Offshore wind | Tender rules for Norway’s first offshore wind licensing round

Today, 6 December 2022, the Norwegian Government submitted for public consultation the long-awaited rules for award of acreage in the two opened areas Sørlige Nordsjø II and Utsira Nord on the Norwegian Continental Shelf (NCS). The consultation period is one month, until 6 January 2023.

Background

The Norwegian Government has expressed major ambitions for Norway’s offshore wind industry, aiming for Norway to take a leading position in the global offshore wind market. As part of this ambition the Government intend to award acreage on the NCS for 30 GW capacity by 2040, with the potential to nearly double Norway’s renewable energy production compared with today’s level.

The first licensing round for the award of acreage in Sørlige Nordsjø II (SNII) is anticipated to be announced before the end of first quarter next year, with award later in 2023.

Award of the acreage rights will be based on a competitive process. Award of SNII acreage rights (bottom fixed) will be based on an auction process, whilst award of acreage within Utsira Nord (UN) (floating wind) as a starting point will be based on qualitative criteria.

Today the Government provided important updates on the regulatory framework for the upcoming award processes and urged relevant stakeholders to provide feedback in the consultation.

We have summarized some of the main points in the proposal below:

Sørlige Nordsjø II

Area rights for a total capacity of 1,400 to 1,500 MW is intended to be awarded to a single project. Announcement is intended before end of first quarter 2023, with intended award during 2023.

SNII prequalification process

First, a prequalification process will be carried out. The key purpose is to increase the probability of a timely realization of the winning bid and exclude bidders with limited capacity to realize the development.

The prequalification will be based on the following key parameters:

1) Ability to complete the development project:

a) Technical capabilities (experience from comparable projects)

b) Financial capabilities (financial capability to carry the project – exact requirements, such as rating requirements is not yet determined. The mechanism in the relevant consortium agreements for cash calls/access to funding will be taken into account. Equity portion of the total project cost cannot be lower than 20%)

c) HSE requirements

2) ESG (climate footprint, co-use, re-use); and

3) Level of local impact and contributions to the industrialization of Norwegian offshore wind supply chain.

The Government indicate that there will be a cap on the number of qualified bidders and as such the prequalification process will contain an element of competition (and not only a pass/not pass assessment).

SNII support mechanism

The MPE propose a two-sided contract for difference (CfD), with one year average reference price period and a contract duration of 15 years. The CfD will cover 1,400 of the total 1,500 MW capacity limit for the awarded acreage. Payments from the Government under the CfD will be suspended in hours where the market price for electricity in the relevant price area (NO2) is zero or negative, and suspended or reduced in hours where the contract strike price is higher than the market price less production cost.

SNII auction model

The auction model for SNII is proposed as a pure monetary auction, where the prequalified participant with the lowest offered CfD contract strike price wins. The Government’s preferred approach is to have an open bidding round first, inviting only the two highest bidders for a sealed bid round (so called Anglo-Dutch auction).

Utsira Nord

For Utsira Nord the main proposal is to award three areas of acreage rights, each with a project capacity of 500 MW.

UN award model

The Government has proposed a two-step approach, where the first step is an award of acreage rights based on qualitative criteria. Acreage rights provide for an exclusive right to undertake a project specific impact assessment and apply for a concession. Following completion of the impact assessments, the developers having been awarded acreage rights will be invited to compete for State support as part of the concession process. The expressed purpose is to allow for a de-risking of the projects through project maturation to ensure the project or projects with the lowest need for State support are realized. Not all projects awarded acreage will be granted State support in the second step.

The Government indicate they are considering mechanisms to provide incentives for developers that are not awarded State support to further mature their projects, including an alternative where exclusivity is prolonged to allow the developer to mature a commercial project at a later stage.

The Government also presents an alternative award process where more than 3 participants (minimum 6) are selected through a pre-qualification round and allowed to mature their projects further over a one-year period and then compete for three area rights to be awarded following a quantitative competition on the level of State support required. Participants that are not awarded area rights may get some of their development cost refunded. The three projects awarded area rights obtain an exclusive right to undertake an impact assessment and apply for concession. The final state support level will be decided by competition within a defined maximum, and not all projects will be granted State support.

UN qualitative criteria

The qualitative criteria for UN will contain comparable elements as the prequalification criteria for SNII referred to above. In addition, the UN qualitative criteria will include cost level 2030 (LCOE) and contributions to innovation and technology development.  

UN support mechanism

The Government are considering two alternative support mechanism for UN: A CfD or investment support. The Government want to avoid over-compensation, and an investment support will be combined with a maximum return on the investment and the developer will need to provide accounts showing the return.

In the consultation, the Government does not express a preference for either alternative and ask for input from the public on the two alternatives.

BAHR’s view

Today’s announcement provides additional direction on the award process and support mechanisms intended for the award of area rights in the Sørlige Nordsjø II and Utsira Nord areas. Although there still are important details to be confirmed, such as the detailed content of the CfDs, grid connection regime and grid delivery model today’s announcement will provide added clarity and likely trigger a more detailed debate on which of the presented alternatives are preferred.

It is to be noted that the State does not provide much clarity on the taxation regime for offshore wind. The MPE express that extraordinary return over time is not expected for offshore wind projects, and that a special tax regime for offshore wind will not be proposed at this stage. With the recent proposal to apply a special tax for onshore wind projects in Norway, the offshore wind participants cannot exclude the risk that the Government may introduce a special tax also for offshore wind at a later stage. Without a firm clarification, the participants will have to take this political risk into account when presenting their bids and deciding their required rate of return for the offshore wind projects.

Link to the consultation documents:

Høring av prekvalifiseringskriterier og auksjonsmodell for Sørlige Nordsjø II Høring av kvalitative kriterier og støtteordning for Utsira Nord
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