The surprising results from the latest UK CfD auction by Giles Hundleby

The winning bids revealed on Monday for contracts for difference (CfD) to supply offshore wind power in the UK were lower than most of us dared hope for. Are they in-line, however, with the bids seen in Denmark, Germany and the Netherlands over the past year?

To compare these bids we need to put them on the same level playing field. The industry standard is to use levelised cost of energy (LCOE).  The basis for LCOE that we use is to consider LCOE as seen at the start of wind farm operation, defined in real terms in a single relevant currency. We include the cost of developing the site before award of a contract and the cost of the electrical connection to the grid connection point onshore. When we do that, we get the picture seen below which shows an LCOE of €77/MWh for Triton Knoll (against a CfD auction award of £74.75/about €84.90) and LCOE of €62/MWh for Hornsea 2 and Moray Firth (against CfD auction awards of £57.50/€65.31).

 

CfD Auction

The LCOE for the latest UK projects aligns with our expected range and with the trajectory established by the projects bid and awarded over the past year. So why were the low numbers a surprise? The answer is that, with three likely main bidders, the UK system looked like it may put less competitive pressure on bidders, constrain their technology choices, and expose them to more risk. In those other markets, developers can benefit from some or all of: the government undertaking comprehensive site characterisation; other pre-development activities; and taking on the risk of the offshore electrical export system. In the event, though, these fears have proved unfounded. The levers the developers found to pull to achieve the awards in Kriegers Flak and Borssele 3 and 4, look to have been pulled just as hard for the UK. In particular, the bidders at Hornsea and Moray Firth are likely to have taken the same view regarding the availability of bigger, more cost effective turbines as the bidders for the Danish and Dutch projects. Over the coming days, the team at BVGA will be producing some further thoughts on what has been a momentous week for offshore wind in the UK.

2017-09-15T16:03:14+00:00 15/09/2017|Views|