WIND

Europe needs cost discipline in make-or-break 2024

Twelve European countries are set to hold tenders for around 50GW of new offshore wind projects in 2024. After challenges in 2023, the onus is now on developers to pitch their bids at levels that are competitive but also give the supply chain the confidence that projects can be delivered.

RICHARD HEAP

January 9, 2024

  • Utilities progress 4.2GW Norfolk trio and 2.9GW Hornsea 3
  • This has boosted optimism in Europe after a difficult 2023
  • Cost discipline is key for 50GW European tenders in 2024

 

There are always big transactions in the week before Christmas – and two such deals in the UK have increased positivity in European offshore wind as 2024 gathers pace.

That isn’t to say that 2023 was a bad year for offshore wind in Europe. The German government awarded support for 7GW of projects in the North Sea and Baltic Sea in July, despite the warnings about “uncapped negative bidding”; and final investment decisions were taken on eight European offshore wind projects totalling 9.3GW.

However, industry debate has focused on how external pressures, such as inflation and rising capital costs, have undermined the financial assumptions that developers made in rosier times. The most vocal have been Ørsted and Vattenfall, which spent most of 2023 arguing that the 2.9GW Hornsea 3 and 1.4GW Norfolk Boreas projects respectively needed more tax breaks from the UK Government, as the support they won under the Contracts for Difference regime in July 2022 is now too low. The latter project attracted most headlines when Vattenfall put it on hold last August.

It was therefore a welcome surprise to get positive news on both projects just before Christmas. This felt like the upbeat twist to end a ‘will they, won’t they?’ story.

 

Pre-Christmas presents

On 20th December, Vattenfall announced it has signed deals with Vestas to use the Danish firm’s 15MW turbines at three projects. The pair signed a firm order for the 1.4GW Norfolk Vanguard West project, and preferred supplier arrangements at the 1.4GW Norfolk Boreas and 1.4GW Norfolk Vanguard East. The biggest loser from the announcement was Siemens Gamesa, which was ousted from the 4.2GW trio where it was named preferred turbine supplier in 2021. But the reception for the deals has been generally positive given the very public uncertainty at the complex in 2023.

The other big news about the Norfolk trio is that it won’t be Vattenfall that actually delivers them. On 21st December, Vattenfall revealed it was selling the projects to German utility RWE, which said it was attracted to the schemes because most of the key permits had already been secured. The next milestone for RWE is to win backing for Norfolk Vanguard East and West in the UK’s upcoming CfD auction round; and to restart development on Norfolk Boreas. It is due to commission all three by 2030.

Meanwhile, Ørsted made a huge announcement about the 2.9GW Hornsea 3 on 20th December, which is due to be commissioned in 2027. Hornsea 3 is set to be made up of 207 Siemens Gamesa turbines, and Ørsted said it was able to make the numbers make sense after all by reducing the proportion of the project that won CfD support in 2022 and increasing the proportion that would bid in the UK’s sixth CfD round.

This shift enables Ørsted to take advantage of the UK Government’s decision to raise the maximum strike price for offshore wind projects in this year’s CfD auction by 66% to £73/MWh. UK policymakers were forced to act after the UK’s 2023 CfD auction in September failed to attract a single offshore wind bidder, due to level of strike prices. Industry sources expect offshore wind projects totalling up to 10GW to win support in this year’s tender, where offshore wind also has a separate funding pot to reflect the importance of the technology in the UK’s future energy mix.

But the lack of offshore wind bids in the UK’s 2023 auction was not necessarily a bad thing for the European wind sector. It showed that developers were not willing to bid at unsustainably-low strike prices and further undermine the health of the sector.

In the European Union, governments have also committed to back policies in areas such as permitting, finance and auctions that are intended to boost the industry. But now the onus is on the industry to set aside the fierce “race for the bottom” and lodge sustainable bids, which may be easier said than done in a competitive tender regime.

 

New year’s resolution

Ensuring that winning tender bidders are viable is not only an issue in the UK, and we will see plenty of opportunities in Europe in 2024 to assess how utilities, developers and investors are approaching these risks.

S&P Global Commodity Insights has reported that 12 European countries are set to auction around 50GW of offshore wind capacity in 2024. This includes a combined 12.7GW in the UK’s CfD round 6 and Celtic Sea floating tender, as well as 9.2GW in Denmark, 8GW in Germany, 4GW in the Netherlands, 3.5GW in Portugal, 3.3GW in France and 3GW in Finland. Belgium, Estonia, Ireland, Lithuania and Norway are tendering too.

The industry has welcomed this plethora of offshore wind tender activity, because it opens up opportunities for companies throughout the European value chain.

But there are risks too: having this concentration of projects in development in a short period of time can only add pressure to a supply chain that is struggling as a result of slim profits. Ultimately, these tender processes will only represent a long-term success if the winning bids are at a level where it is viable to deliver projects.

Companies across the value chain need predictability. A ‘will they, won’t they?’ story might work for a festive romcom, but manufacturers and contractors in European offshore wind want certainty that the projects will be delivered and they can make a profit. They need that predictability if they are to invest in scaling their operations.

If the European offshore wind industry needs a new year’s resolution, it’s this: show discipline and realism in your 2024 tender bids. Sticking to that resolution could make a crucial difference in a ‘make or break’ year for the industry.