Founding Partner Colin Morgan considers the parallels between offshore wind auction design and…… sharing ice lollies. Hmmm….. too much time in the sun perhaps Colin?
Now here’s a conundrum – it’s a sweltering hot day, you’ve got one spare ice-lolly left to give away and several workmates you could give it to. Who do you choose? I usually suggest either a coin toss or retreat to buy a few more lollies. That’s sort of where the Netherlands Ministry of Economic Affairs (rvo) has found itself with the Hollandse Kust offshore wind farm concession. In the days of the Borselle concessions (way back in 2016….) they had to pay operators to take them and could run a straight auction for these pre-consented free-connected assets. Based on the auctions since in Denmark and especially Germany, Hollandse Kust can reasonably be expected to go merchant.
In attempt to solve this dilemma, rvo has just opened up a consultation on ranking of selection criteria – design quality; wind farm capacity; social costs; understanding of risks; and, likely cost certainty. I really wouldn’t fancy the challenge of trying to extract objective selection criteria from those and can see a mountain of study paperwork landing with each bid. Uncharacteristic for the normally-direct Dutch, they stopped shy of a negative auction. Why’s that?
To understand, we need to dig into why offshore wind is going merchant, which doesn’t just suggest confidence in being able to deliver to a demanding price but also long-term certainty around that price. We know the cost reduction drivers (cheaper capital, bigger turbines and monopiles, more scale, same-again contracts, owner-operator business models extracting lifecycle profit stream) have given operators confidence that they’ll be able to deliver at dramatically lower levels than in the past, but where’s the competition going to be pricing? My take is that confidence in a profitable level of long-term power pricing can only have come from one place – a working assumption that offshore wind will be the price-setter in European power markets, whatever that price may be.
So that explains to me why rvo has steered clear of negative auctions. From a governmental perspective, we’re now in a zero sum game and it signals that the Netherlands wants to have its fair share of offshore wind revenue coming through its system long-term. On that basis, the main differentiator of the rvo shortlist has to be the cost certainty angle – because that’s what will drive energy bills 10-20 years hence. But they might still end up tossing a coin …. and going back to get another few lollies.