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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Offshore Wind Can Be Boon Or Bust, Depending On Where You Are

  • No energy companies have so far submitted bids in the UK’s 5GW offshore wind auction.
  • The U.S.’ first offshore wind auction in the Gulf of Mexico ended with a paltry $5.6 million winning bid last month.
  • A recent offshore wind auction in Germany saw 'negative bidding'
Wind Power

No energy companies have so far submitted bids in the UK’s 5GW offshore wind auction, with the government coming under fire for ignoring warnings that the offer on the table was too low to reflect soaring costs. This comes as a significant blow to Rishi Sunak’s plans to meet climate targets and lower energy bills and also makes it harder for the government to achieve its goal of reaching 50 GW of offshore wind by 2030. The price of the UK's offshore wind power has fallen steeply in recent decades. The government set a maximum price of £44 a MW hour for the latest auction, which developers deemed too low due to soaring construction costs, owing to rising inflation and higher borrowing costs.

If confirmed, this will be an energy disaster and a £1bn Tory bombshell that will push bills up for hardworking families. The Conservatives have now trashed the industry that was meant to be the crown jewels of the British energy system … they broke the onshore wind market by banning it, they undermined the solar industry, and they caused chaos in the home insulation market,’’ Ed Miliband, the shadow climate change secretary, has lamented.

The key point here is that even with inflation, offshore wind is still about a third cheaper than gas power stations with the price of gas set to remain higher than before the crisis.The more renewables, the less gas you have to buy. By failing to back offshore wind, the government has added around £1bn a year to energy bills in coming years. Combine this with the fudge on lifting the onshore wind ban, and the government is going backwards on easing the energy bill crisis,”Jess Ralston, an energy analyst at the Energy and Climate Intelligence Unit, has told The Guardian.

Despite the setback, the UK's offshore wind sector has grown rapidly over the past decade, currently supplying about 11% of the country’s electricity. The year 2020 marked the first time in the country’s history that electricity came predominantly from renewable energy, with 43% of the country’s power coming from a mix of wind, solar, bioenergy and hydroelectric sources.

On 15 May 2023 the UK produced its trillionth kilowatt hour (kWh) of electricity generated from renewable sources – enough to power UK homes for 12 years based on average consumption. Whereas it took half a century to reach this milestone, it will take just over 5 years to achieve the next trillionth kWh.

Gulf Of Mexico Another Flop

The UK’s offshore wind industry can take small comfort in the fact that it’s not alone in the doldrums. The U.S.’ first offshore wind auction in the Gulf of Mexico ended with a paltry $5.6 million winning bid last month, highlighting just how tough it can be for renewables to gain traction in oil and gas strongholds. Germany's RWE was the winner of  rights to 102,480 acres (41,472 hectares) off Louisiana. This marked the lowest winning bid for a federal offshore wind lease at auction since the Obama administration. The other two lease areas on offer off Texas received no bids. The Biden administration has set a goal to deploy 30 gigawatts (GW) of offshore wind by 2030, and the three Gulf leases combined had the potential to deliver more than 10% of that amount.

Although the Gulf’s waters haven’t sprouted any wind turbines yet, there are several reasons why the Gulf of Mexico is a perfect fit as an offshore wind hub.

First off, the Gulf Coast also has an abundance of companies and workers with decades of experience in producing energy offshore. According to the Energy Information Administration, Gulf of Mexico federal offshore oil production accounts for 15% of total U.S. crude oil production. Major fields include Eugene Island block 330 oil field, Atlantis Oil Field, and the Tiber oilfield (discovered 2009) while notable oil platforms include Baldpate, Bullwinkle, Mad Dog, Magnolia, Mars, Petronius, and Thunder Horse. 

“We have a really mature base for energy. We’ve got the know-how,” Lefton said. The people, the companies, the manufacturers that know how to do [Outer Continental Shelf] energy development are in the Gulf of Mexico,” the Interior Department’s Bureau of Ocean Energy Management director Amanda Lefton has told Politico.

According to Hayes Framme, government relations manager for North America at Danish wind giant Ørsted A/S (OTCPK:DNNGY), the Gulf’s existing oil and gas infrastructure represents “a historic expertise.”

One of the things that makes the Gulf area attractive is the fact that you’ve got a workforce that is accustomed to working on rigs in the ocean. It’s not like you have to build an industry. What you have to do here is basically help an existing industry evolve,’’ Dennis Arriola, CEO of the renewable energy company Avangrid Inc. (NYSE:AGR), has said.

Michael Hecht, the president and CEO of Greater New Orleans, says jobs in the Gulf’s traditional oil and gas industry have declined during the past decade, creating a sense of urgency to make a transition that allows people to retain their skills.

The Gulf could also become an important hydrogen hub, with wind power being used to generate green hydrogen to reduce greenhouse gas emissions from industries such as long-haul trucking, fertilizer manufacturing and aviation.

German Breakthrough

That said, there’ve been some success stories in the offshore wind sector in the current year.

Back in July, European oil and gas supermajors BP Plc (NYSE:BP) and TotalEnergies (NYSE:TTE) won all of the capacity on offer in Germany’s 7GW offshore wind auction, the country’s biggest in history. BP secured leases at two North Sea sites off the coast of Helgoland with total generating potential of about four gigawatts, paying a total of $7.5 billion. The new sites--BP's first offshore wind projects in Germany--will nearly double the company’s global offshore wind pipeline. Meanwhile, TotalEnergies--through local subsidiaries--secured the other two sites for a total of  $6.5 billion. Germany currently has 8.4GW of operational offshore wind capacity.

These awards are a huge milestone for BP's decarbonization plans in Germany and are a strong reflection of our wider strategy.The renewable power we aim to produce will anchor the significant demand we expect for green electrons for our German operations," Anja-Isabel Dotzenrath, BP's EVP for gas and low-carbon energy, said. 


But not everyone was particularly pleased with these giant clean energy projects. Multiple bidders, including the winning bids, pledged to build without any subsidies or state support aka ‘‘negative bidding’’, thus triggering an additional “dynamic bidding procedure”. Negative bidding creates additional costs for offshore wind developers, which they pass on either to the supply chain, already struggling with inflation, or to the consumers, who are grappling with higher electricity prices and costs of living.

Indeed, WindEurope has called for an end to financial bid auctions after BP’s and Total’s historic wins:

Crucially the European Union wants to strengthen its energy security with competitive and home-grown renewables. The EU needs as much new wind energy capacity as it can get, as fast as it can get it. All the money paid in negative bidding is money our companies cannot invest in other wind energy projects. European governments should therefore not follow the German example of negative bidding. For example the industrial capacity for the construction of wind turbines, foundations and the installation vessels. But investments are also needed in grids, ports and skilled workers. Negative bidding is unhelpful here. Companies along the wind energy supply chain will have to work with even tighter margins, as developers pass on the extra costs of negative bidding to them,”  the trade body said.

By Alex Kimani for Oilprice.com

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