Germany and the Netherlands have recently issued the results of their latest offshore wind auction. They awarded a total capacity of 6.5 GW. That’s good for Europe’s energy transition. But the auction design in both countries included negative bidding. This puts unnecessary additional pressure on offshore wind developers – with adverse consequences for the wider wind energy supply chain and Europe’s electricity consumers.

Germany and the Netherlands have recently awarded 6.5 GW of new offshore wind projects. Germany awarded 2.5 GW and the Netherlands 4 GW. To put this in context the EU has 19 GW of offshore wind in operation today.

The auctions in both countries used negative bidding, where wind farm developers bid the amount of money they’re ready to pay for the right to build a wind farm – and the higher the price you bid the more likely you are to win. Most other countries in Europe use Contract for Difference (CfD) auctions where developers bid the amount of revenue they think they need, and the lowest bid wins.

If you win a negative bidding auction your revenue will be whatever is the wholesale market price of electricity. If you win a CfD auction your revenue will be whatever you bid in the auction, and if the market prices are higher than the agreed strike price, you pay the difference to the Government.

The negative bidding amounts are a straight add-on to the costs of developing an offshore wind farm. It’s extra money the developer has to pay which they don’t pay in a CfD auction. Project developers have to pass on these costs. Either to the wind energy supply chain which is still recovering from supply disruptions and cost increases. And/or to electricity consumers in the form of higher electricity prices.

The auction results

The results of the latest German auction were:

  • TotalEnergies will pay €1.958bn to develop the N-11.2 site which has a capacity of around 1.5 GW. So they’re paying €1.3m per MW.
  • EnBW will pay €1.065bn to develop the roughly 1 GW N12.3 site. That’s €1.1m per MW.

The results of the latest Dutch auction were:

  • UK-based SSE Renewables and the Dutch state pension fund APG and ABP will pay €40mn to develop the 2GW IJmuiden Ver Alpha site. That’s €20,000 per MW.
  • Vattenfall and Copenhagen Infrastructure Partners will pay €800mn to develop the 2GW IJmuiden Ver Beta site. That’s €400,000 per MW.

Germany and the Netherlands both used negative bidding in their previous offshore wind auctions already. The Netherlands previously applied a cap on the bids which equated to €70,000 per MW – their cap is higher now. Germany doesn’t apply a cap. The winners of their previous auction, BP and Total Energies, are paying €12.6bn for the right to develop 7 GW – which equates to €1.8m per MW.

Negative bidding also means higher financing costs than you get with wind farms that are awarded in a CfD auction. The latter have fixed revenue, so banks feel much more comfortable offering more debt finance. But projects awarded in a negative bidding auction have variable revenue – the market price of electricity. So they need to rely more on (more expensive) equity finance – though they can mitigate this by signing PPAs with offtakers.

“Negative bidding increases the costs of offshore wind. Costs that have to be passed on to consumers and the wind energy supply chain. It may be a short-term gain for finance ministries. But it’s a long-term cost for society”, says WindEurope CEO Giles Dickson.

Non-price criteria

The Dutch auction made extensive use of non-price criteria. For the Alpha site these were about biodiversity protection. For the Beta site it was system integration. The winning bidders made significant commitments to invest in these respective areas. Vattenfall and CIP have among other things committed to build a 1 GW electrolyser facility in Rotterdam which will run on renewable electricity from the Beta site. And the Alpha wind farm is designed as a “living laboratory” – more than 75% of the wind turbines in the wind farm will have artificial reefs for muscles and other maritime animals.

“The Dutch auction shows the European wind industry has a great offering on ecology and system integration. We are building new wind farms and creating lasting value for Europe’s environment and energy system”, says Giles Dickson.

The German auction used price criteria only.

What’s the money used for?

In Germany 90% of the money raised from negative bidding will be used to reduce the grid levies. The other 10% are used to support maritime biodiversity and sustainable fishing practices. OK. But building these wind farms requires a strengthening of Germany’s offshore wind supply chain and an expansion of port capacity. The German Government should consider putting some of the money into that as well.