What can the UK learn from other auction processes for offshore wind?

Increasing co-ordination  

The UK Government is targeting the connection of 50GW of offshore wind generation capacity by 2030. Moreover, it is thought that achieving the Government’s 2050 Net Zero targets may require as much as 100GW of offshore wind generation capacity by 2050.

The UK model of tendering offshore windfarms has been a success – for example, prices in the latest auction round are almost 70% lower than that secured in the first allocation round in 2015. However, the current process for offshore windfarm development in the UK is long and multi-stage, with projects not being confirmed until they win in a ‘contracts for differences’ (CfD) auction, which can take many years.

Historically, there has been a ‘radial’ approach - windfarms are connected to the closest point on the onshore network, with little or no co-ordination of location or transmission connections across projects, or optimisation across onshore and offshore transmission.

As the number of potential offshore wind developments increases, so too does the need for co-ordination. A holistic approach can support optimisation of the whole electricity system and minimisation of the costs and impacts of connecting such developments to the system, particularly for the local communities where the cables come ashore. Whilst recent efforts to develop a “Holistic Network Design (HND)” have been a step in the right direction, this still falls some way short of the level of co-ordination seen in other countries.

Creating a single, competitive process which encompasses both the leasing of the seabed and the determination of government support, as is the case in Germany, Denmark and the Netherlands is one potential way forward.

The case for change

As we noted in our previous post about the OFTO regime, both the Department for Energy Security and Net Zero and Ofgem have recognised the need for a more co-ordinated approach to offshore windfarm development to ensure the best outcome for consumers, the environment and local communities.

The first step for any potential windfarm developer is securing an option for a seabed lease. The processes for doing so differ, with one approach required for England, Wales and Northern Ireland and another for Scotland. However, both involve potential developers bidding to lease a particular area of the seabed in competition with other potential developers.

Those that succeed then need to obtain consent to construct the cable connection onshore and connect to the National Transmission System before conducting the necessary environmental surveys and applying for planning permission.

Once they have the necessary planning permissions and consents, developers need to participate in a Contracts for Difference (CfD) auction by submitting sealed bids for the flat rate they will receive for the electricity generated over a 15-year period. Only then can a final investment decision be taken and can construction (which can take 2-3 years) commence.

While it is the prospect of failure that drives the competitive auction process, it is the possibility of failure that makes co-ordination more difficult and anticipatory investments in transmission assets harder to justify. Indeed, the lag between obtaining the option for a seabed lease and participation in a CfD auction creates significant uncertainty and scope for abandonment of projects, with associated headaches for those planning transmission infrastructure.

In the summer of 2022, the Electricity System Operator (ESO) published its ‘Holistic Network Design’ (HND) which identified the potential for £5.5 billion of net consumer savings through the co-ordination of connection arrangements for existing early-stage offshore wind projects to minimise the risk of onshore transmission constraints. However, the projects around which the HND is based are those recently identified by the seabed leasing process, and they will remain subject to uncertainty for some years to come, given their early stage of development. In addition, the location of windfarm projects is determined by the competitive seabed leasing process, rather than being driven by the HND through a co-ordinated approach.

How do other countries coordinate the process of offshore wind development?

In understanding the scope for alternative approaches, it is instructive to look to other countries. Indeed, the greater geographical constraints faced by many other European countries with a smaller coastline or deeper waters (which are more problematic when it comes to development) has required greater co-ordination at an earlier stage.

In Germany, a single competitive process manages the leasing of the seabed and the determination of government support. The cost of leasing the seabed is included in the permit fee, and is determined by statute and so is not subject to competition. Instead, participants compete for the exclusive right to apply for a permit to build and operate a windfarm on a given site on the basis of the financial support required. The right for the windfarm to be connected to the grid by the electricity Transmission Operator comes automatically with the winning bid and the specification of that connection is determined by a strategic plan. In order to minimise total costs, reduce the barriers to competition and reduce delays, the German Government conducts the preliminary surveys to assess a site’s suitability and makes them available to bidders.

In The Netherlands, the process is further consolidated with the granting of construction permits for generation, seabed leasing and connection agreements as part of a single package. The specification of windfarms is standardised into common, pre-set size increments to facilitate supply chain economies of scale.

In Denmark, the Government requests offshore windfarm tenders in a specified location and for a specified capacity. Once again, a consolidated approach is adopted where the Danish Energy Agency coordinates with the relevant authorities and issues the licences needed. Here, pre-investigations are also carried out before bid submission for the benefit of all bidders.

Greater co-ordination is often accompanied by greater consideration of qualitative factors in the bidding process

Different jurisdictions also grapple with the way they determine successful bidders. It is becoming increasingly clear that offshore wind allocations can make a non-trivial contribution to government coffers. In the US, The New York Bight offshore wind auction raised a record $4.37 billion from companies wishing to develop up to 7GW of wind capacity.

However, this needs to be weighed against the Net Zero imperative and the potential societal costs of promoting developments that have a higher probability of failure or delay or might impose costs in respect of system optimisation, biodiversity or the local economy.

Greater co-ordination of the development process is therefore often accompanied by the consideration of non-price factors.

Non-quantitative criteria are playing an increasing role in the determination of successful bids around the world. Earlier this year, the UK Government issued a ‘Call for Evidence’[1] to consider ways in which the CfD scheme could capture the wider value of renewable projects.

In Germany, qualitative criteria have recently been introduced for certain sites, including factors such as the use of green electricity, nature conservation and species protection, and worker training.

In two recent capacity auctions in the Netherlands, the Dutch Government used qualitative criteria to assess bids. In both auctions, qualitative criteria accounted for 90% of the bid assessment – with the financial component only accounting for the remaining 10%. In one auction, the focus was on how well the windfarm would be integrated into the Dutch energy system. In the other, the focus was on biodiversity.

The use of qualitative factors is also being seen in jurisdictions such as France, Japan and Massachusetts in the US, with qualitative considerations ranging from early delivery dates to diversity, equity and inclusion.

What could this mean for the UK process?

There is a clear case for greater co-ordination of the process for offshore windfarm development in the UK.

If the process was being designed from scratch, then a single competitive process which encompassed both the leasing of the seabed and the determination of government support could be a potential outcome. This would avoid the issue of project failure between stages, create greater certainty for pre-emptive investments and eliminate the potential for the unintended consequences that can arise between two separate, competitive processes. The process could be supported by the provision of preliminary site surveys to bidders and a more standardised approach to network development that allowed the granting of planning permission before leasing the seabed. A managed transition would be needed to reach this goal, but the rewards for doing so, given the scale of the development to come, would, we believe, justify this effort.

However, given the processes and institutional structures already in place, a more evolutionary approach may be necessary. For example, the current system could be amended to allow joint or linked bids into a CfD auction to optimise transmission investments. However, this could reduce competition, as bids would become interdependent, or add complexity if bidders were allowed to specify alternative bids should their linked bid fail. Penalties for non-delivery could also be strengthened so that the system costs from developments failing to materialise would be, at least partially, borne by the responsible parties.

Whichever route is taken, we already know that the UK Government is proposing to review the basis for determining successful bids, including the potential consideration of non-financial criteria. However, its current ‘long-list’ of potential non-price factors is long indeed, reflecting a wide variety of potential objectives including capacity building, sustainability, innovation, skills development and wind-farm location. A transparent discussion amongst policymakers about their objectives and priorities for offshore windfarm development should, we believe, form the foundation for any next steps.

[1] Call for Evidence on introducing Non-Price Factors into the Contracts for Difference Scheme, April 2023.