FEATURE: German offshore wind to enter new era as 7 GW auction closes

Germany's biggest ever offshore wind auction is to close June 1 with 7 GW of capacity on offer in a process likely to attract some of Europe's largest utilities, developers and oil majors.

Three 2-GW wind farms in the North Sea and a 1-GW concession in the Baltic Sea are being tendered.

For the first time, the auction is for areas of the seabed without any previous site investigation, but concessions include a grid connection guarantee for 2030.

At stake is investment of up to Eur20 billion ($21 billion), based on recent capital expenditure costs for 900-MW offshore wind projects in Germany as well as larger ones elsewhere in the North Sea.

Despite the recent inflationary pressure in the sector, multiple bidders are likely to offer to build projects without subsidies, continuing a trend of zero-subsidy bids that spans Germany, the Netherlands and Denmark.

The maximum bid price for state support is capped at Eur62/MWh.

Rising costs "will make it harder but I still think there will be enough bidders willing to do it on [a zero-subsidy] basis," Alon Carmel, renewable energy expert at PA Consulting, said in an interview.

In case of multiple zero bids, a second round "dynamic bid" phase is designed in a similar way to offshore wind lease auctions in the US, with companies paying for the concession.

RWE confirmed to S&P Global Commodity Insights that it has participated in the 7-GW auction, while Vattenfall said it had not.

Several other companies known to be active in German offshore wind either did not reply or declined to comment.

Some developers have come out publicly already, such as EnBW and Equinor, which recently said they would jointly pursue offshore wind opportunities in Germany.

Meanwhile, EDF and BayWa applied to the German competition authority to create an offshore wind joint venture, suggesting they might also be lining up a bid.

Orsted, EnBW, RWE, Vattenfall and Iberdrola have succeeded in previous auctions in Germany with zero-subsidy bids.

Previous tender results:

(selected zero bid projects)

Source: S&P Global Commodity Insights

Avoiding 'winner's curse'

The move toward dynamic bidding – also known as "negative bidding" – has split the wind industry.

Some say it is the fairest way to separate multiple bids of zero and avoids the drawing of lots, as happened in a recent offshore wind auction in Denmark won by RWE.

Meanwhile, others like lobby group WindEurope claim it "increases the costs for offshore wind," especially where dynamic bidding is uncapped like in Germany.

If multiple companies bid at zero, dynamic bidding starts at Eur30,000/MW and increasing by Eur15,000 each round, until one company is left.

This kind of price discovery means developers "get to see what the market view of the value is before committing to paying something," PA Consulting's Carmel said.

It also avoids situations like in the UK in 2021 where BP and EnBW paid significantly more than their competitors for seabed leases because prices were not transparent.

Price discovery in auctions "means you're less likely to overpay and to fall into the trap of winner's curse," Carmel added.

For now, the timing of the dynamic bid process is unknown.

BNetzA only said it will analyze whether there are multiple zero-subsidy bids that mean dynamic bidding is necessary.

"It would be rational to ... give people a significant period of time to do their homework and business case modelling," Carmel said, adding it could take three or four months for companies to properly value a project.

German 2023 offshore wind tenders:

Source: BNetzA, FEP 2022 (*RWE holds pre-entry rights)

Tripling 2025 to 2030

Germany currently has just over 8 GW installed offshore wind with another 3 GW tendered in 2017 and 2018 under construction to come online by 2025.

Capacity is set to triple between 2026 and 2030 in an unprecedented ramp-up with some 10 GW planned to come online under the standard auction model based on the 20-GW target for 2030 set by the previous government.

The new 30-GW target is mainly based on the additional 10 GW of sites without prior examination -- the "not central" auction model -- with new grid link projects rushing to be completed by 2030.

"The auctions are an important step towards reaching the offshore wind target of 30 GW by 2030," BNetzA President Klaus Mueller said in February's tender call, noting a significant step-up in size.

The combined area up for auction this June of 700 sq km is similar in size to the state of Berlin.

The "central" tender model continues in August with four concessions on offer in an auction that includes non-price criteria -- a first for Germany.

RWE holds pre-entry rights for 900 MW which will form its Nordseecluster project -- Germany's biggest offshore project when completed in 2029.

Volume-weighted capture prices for offshore wind averaged Eur195/MWh in 2022, more than doubling on year with daily prices ranging from Eur702/MWh to negative, according to S&P Global data.

Analysts at S&P Global forecast prices to fall sharply averaging only Eur38/MWh in 2030, according to a March report.

The report pegs the 2030-2050 average capture price around Eur32/MWh (in real 2021).

That level would be enough to break-even assuming a 50% load factor and investment similar to EnBW's capex for He Dreiht, but business cases may assume lower costs and additional revenues or higher prices.