New wind farm in Denmark will pay the state for the right to operate

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Imagine a situation where you offer the lowest possible price at an auction and still lose...

On December 1, a tender was held for the construction of a new offshore wind farm "Thor" in Denmark with a capacity of 1 GW. This is one of three large-scale 3 GW wind projects in total that Denmark plans to build in the coming years. Among the bidders were global players - Danish Orsted, French TotalEnergies, Spanish Iberdrola and German RWE.

Descending auctions are common practice for many energy markets. But the peculiarity of this tender was the extremely low result and the fact that the winner had to be determined by a lottery. How did this happen?

The auction is based on the CfD scheme, or "contract for difference". The auction determines the price at which the energy producer will sell it on the market for 20 years. The bilateral CfD scheme provides that the state compensates for the difference when the spot market  price is lower than agreed in the contract with the producer. But when the market price is higher than agreed, the opposite happens - the producer compensates the difference to the state. Thus, the producer can count on a minimum level of remuneration for electricity sold, and the state - on a low level of subsidies to private companies.

The government expected to receive a winning auction price in the region of 30-60 Euro / MWh, but also set the minimum possible price of 0.013 Euro / MWh. This was necessary because state support cannot be provided during periods when spot electricity prices are negative.

Also, an important condition of the auction was to limit the maximum amount of support that both parties can receive. The government has limited the subsidies to companies to 900 million euros. For the auction winner, the maximum amount to be reimbursed to the state was set at 375 million euros.

As a result of the tender, several companies submitted bids that included a minimum possible sale price of 0.013 Euro / MWh. That's why the government had to hold a lottery, in which RWE won.

How could private companies voluntarily offer such auction conditions? In fact, it means selling electricity almost for free. Moreover, it imposes an obligation to compensate for the difference between the market price and "almost zero". 

An important condition in the structure of this agreement is the above mentioned limit of compensation from the participants at the level of 375 million euros. After its payment is done, the winner will be able to sell energy on the market on general terms, which is quite profitable for him.

According to WindDenmark and Our New Energy, if the price trends of the energy market in Denmark are taken into account, this moment of full compensation to the state will come in about 3 years after COD.

Thus, the business case for the project is as follows: total CAPEX for the construction of 1 GW wind farm, payment to the government of 375 million euros over three years, and then the sale of electricity at exclusively market prices. At the same time, the right to sell electricity is guaranteed by the state for at least 20 years. The station is expected to start operation in 2026, and full compensation to the state and access to the market will take place around 2029.

This case demonstrates that the state support of renewable energy makes sense. With sound government policies and regulations, technology development, new financing mechanisms and business models allow the implementation of RES projects with a minimum price for the state and the consumers.