Oil majors paid a hefty premium to develop the next generation of major British offshore wind farms after BP Plc and Total SE won contracts in an auction ahead of many of the utilities that have dominated the space until now.
The Crown Estate auctioned seabed rights that will allow about 8 gigawatts of new wind farms, enough to power more than 7 million homes. With oil majors taking a majority of the projects, it’s a sign that green energy companies are facing a new era of competition for some of the world’s biggest renewable energy projects.
The winning companies will pay about $1.2 billion per year in total for up to a decade to develop the wind farms. BP led the bidding with an offer about 80% higher than the average of its competitors for sites in the North Sea, an area it’s long familiar with through its oil operations.
“These huge upfront costs will put up barriers to entry for utilities and oil and gas companies without very deep pockets,” Barclays Plc analysts led by Dominic Nash said in a note.
It’s the first time in a decade the Crown Estate has offered seabed for new wind farms and the first time it’s done so with this kind of competitive auction. The industry has changed drastically in the meantime as the cost of construction and financing plummeted and competition for the projects has soared, most notably from traditional fossil-fuel producers.
Winning bids came from a consortium of BP and German utility EnBW Energie Baden-Wuerttemberg AG for a total capacity of 3 gigawatts, while a partnership of Total and Macquarie Group Ltd’s Green Investment Group got 1.5 gigawatts and RWE AG’s renewables arm won 3 gigawatts. Cobra Instalaciones y Servicios SA and Flotation Energy Plc, a floating wind farm specialist, will jointly develop a 480-megawatt site.
Getting hold of the seabed rights is the crucial first step in building a wind farm, a process that can take years.
The development rights will also be key for BP and Total to realize the oil companies’ goals to dramatically scale up their renewable power businesses. BP said last year that it aimed to have 50 gigawatts of renewable power capacity. The U.K. site will not only help it chip away at that goal, but also bolster its wind credentials and help it win mandates for projects in other countries.
But the victory comes at a steep price. BP and EnBW agreed to pay 154,000 pounds a megawatt per year for the right to build the site, or almost half a billion pounds annually during the development phase. Once the project starts generating power, the payment will shift to a percentage of the revenue.
The results will be a major loss for incumbent players such as Orsted AS, Iberdrola SA, Equinor ASA and SSE Plc that have previously dominated the offshore wind sector in the U.K.
The Crown Estate hasn’t yet said when it will auction more areas. RWE was the only major utility to win rights to develop projects without a partner in this round.
The Crown Estate manages the waters around England, Wales and Northern Ireland. The property in its portfolio is owned by the monarchy and managed in the public interest along with Queen Elizabeth II’s private properties. Profits are sent to the Treasury, but the Queen’s household receives a part of that.
The next generation of projects will be vital to Prime Minister Boris Johnson’s goal to quadruple the country’s offshore wind capacity in the coming decade, a central plank of his plan to cut carbon emissions.
|Wind Watch relies entirely
on User Funding