Offshore Wind at 11 Paise? Understanding The Award Of The 1 GW Thor Offshore Project By Lottery

Highlights :

  • Financial innovation and stability have made such low rates possible in Denmark.
  • Renewable energy growth will need much more of such innovations to grow faster in capital constrained markets like India.
Offshore Wind at 11 Paise? Understanding The Award Of The 1 GW Thor Offshore Project By Lottery Offshore Wind farm

Early this month on December 1, the Danish energy agency announced that Germany’s RWE had won a tender to build what will be Denmark’s largest wind farm. The Thor Wind farm. What was interesting here was that this was possibly one of the biggest renewable awards made by a lottery, after multiple bidders (6) tied with an offer to sell electricity at Danish Kroner (DKK) 0.01 (11 paise) for the full capacity of 800-1000MW. This particular tender also made it probably the first offshore wind farm in the world  that will be constructed with payments being made to the state.

The Thor wind farm, which will deliver 1 gigawatt (GW) of renewable electricity, is one of three large offshore wind farms Denmark aims to have built before 2030 as part of its plans to reduce its carbon emissions to 70% below its 1990 levels by 2030.

The Thor wind farm comes with a license for the electricity production and authorisation for 30 years with the possibility of a five-year extension.

The concession owner of the Thor offshore wind farm will receive subsidies in the form of a price premium for a 20-year period. The subsidies will be granted in accordance with a Contracts for Difference (CfD)-scheme designed for this tender.

Predictably, there has been a lot of curiosity about the mechanics of such a bid, as well as complaints by turbine manufacturers that the relentless cost pressures will hurt their ability to invest in innovation and development.

The tender also drives in the immensely competitive market offshore wind has turned into, following the footsteps of solar, where quality buyers, in combination with falling costs quickly took prices to well below fossil fuel powered electricity. It’s the same story being repeated in offshore wind energy, although with a little more help from special contacts, or CfD in this case.

The offshore wind farm must be fully built and connected to the grid by 31 December 2027. The Danish government itself has guaranteed completion of the transmission network to offtake power by the end of 2025 at a landing point on the mainland.

RWE will need to complete the installation of the offshore wind farm, including the offshore substation and the grid connection from the offshore substation to the substation on land. RWE will receive subsidies in the form of a price premium for a 20-year period. The subsidies will be granted in accordance with a Contracts for Difference-scheme designed for this tender, giving the firm a clear visibility on predictable revenue streams post its payment year to the government.

Thus, in this case, RWE has to pay the Danish government for the first years of the wind farm’s production until it reaches a 2.8 billion Danish crowns (Rs 3220 crores) cap, expected in a few years.

Thor is the first project to be tendered of the three large-scale offshore wind farms that the Danish government decided to establish before 2030, as part of the Energy Agreement signed in 2018.

The second is the Hesselø project in Kattegat, an up to 1.2 GW offshore wind farm which is also expected to be commissioned by 2027.

The third wind farm will be built as part of Denmark’s energy island project.

While very low interest rates are one factor that make such bids possible in the developed world, there is no doubt that India can also seriously start to look at the model. We have already seen the premium developers are willing to pay for a central government backed buyers for power here, and the country’s ambitious renewable targets will need such financial innovations to circumvent the many challenges with the existing PPA regime and more. One really has to wonder how much, and quickly, discom attitudes to higher renewable energy shares would change if they were to actually get, say, a 5 year window of payments for taking up electricity in India. Followed by a government backed 20 year concession for the developer at a slight premium. Considering the dire financial hole of the sector, it’s well worth pondering over for the powers that be.

Portugal has already shown the way, in some ways .

As it is India’s own stalled offshore wind development program will need all the innovations it can get to get going.

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Prasanna Singh

Prasanna has been a media professional for over 20 years. He is the Group Editor of Saur Energy International