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

Sørlige Nordsjø II

Summary

The area Sørlige Nordsjø II borders the Danish exclusive economic zone in the North Sea and is suitable for bottom-fixed wind power. A time limited exclusive right to the project area will be awarded to one project with minimum 1,400 MW and maximum 1,500 MW capacity. The recipient will be allowed an exclusive right to submit a project specific impact assessment program and (subsequently) apply for concession. The application deadline is set to 4 August 2023 at 12:00 CEST. Expected award is December 2023.

The area award process will consist of two key steps. The first step is a competitive prequalification process where minimum 6 and maximum 8 participants are selected based on a how they score (from 1-10) on a set of qualitative criteria. The criteria on integrity and HSSE will be limited to a pass/no pass test. The second step will be a monetary auction for a two-sided contract for difference (“CfD”). The auction will be an open bidding process with a predetermined maximum reference price of 66 øre/kWh for the bid to qualify. The CfD contract will be published by the Ministry of Petroleum and Energy (the “MPE”) at a later stage, but the reference price will be a monthly average. The duration of the CfD will be 15 years and the state support under the CfD is proposed to be capped at NOK 15 billion.

Pre-qualification

The prequalification process will consider criteria on the participants with regards to (i) execution capabilities (60%), (ii) sustainability (20%) and (iii) local ripple effects (20%). The score will be weighted at the percentage in parenthesis.

Execution capabilities: To reach the political target of operational offshore wind projects within 2030, the project concept must be adequately matured, and a solid project plan and financing plan must be demonstrated under the criteria on execution capabilities. Experience from other projects and financial strength will be considered.

Sustainability: The participants must demonstrate that their project is sustainable, and how to ensure co-existence with other activities such as fisheries and shipping and minimized consequences on climate and environment.

Positive local ripple effects: The participants must demonstrate how the offshore wind project will provide local ripple effects and contribute to increased competence and development in the supply chain.

Each qualitative criteria includes a more detailed explanation and documentation requirements. Key points to note are:

• The applicant must have a minimum yearly turn-over of not less than NOK 40 billion each of the last three years and a solidity (equity capital / total capital) of at least 20% over the same period or a credit rating of minimum BBB- (S&P) / BBB- (Fitch) / Baa3 (Moody’s).
• The financing plan must reflect that the equity capital in the project company is at least 20% of the total investment cost. A higher equity ratio will be deemed positively.
• The applicant must have experience and competence to complete the project, and must as a minimum have experience from one reference project comprising the construction of a full-scale offshore wind project of minimum 300MW capacity that is fully operational. In addition, experience from planning, construction and operation of large grid facilities offshore with either HVDC (>300 kV) or HVAC (>220 kV)-technology or another comparable and relevant reference project must be demonstrated.
• If the project can provide electricity to the oil and gas field Ekofisk, it will be weighted positively.
• The project plan will be assessed on its realistic progress with clear milestones for completion of activities. The applicant shall base its timeline on the MPE requiring 4 months to determine the project specific impact assessment program and a total 12 months to assess the application for concession and the detailed development plan. The project plan and the contemplated commercial operations date will form the basis for the schedule in the CfD.
• The applicants are required to document measures to promote small and medium-sized enterprises (“SMEs”) being companies with up to 100 employees, a description of how the applicant’s contract strategy contributes to the development of the supplier industry and the applicants experience with industry development from past projects.

The Government has after the public consultation round widened some pre-qualification criteria on execution capabilities, including expanding the criteria on relevant reference projects and removing the previous condition that the reference projects had to be completed within the last 5 years. Furthermore, a wider and general alternative for other relevant grid facility reference projects has been added.

SNII support mechanism

The support scheme for SNII will be based on a two-sided CfD. Even though the Government did not disclose the detailed terms of the CfD, some key points have been made public.

The CfD will cover 1,400 of the total 1,500 MW capacity for the awarded acreage. The contract duration for the CfD is set to 15 years, with a monthly average reference price. The payments from the Norwegian State will be suspended (i) when the market price for electricity in the relevant area (NO2) is zero or negative, and or reduced (ii) where the contract strike price is higher than the market price less production cost. The Government has further proposed a total cap of NOK 15 billion for the support to be received from the State and for the payments being made by the producer.

The CfD will be shared with the applicants wishing to contribute with comments to the draft. The Government has therefore invited applicants who wishes to receive a draft of the CfD for review to notify the MPE at havvind@oed.dep.no.

For further key terms of the CfD for SNII, see the proposition to the Parliament here! (Prop 93.S)

SNII auction model

The auction model for SNII will be a pure monetary auction between the 6 to 8 pre-qualified participants. The auction model will be held as an open auction process where the lowest offered CfD contract strike price wins.  Hence, the original proposal of inviting the two highest bidders for a sealed bid round (so called Anglo-Dutch auction) has been abandoned following the public consultation.

