The UK government have announced the long-awaited Offshore Wind auctions for contracts for difference (CfDs) in 2019 and plans to double wind capacity in the next 10 years. At a recent CMS UK renewables seminar in London, I presented on the key commercial implications for bidders in future auction rounds on the significant amounts of New Build offshore capacity expected on the GB system. Price competition in future auction rounds is again expected to be very strong, as evidenced by previous GB auctions, as well as internationally in the Netherlands and Germany. Auctions will favour the best offshore wind projects which are well structured, but also factor in revenue assumptions beyond the 15-year CfD subsidy period – which for a typical wind farm with a 30-year economic life represents 50% of its revenues.
More wind on the system will have the impact of lowering captured prices for offshore wind. This is known as price cannibalisation – when there is high wind output, market prices will fall and when there is low wind output, prices will rise. Bidders in future capacity auctions will need to include post-subsidy revenue assumptions in their business cases and to inform their auction bid prices. There are four key commercial implications which we have seen in our work with offshore wind developers recently which will be important success factors for bidders in future auction rounds to consider:
- Firstly, higher capacity factor sites can capture higher average prices, reducing the price cannibalisation effect. Having higher post-subsidy revenue assumptions will allow bidders lower their auction price
- Secondly, the geographical location off the offshore wind farm can also drive higher post-subsidy revenues. Sites with lower correlations of their wind output to the average system wind output can also reduce the price cannibalisation effect
- Thirdly, larger sites will be more competitive. This is because costs are being driven by economies of scale (larger projects with bigger turbines) and standardisation. Developers with larger sites with standard seabed topology can lower costs. Transmission costs in particular are an important element which are currently under review by National Grid and will be subject to future changes
- Finally, offshore wind generators can provide a range of capacity, ancillary and system services post-subsidy (and in some cases during the subsidy period) and thus achieve a higher revenue stack, similar to conventional generation units. Developers with sites which are located where the wind farm can access these additional locational-based revenue streams will be able to bid lower prices at auction.
All of the above potential future additional revenue opportunities require a deep understanding of the future structure and pricing dynamics of the GB power system. Not only will developers need to take a long-term view of wholesale power prices, but they will also need to understand the interplay between additional revenues from the capacity and ancillary services markets as well as transmission charging and system operator actions.