2017. Even with storage and interconnections as mitigation, the average price achieved for offshore wind generated electricity is likely to be below the 2025 CCGT generation costs that we calculate as €60/MWh, including CO2 price.
These headline grabbing results have demonstrated the downward cost trajectory in offshore wind. Normally, I’d welcome such a demonstration of the progress the industry is making in the march to be subsidy free. But I do also worry that too much excitement (and too much fear from developers who calculate that they need subsidy for their projects to be feasible) will be generated from these results. It will be too easy for subsidy providers to overlook that these results are from an interim system for this and next year only with unique conditions, legislative framework and bidders’ wider commercial strategies.