Earlier this month DONG Energy won an offshore wind tender that set a new benchmark for project costs in Europe and reinforced its position as one of the sector’s most influential players.

The Danish energy company was awarded the tender for the Netherlands' 700MW Borssele 1 and 2 offshore wind projects on 6 July 2016, after it bid at a record low price for the sector. DONG Energy’s strike price bid of €72.70 ($80.42) per MWh saw off 37 other bidders for the projects, in a competition in which the lowest price won.  

DONG Energy will receive this fixed state-guaranteed revenue for the projects for 15 years. At the end of this period DONG will receive the market price for the electricity the wind farms produce, which today stands at around €37 per MWh.

Instant impact

On the morning of the announcement, the managing director of one European bank’s energy practice told IJGlobal that other offshore wind developers “will be almost certainly tearing up contracts. Everyone will be going back to their suppliers and saying, how the hell did DONG do that?”

The bid cuts the assumed price of building offshore wind projects in 2016 by up to half in some cases: other European offshore wind projects have been assigned strike prices double that of Borssele. In the UK, DONG Energy’s in-development Hornsea Project One, for example, has an inflation-linked strike price of £147.42 ($194.20).

The bid quickly had a knock-on effect for other European wind projects. As IJGlobal reported, Belgian politicians have asked the European Commission (EC) to review the state subsidies for two offshore wind projects, the €1.25 billion, 300MW Rentel and €1.3 billion, 370MW Norther. Norther is set to receive a levelised cost of €124 per MWh, while Rentel has agreed a €129.80 per MWh tariff.

Both are in advanced stages of project financing, with bank clubs appointed. If the EC agrees the subsidies are not competitive, the sponsors could have a problem on their hands. The projects’ economics are already under scrutiny: in June the ministry cut the support period for both Rentel and Norther to 19 years rather than the standard 20 years. However, a partner at one Belgian law firm told IJGlobal “the energy ministry can’t pull the strings again. If the EC says the subsidies are OK, they’re OK. They’re unlikely to be able to change the terms.”

Apples and oranges

Several market participants have warned that comparing other offshore wind financings to Borssele is unfair, with DONG Energy’s bid, and the tender’s structure, not reflective of the true cost of developing the technology elsewhere.

At the start of the bidding process in 2015 Irish renewables developer Mainstream ruled itself out of the competition. Chief executive Eddie O’Connor told IJGlobal, “the Dutch government took care of the technical and feasibility elements of developing the projects, so the bids will come down to who has the cheapest source of finance.”

DONGs size and strength have boosted its ability to bid low, some argue. In June it launched the largest stock market flotation of 2016 to date on the Nasdaq Copenhagen exchange, with an implied market capitalisation of DKr98.2 billion ($14.54 billion) at pricing.

Perhaps more significantly, DONG Energy builds offshore wind in its own way, a method that has proved to be highly successful, but difficult to replicate.

The utility follows a model whereby projects are financed on balance sheet, then an average 50% equity stake is sold to an incoming partner at financial close. This helps to keep development costs lower than if DONG had needed to raise construction stage debt.

“DONG Energy also transfers risk to contractors, and uses modularised equipment,” another lender explains. “Only the largest of utilities will be able to copy their models.”

“It’s not setting a precedent,” asserted a managing director at one French bank to IJGlobal. “You can’t compare it to other active financings. There are plenty of things we don’t know. Are revenues from other DONG projects being used to subsidise this one? Is that €72.70 price sustainable?”

Looking ahead

The renewables chief at another French bank took a more provocative view. “DONG Energy’s bid was at the correct price,” he said. “It’s what prices for offshore wind should be.” He said it comes down to a question of the rate of return developers will be willing to receive for their projects in the future. “Your expectations of equity returns determine how competitive you can be,” he argued. “In the past, the expected returns of other sponsors have often been between 8-9%: it’s potentially half that for DONG and Borssele. The fat has just gone out of it for a lot of other sponsors.”

“Rates of return will be hugely compressed,” another lender agreed.

The bid price is significant not only because it is a record low for the offshore wind sector, but because it pushes the cost of building offshore wind significantly below competing technologies such as nuclear. EDF’s Hinkley Point C nuclear project in the UK has a £92.50 (€119.75) per MWh strike price in place with the country's government. Questions over the cost effectiveness of European government's subsidy schemes may continue as these projects look for finance. 

It appears the market won’t have to wait long to see the impact on the next Dutch offshore wind projects. The tender for the next round of Dutch offshore wind development, Borssele III and IV, will close in the last week of September 2016, the Netherlands’ minister of economic affairs, Henk Kamp said on 5 July.