Denmark's latest 3 GW offshore wind auction round ended without any bids. That's a huge disappointment for Denmark and for Europe's wider energy security and electrification efforts. The failure to attract bids results from Denmark's auction design - including its unhealthy uncapped negative bidding. The Danish Government must now quickly re-tender the lost volumes. And they must adapt their auction design to market realities. The industry needs healthier pricing and fairer risk allocation.
Denmark is the birthplace of offshore wind energy. The world's first offshore wind farm, Vindeby, was built there in 1991. Denmark has since remained a leader in wind energy development worldwide. Today (Dec 6) the country has 3 GW of offshore wind capacity - generating 24% of Denmark's electricity demand. Offshore wind and onshore wind combined generate 55% of all electricity consumed in Denmark.
The European Union has big plans for offshore. They want to have at least 88 GW, up from 20 GW today. On this ambitious trajectory, the EU cannot afford failed offshore wind auctions. Denmark, as part of the North Seas Energy Cooperation, aims for 7.7 GW by 2030 and 35 GW by 2050.
In its latest offshore wind auction, the largest offshore wind auction in Denmark's history, the country offered 3 additional offshore wind sites of 1 GW each. It also allowed developers to overbuild the areas by another 1 GW.
Yesterday the auction results came in: not a single bid was submitted for any of the three sites.
Why did the Danish auction fail to attract bidders?
The main reason for the Danish auction attracting less industry interest than similar offshore wind auctions in Poland, the Netherlands and the UK lies in the Danish auction design.
The Danish auction system does not foresee any form of state support or revenue stabilisation model - such as the Contracts for Difference (CfD) used in many other European countries. Instead offshore wind developers are asked to pay for the right to build a wind farm. Denmark's uncapped negative bidding creates an unhealthy race to the bottom and unnecessarily increases the upfront costs for offshore wind developers. On top of that Denmark does not pay for the grid connection to the offshore wind farms, instead developers have to take on these extra costs.
This unfavourable auction design is further complicated by the fact that Denmark's electricity demand from mobility, heating, hydrogen producers and industry is not picking up fast enough. Denmark is already frequently covering its electricity demand to 100% from renewables today. For offshore wind developers this creates uncertainty around the price they can sell their electricity at in the future.
"The failed Danish offshore wind auction was disappointing but sadly not surprising. Uncapped negative bidding is not a good system. It raises costs and risk. And it's even harder when the bidders don't know who's going to be buying the energy they produce and how it'll get to them. The Danish Government have got to change their auction design. Most other countries in Europe use 2-sided CfDs in their offshore wind auctions", says Giles Dickson, WindEurope CEO.
Another explanation for the lack of bids is that the costs to develop an offshore wind farm have increased significantly due to inflation and rising commodity prices. Likewise interest rates are now significantly higher than they were a few years ago. This is putting pressure on the economics of the projects.
No time to waste in re-tendering the volumes
Denmark is planning a similar 3 GW offshore auction on 1 April 2025. The Government must ensure that the volume not awarded in the current auction round is re-tendered then. In the meantime, the Government should also take stock of Denmark's auction design and reflect on adapting it ahead of the April auction.
Otherwise Denmark runs the risk of falling behind as an offshore wind market. A second failed auction round in 2025 which would limit Denmark's green electricity export and renewable hydrogen production potential. And it means that Denmark would continue to be dependent on fossil energy imports from unreliable countries outside of Europe, ultimately weakening Denmark's energy security.
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Christoph Zipf
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Press & Communications Manager
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December 23, 2024
