After years of continuous cost reductions, power companies bidding in an offshore wind auction in the Netherlands will be judged mainly on nonprice criteria, reflecting an ongoing shift in the procurement of renewable energy in Europe.

The Dutch government is tendering two new wind farms in the Hollandse Kust West zone, known as sites VI and VII, with planned capacity of at least 700 MW each. It will rank bidders chiefly on their contribution to the ecology of the North Sea and their plans to integrate their project into the Dutch energy system.

The tenders have attracted bids from major power companies like RWE AG and Ørsted A/S, oil and gas producers like Shell PLC and BP PLC, as well as investment funds and industrial giants, with the winners set to be announced after the summer.

Most renewables tenders in European nations to date have selected winners based on how cheaply they can deliver electricity. This race to the bottom has dramatically reduced the need for public subsidies, but it has also put pressure on equipment-makers and other supply chain companies to produce, deliver and install components at ever-lower costs, for ever-tighter margins.

"Whoever thought that [levelized cost of energy] is a one-way road that just goes down, down, down — that doesn't work anymore," Martin Neubert, chief commercial officer and deputy CEO at Ørsted, said at industry group WindEurope's annual conference in Bilbao, Spain, in April.

WindEurope said the Hollandse Kust West tender is "by some distance the most advanced use of nonprice criteria yet in any wind energy auction." France, Germany and Belgium are among the other countries to have used or been planning similar approaches, the group said.

"We support the introduction of qualitative criteria into wind energy auctions," WindEurope spokesperson Christoph Zipf said in an email. "We want to move away from a situation where the lowest price always wins and toward a situation where the project that brings the biggest value wins."

New criteria means new players

The Dutch government began considering nonprice factors as a means of comparing multiple zero-subsidy bids. Hollandse Kust West is the fourth Dutch offshore wind tender to be conducted on an unsubsidized basis.

The site VI tender reserves half of the scoring criteria to investments or innovations that benefit the biodiversity of the Dutch North Sea. A bid by RWE, for instance, includes innovations to allow birds and bats to fly safely between turbines and under the rotor swept area, as well as proposals to add artificial reefs and floating gardens.

Meanwhile, for site VII, half of the points are attributed to bidders' plans to integrate the project into the Dutch energy system. Companies such as Ørsted, TotalEnergies SE and BP included plans for green hydrogen production in their bids, while some touted the use of battery storage, electric vehicle charging infrastructure and demand-side response technologies to boost the capacity factor of their projects.

The more complex bidding rules have seemingly not dampened the market's appetite for Dutch offshore wind. Seven companies or consortia have so far publicly declared their bids in the tender, including the winners of all previous tenders and Dutch tender newcomers SSE PLC, Brookfield Renewable Partners LP and BASF SE.

That is a far cry from the Hollandse Kust Noord tender in 2020, when the Dutch government received just two bids, with Shell and Eneco Groep NV ultimately beating off competition from Ørsted.

"The innovation aspect [of the Hollandse Kust West tender] gives the possibility for new players to team up with those who have experience in this market," Marinus Winters, senior counsel at Allen & Overy LLP in Amsterdam, said in an interview. "On the other hand, the sites are large ... and because you need to include the innovations, I can also imagine the usual suspects have an advantage to win the tenders."

'A few parties will not be happy'

The move toward incorporating nonprice criteria brings offshore wind in line with other infrastructure sectors like roads and hospitals, which have long considered nonprice factors in procurement processes, according to Zeeger de Jongh, a partner at Allen & Overy.

"If the ecologically strong bids win, that will also have value," de Jongh said in an interview. "We should be grateful that we have a government that looks a bit further than money only."

But the system being used in Hollandse Kust West could also make it difficult to compare offers given developers have found different solutions to the Dutch government's requirements, according to Jan-Peter Elffers, managing director at Amsterdam Capital Partners BV, a financial advisory firm. In past tender rounds, some losing bidders requested clarification from the government about why their proposal had not been selected.

"You will have a few parties that will not be happy," Elffers said in an interview, adding, however, that there is clear visibility on the Dutch offshore wind pipeline, with the government recently adding 10.7 GW of capacity to the country's tender roadmap by 2030. "You might lose out in one tender, but you should definitely participate in the next one."

For some, the subjective element of using nonprice criteria is justification alone for adopting so-called "negative bidding," where developers pay governments a fee for the right to build wind farms. The Dutch Offshore Wind Energy Act allows for the use of traditional auctions — awarding projects to the highest bidder — for future wind farm zones.

Negative bidding was on show in a U.K. offshore wind auction in 2021 that fetched sky-high prices for areas of the seabed. The tactic has been criticized by wind executives for piling additional pressure on the supply chain, while companies also run the risk of being subjected to a lottery if bids are capped at a maximum value. That was the case in a recent Danish tender where RWE's name was drawn out of a hat.

For Hollandse Kust West, bidders can make a financial offer of up to €50 million, but this represents just 10% of the overall score in each tender. Germany is also looking to introduce negative bidding in upcoming auctions.

A spokesperson for Vattenfall AB, the winner of two previous Dutch offshore wind tenders, acknowledged that it will be harder with Hollandse Kust West to compare bids than it would be in a process where only price is important. However, the company has "strong confidence in the swift and adequate methodology" developed by the Dutch government to select winners.

"Competing on price only would further stress the tight supply chain and indeed many in the market are now against negative bidding or highest offer," the spokesperson said via email. "With the announced large volumes of growth in all of the North Sea countries, competition between countries and thus offshore tender systems would increase as risk profiles differ."

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.