The maximum reservation price for the bid to qualify has been set to NOK 0.66/kWh.

The winner of the auction is, as soon as possible and within 4 weeks after the auction, required to establish a company (for consortiums) in accordance with the Offshore Energy Act section 3-5, enter into a CfD with the State and provide the required guarantees as further set out in the CfD. In order to participate in the auction, the pre-qualified participants must provide a bank guarantee of NOK 400 million as security for liquidated damages of NOK 400 million, which will be triggered if the winner fails to enter into the CfD.

Processing following the award

The process following the area award is governed by the Norwegian Offshore Energy Act and the Norwegian Offshore Energy regulation. Within 6 weeks following the area award, the participant is required to submit a project specific impact assessment program. Within an additional 2 years, an application for concession shall be submitted. There will be limited flexibility to change the project after the prequalification process, and any change has to be within the limitations set out in the CfD with the State.

Timeline

Utsira Nord

Summary

The area UN is located west of Haugesund and is due to the water depth only suitable for floating installations. For UN, three project areas will be awarded, each with a project capacity of minimum 460 MW and maximum 500 MW. The Government will consider increasing the capacity within each area up to 750 MW if studies show that this is feasible. The projects awarded area rights will be invited to compete for state aid later. The Government will propose to Parliament that the support take the form of a CfD contract, and that a CfD contract is awarded to two of the three projects for 500 MW each. This is an important clarification from Government, as it was not previously clear if support would be provided for only one of the projects. This may be a discussion point when Government’s proposal is processed by Parliament.

UN award model  

The Government intends to award the three project areas after a competitive process based on qualitative criteria. There will not be a prior pre-qualification process. The application deadline is 1 September 2023 at 12:00. Expected award is in December 2023. The project with the highest score will be awarded its preferred area, with the project with the next best score being awarded its preferred area of the two remaining areas, and the third best project being awarded the last remaining area.

The applicants will be scored from 1-10 on each criterion. The criteria are cost level 2030 (30%), innovation and technology development (20%), execution capabilities (30%), sustainability (10%) and positive local ripple effects (10%). The sub criteria on integrity and HSSE will be a pass / no pass test. The criteria will be weighted with the weight in parenthesis.

Each qualitative criterion includes a more detailed explanation and documentation requirements. Key points to note are:

• The applicant must demonstrate a realistic and low-cost estimate for a 500MW offshore wind farm operational in 2030. The assessment will include whether the project’s estimates are realistic or not, and the estimated production will be assessed based on a standardized theoretical levelized cost of energy (LCOE) calculation. A template format is provided.
• On technology and innovation, the applicants must demonstrate measures for technology development and show how the technology development will reduce cost at scale.
• On execution capabilities, the applicant must have sufficient financial strength, and as a minimum have an average yearly turn-over of NOK 30 billion over the last three years and solidity (equity capital / total capital) of at least 20 % based on the annual accounts over the last three years or a rating of minimum BBB- (S&P) / BBB- (Fitch) / Baa3 (Moody’s).
• The financing plan shall be robust and realistic and shall be based on the equity capital in the project company being minimum 20% of the total project cost.
• The applicant must have experience and competence to complete the project and must as a minimum have experience from the development of a completed offshore wind project (bottom fixed or floating) of minimum 200MW.
• The MPE has not yet determined grid connection, and the projects preferred grid solution and grid connection should be described.
• A plan for co-existence with fisheries and ship traffic must be provided.
• Applicants are required to document measures to promote small and medium-sized enterprises (SMEs) being companies with up to 100 employees, a description of how the applicant’s contract strategy contributes to the development of the supplier industry and the applicants experience with industry development from past projects.

Following award of area rights, each project must submit its project specific impact assessment program for approval within 6 weeks.

Future development must correspond with the project description provided in the application and any changes shall be explained, for example to reduce costs or improve the project. Any change shall be equally good or better than what is described in the application.  It shall be documented in the (subsequent) application for concession that any changes are qualitatively the same or better.

These requirements apply regardless of ownership changes. The MPE will, when assessing consent to ownership change, consider awarding the area through a competitive process. Changes that adversely impact the execution capabilities may not be approved.

UN support mechanism

Following completion of the impact assessments, the participants that have been awarded acreage rights will be invited to compete for State support as later in the process. The Government will propose to Parliament that the support take the form of a CfD contract, and that a CfD contract is awarded to two of the three projects for 500 MW each. The Government will propose that the duration of the CfD is 15 years from production start. The CfD will be determined by the Government later and will not be subject to negotiations. Guarantees will be required.

The project that is not awarded a CfD can apply to extend the exclusive area right, as well as apply for other general support schemes. The Government will propose that the project may still participate in potential later competitive processes on state aid for renewable energy production offshore.

Timeline

Link to the documentation: