Germany Strikes Offshore Wind Deals, Subsidy Not Included
The wind farm BARD Offshore 1, 62 miles northwest of the German island of Borkum in the North Sea, in 2013. Credit Fabian Bimmer/Reuters
LONDON — European governments have spent large sums of money in recent years subsidizing giant offshore wind projects in hopes of creating a clean source of energy that could eventually pay for itself. Now that moment may be here — and a lot sooner than expected.
On Thursday, the Danish company Dong Energy, the largest offshore wind developer, won the right to build two large wind projects in the German North Sea with no government subsidies — a highly symbolic first for the industry.
The company will receive the revenues from the electricity generated by the wind farms. German consumers will pay the substantial costs of connecting the wind farms at sea to the power grid.
“Offshore wind is categorically proving its competitiveness,” Jochen Homann, president of the Bundesnetzagentur, the Geman agency that held the auction, said in a statement. “This is good news for all electricity consumers who contribute to funding renewable energy.”
Offshore wind dates back only a quarter-century; developers in Denmark were the first who took to the sea to gain access to wide open spaces and stronger breezes.
The industry has always seemed promising because its installations could generate large amounts of electricity without the greenhouse gas emissions produced by coal- or natural-gas-fired plants. In this way, offshore wind projects helped meet governments’ goals for tackling climate change. Costs, though, remained stubbornly high until the past two years.
Governments have recently become much more sophisticated at designing auctions to reduce the costs of building offshore wind projects, and that change is forcing developers like Dong to adjust.
Last year, highly competitive auctions in Denmark and the Netherlands resulted in low bids from developers such as the oil giant Royal Dutch Shell. The German auction for the two projects to be handled by Dong, called OWP West and Borkum Riffgrund West 2, continued the pattern.
In the same auction, a German power company called EnBW won a no-subsidy bid for a project called He Dreiht, and Dong won a third project called Gode Wind 3 with a guaranteed electricity price of 60 euros ($64) per megawatt-hour, a wholesale measure of electricity.
In a news release, Dong cited several factors that underpinned its bids. By the time the projects are completed in 2024, the company said, it expects turbine makers to offer a new generation of machines almost double the size of the largest current models.
In recent years, turbine makers like General Electric in the United States, Vestas in Denmark and Siemens in Germany have produced larger and more powerful machines up to 600 feet high. That means more power can be produced by fewer windmills, reducing costs.
Dong also said that the new sites offered very high average wind speeds and that it can combine the operations with others in the area, further lowering costs.
In addition, Dong assumes that electricity prices will rise from current levels, about 40 euros per megawatt-hour.
“If we did not think we would be creating value for our investors, we would not have made this bid,” Tom Lehn-Christiansen, a Dong spokesman, said in a phone interview.
Analysts say that the high financial returns that operators like Dong have had in recent years may eventually come under pressure as subsidies decline. Dong and other developers have benefited from guaranteed prices for their power that may be double or more those of current tariffs. Dong says it earned a 16.5 percent return on capital last year.
The biggest uncertainty may be future electricity prices. Dong, without disclosing precise figures, says it expects power prices to rise in Europe as nuclear and coal-fired power plants are retired, increasing demand for new sources.
Analysts, though, say that fast-growing renewable energy sources like wind and solar may bring electricity prices down.
Dong’s German bid may turn into a costly mistake “if their cost reduction or power price assumptions don’t materialize,” Deepa Venkateswaran, an analyst at Sandford C. Bernstein & Company in London, said by email. Because the project is several years away, the company can walk away from the deal if trends do not go its way.
The offshore wind industry is expanding beyond its stronghold in northern Europe, and long-term investors such as pension funds are showing increased interest in financing these projects, which can cost $1 billion or more.
A small wind farm off Rhode Island began generating power last year — a first for the United States — and Dong is working on projects off the country’s east coast.