Published December 2024

What do Christian Eriksen and carrots have in common with offshore wind leasing in Europe? Nothing. And that’s an under-appreciated problem. In his latest article, Daniel Bacon describes the issue; “although I haven’t seen it, I am pretty confident that in Christian’s contract with his club and national teams, it won’t seek to punish him by wage reduction if he doesn’t score, or if the team fails to win. On the contrary, it is likely that he will be rewarded for performance. Carrots, if you will.” He continues:

Professional sportspeople want to win. OSW developers want to build. There is no need to punish either when they don’t achieve that. Seeking to change outcomes through punitive measures is more likely to change behaviours and to be counter productive to the objective.

It’s also contrary to the basis of our entire system. In an electricity system in which we rely on private sector investment for driving development and construction of renewables projects, if the rewards are sufficient, then developers will want to build as soon as possible, within their respective risk tolerance. If the rewards are not sufficient, then we can change the rewards, or simply wait. If neither of those is an option then it removes some potential upside.

But, in the European leasing rounds I’ve been involved in recently, it has become fashionable to punish developers of green-field/blue-ocean projects (i.e those not in the Netherlands) for not meeting improbable schedule targets, borrowing the principles of Liquidated Damages from typical construction contracts – applying the “stick” from the carrot and stick analogy. In my opinion, this is a critical design flaw.

In the recent Danish auction round, the government’s intention of COD by end 2030 was not possible, and never was. The backstop date of 2033 (with government termination rights following) is challenging enough. Whilst there were other more important factors to the outcome, it would be unwise to neglect its influence both here, and in other systems.

I have included an illustration of schedule risk in this post, which approximates minimum, mean and maximum times achieved to COD from site exclusivity for some notable European markets. The Netherlands is an obvious outlier, and we all know why.

There are indeed some notable examples of developers taking greater risk by progressing activities at cost without site exclusivity or consents. Those were different times and different markets, and in all cases developers were chasing the carrot of reward rather than fleeing the stick of punishment.

So, if incentivization is to be applied, then providing reward for over-achieving is likely to be more productive. Why? Humans respond, as individuals and as teams, more productively to seeking Opportunity than they do to managing Risk.

This is one part of European leasing structures which really needs a rethink. Reset our schedule expectations; focus on the carrot; abandon the stick.