The German offshore tender: the surprise of the year (so far)

First had to check that I did not miss an order of magnitude, but no, the average subsidy need was 4.4 euro/Mwh not 44, and this is an average pulled down by around a GW of zero subsidy bids from EnBW and Dong. I know, I know, in Germany the offshore transmission is provided, these are large projects close to existing infrastructure with good wind conditions and so on. Still,  I have to eat my hat and acknowledge that I did not expect to see an unsubsidised wholesale market based offshore wind project under any conditions, this is indeed an amazing achievement, and given that offshore wind can bypass NIMBY issues far easier than onshore, a potentially very important one. Still, reading the fine print, a couple of interesting things emerge:

The projects will  come online in the mid 2020s when EU power markets are expected to tighten. I very much share this expectation in the light of the looming decommissioning of nuclear and coal, but the only real rule in trying to predict wholesale markets is expect the unexpected. They intend to use a new 10 MW+ turbine generation which is not yet in commercial production but they are prepared to bet on it. Such investment indicates a strong trust in regulatory stability as well. While a vote of confidence in a high level commitment to the Energiewende is something I definitely agree with, the devil is often in the details when it comes to regulatory risk. For example I think it would be entirely justified to introduce locational pricing in the European transmission system, this could create a low price zone around the German coast and put pressure on the business model. A strong deployment of residential batteries or smart charging of electric cars could undermine the advantage of having a high load factor offshore. Gazprom can get into a price war with American LNG exporters keeping the marginal cost of gas plants down. This is not your Daddy’s guaranteed offtake low risk renewable investment. The fact that the winning companies EnBW and Dong are prepared to take on a wholesale market risk with a yet to be introduced turbine generation is an indication of both the increasing confidence in the technological maturity of offshore and the strong strategic commitment to low carbon investment. Wow. Potential gas turbine investors are shying away as they don’t trust that a future wholesale market will cover their costs, but multibillion euro offshore investment goes ahead on this basis. The two companies share one more interesting characteristics: both of them have as controlling shareholder a government (the state of Baden Würtenberg for EnBW, Denmark for Dong) with very strong long term political commitment for the expansion of renewables and no obligation for quarter to quarter optimisation. I wander whether this is a random coincidence or an interesting lesson about the importance of a stable, patient and supportive shareholder base with a strategic vision.