Iberdrola plans one billion euro investment in Baltic Sea wind energy

Iberdrola Renewables Offshore will invest 1 billion euros (878.5 billion pounds) in developing two offshore wind farm projects in the Baltic Sea after winning 486 megawatts (MW) of capacity in a recent auction, managing director Jonathan Cole said.

Germany has granted approval for offshore wind parks capable of generating 1,610 megawatts (MW) of power at contract prices above the unexpectedly low bids in an auction a year ago.

The total amount of electricity that could be produced by the parks approved on Friday equates to the power generated by one large nuclear power station, or two big coal- or gas-fired power plants.

Offshore wind costs have fallen sharply around the North Sea as the industry develops, with turbines of 10 to 15 MW size due to be delivered in the next decade, able to offer twice today’s performance.

Proximity to existing construction and maintenance hubs and to onshore connections is also allowing more economies of scale.

In the industry’s infancy, operators secured sky-high support payments for years, as there was little experience of installing turbines far out at sea.

Six projects were granted licenses for construction at an average 4.66 euro cents per kilowatt hour (kWh), compared with an average 0.44 euro cents in the first auction a year ago, the Bundesnetzagentur network agency said.

This auction wraps up two rounds for a total 3,100 MW of projects applied for before Aug. 1, 2016, after which new projects became subject to reforms to the offshore subsidy scheme.

While the industry has cut costs sharply in recent years, last year’s results were widely viewed as overly optimistic.

Bundesnetzagentur President Jochen Homann said on Friday this year’s result reflected a changed competitive situation, but noted the range of bids made by would-be operators again included some not seeking a subsidy, without giving details.

The range was between zero and 9.83 cents for the six projects, three of which are in the Baltic Sea and three in the North Sea.

Germany’s Innogy said it had been awarded the rights to build and operate the 325 MW Kaskasi wind farm in the North Sea.

Denmark’s Orsted, formerly Dong, said it won approval for two bids of a joint 551.75 MW in the North Sea.

The other winning companies were Iberdrola’s German branch, KNK Wind and Baltic Eagle.

The operators rely on expected wholesale power price revenue for the time that the offshore wind capacity starts operating plus the auction price awarded, to achieve profitability.

The winners get an option to build the wind parks between 2021 and 2025, at the price they were awarded, or pay penalties.

They also gain the right to onshore connections and operation rights for 25 years.

German thermal operators currently obtain 3.8 cents a kWh in the wholesale market for power delivery next year while end-users of electricity pay around 30 cents/kWh, due to a high share of taxes and fees.

Last year, Orsted and EnBW won a total 1,490 MW of capacity permits for 2024/25, pledging to build 1,380 MW of the total at zero subsidy.

A final investment decision for the Baltic Eagle and Wikinger Sud projects is due in late 2019 or early 2020, with production set to commence in 2022, an aggressive development timeline versus some North Sea projects due in 2025, Cole said.

The 476 MW Baltic Eagle project received a minimum guaranteed power price from the German regulator of 64 euros per megawatt/hour, while the 10 MW Wikinger Sud has no guaranteed price, Cole said.

Baltic Eagle will be 12-13 nautical miles from the currently under-construction 350 MW Wikinger wind farm, enabling cost savings through pooling of infrastructure.

The auction offering 1.6 gigawatts was four to five times over-subscribed, Cole said.

The Baltic Eagle guaranteed price underscores the falling cost of offshore wind. Scottish Power Renewables’ 714 MW East Anglia ONE Offshore Wind Farm in the southern North Sea, more benign than the Baltic Sea, set the cost of electricity at 119 pounds per MW/hour in 2015.