WIND

Denmark starts 10GW tender – but will it deliver?

Denmark has started its tender for six sites with the potential for up to 10GW of offshore wind farms. But bidders are reportedly concerned about the lack of subsidies, the need for grid investment, and plans for the state to retain 20% stakes in winning projects.

RICHARD HEAP

April 30, 2024

  • Denmark has started its latest up-to-10GW offshore wind tender
  • Fifteen bidders are reportedly interested in the six sites on offer
  • But experts have warned about grid, costs and state ownership

 

It’s not how you start that’s important. It’s how you finish. We’ve seen how this LinkedIn-friendly adage applies to offshore wind tenders in the last month.

The New York State Research & Development Authority announced last October that it had awarded provisional support for three offshore wind projects totalling 4GW. But on 19th April it revealed it has had to pull its support due to “material changes” that made it impossible for it to finalise power purchase agreements with the developers.

In Europe, Lithuania’s National Energy Regulatory Council started the year strongly by kicking off its second 700MW offshore wind tender in January. This followed the success of its first offshore wind tender in 2023. However, Lithuanian policymakers have since been forced to delay the process after only attracting one bidder.

Nearby Estonia is faring a little better, where four bidders are in the running for the three sites in its ongoing tender. But we cannot be sure that all four will bid when the process reaches its conclusion. After all, Norway faced criticism from two of the five pre-qualified bidders in its 1.5GW Sørlige Nordsjø tender during the final weeks of the process, even though it managed to conclude the process successfully.

These examples show that starting the process, or even announcing provisional deals with winners, is no guarantee of tender success. It is in this spirit that we welcomed the official launch of Denmark’s largest offshore wind tender last month.

On 22nd April, the Danish government announced the start of the tender process for sites for six projects with the potential for between 6GW and 10GW of offshore wind capacity. That capacity is split across six projects in four zones. They are:

  • 3GW North Sea 1 zone, which is split into three projects;
  • 1GW Kattegat zone;
  • 1GW Kriegers Flak 2 zone; and
  • 800MW-1.2GW Hesselø zone.

This could provide a major boost for the country’s offshore wind sector. Denmark has 2.7GW of offshore wind farms operating in its waters, and work is underway to add to that with an extra 1GW. But the structure of the tender is worrying some in the sector, who shared their concerns off-the-record with A Word About Wind.

 

Danish dilemmas

Denmark has been keen to cash in on the interest in offshore wind that it saw in the 1GW Thor offshore wind tender, which reached its conclusion when RWE has named the winner in December 2021.

In that process, the Danish government saw that five bidders were happy to seek to build the maximum possible capacity with the lowest subsidies, while also taking on the cost of developing offshore transmission links.

This strong demand to build offshore wind in Danish waters has inspired the country’s policymakers to pursue rules that would maximise returns for the government. There’s not necessarily anything wrong with that. Governments face criticism when they fail to extract enough value from desirable sites too.

But there are elements of the tendering process that our sources warn are deterring investors. One interviewee claimed that around 19 bidders had shown an interest in bidding early in the process, but this is now nearer 15 – and he warned that the final number of bidders could be well below that because of concerns about the process.

Winning bidders will be able to secure 30-year leases for projects where they will gain no financial support, even in the form of revenue stabilisation mechanisms such as Contracts for Difference, and will have to pay annual concessions. This is a model that has already been criticised by organisations including WindEurope.

The Danish government also intends to own 20% stakes in the final projects, which has led to questions among potential bidders about whether the state would interfere with developments. State ownership is not necessarily a problem: it could be helpful if it helps to accelerate the permitting process, and it is also a set-up that Denmark has used successfully in previous oil licensing rounds. It just isn’t often used in offshore wind, which means bidders will have to adapt their business models and expectations.

There are concerns about the transmission grid too. Winning projects will secure a connection to the grid, but there is no guarantee that the grid would be able to cope with up to 10GW of new offshore wind capacity in addition to new onshore wind and solar being built. This may lead to extra costs for curtailment or to fund new grid links.

And even when projects connect to the grid, there will be no guarantees about how much operators will be able to charge for their electricity. Operators in Denmark have been affected by negative power prices when renewable power production has been high, and adding so much new capacity will likely exacerbate that issue.

 

Power-to-X potential

Finally, the Danish government is arguing that the winning schemes could help to support the growth of green hydrogen and power-to-X production in Denmark. We see the power-to-X market as increasingly attractive for wind developers, but there is still uncertainty about how much demand there will be for green fuels and how much buyers would be willing to pay. This makes it tough to come up with precise financial plans for projects, including offshore wind farms, to power green fuel production.

However, we don’t want to come across as too negative. There is plenty to attract bidders too. The North Sea is well-known to offshore wind developers, with shallow waters and an abundance of data about actual performance of offshore wind farms. These factors will help to bolster demand – and the government can point to the success of its Thor tender in late 2021. This year’s vintage could be a huge success.

But this isn’t 2021. The economics of offshore wind have changed dramatically. It will be financial viability, not launch fanfare, that determines the success of this headline-grabbing auction. We are due to hear the final outcome in late 2024 or early 2025.