Offshore wind update: Utsira Nord – competition rules and key commercial terms

The competition model – ESA gives green light to the two-step model

Summary

The Utsira Nord offshore wind area is located west of Haugesund and is due to its average water dept of 265 meters only suitable for floating offshore wind technology. Three project areas of 182 km2 each will be awarded, each with a maximum permitted installed capacity of 500 MW. The projects awarded area rights will, provided they mature their projects in line with the criteria (and no changes are being made to the support in the interim period), be able to compete for the aid of 35 billion NOK maximum by way of investment support after two years from award of area rights. Only one of the three projects will be awarded state aid in the subsequent competition for state support.

This is the same two step-model as was proposed back in 2023, which the Ministry has spent approximately two years to convince ESA is in line with the EU principles on state aid in a prolonged pre-notification phase. The stated purpose of the two-step model is to ensure that projects are matured to a sufficient level at the time for state aid competition, thereby increasing cost certainty for the developers and reducing risk premiums with end result being to minimize the level of needed state support.

ESA approved the scheme under its guidelines on state aid for climate, environmental protection and energy (the so-called CEEAG rules). The analysis is consistent with the approach taken in ESA’s previous decision concerning Sørlige Nordsjø II, where ESA concluded that the measure did not fulfill all the conditions in the CEEAG, but could be approved on the basis of the temporary crisis and transition framework in place at that time. The Ministry has taken onboard the guidance provided by ESA in its Sørlige Nordsjø II decision by e.g. ensuring that the public consultation for Utsira Nord addressed all points required by CEEAG. ESA’s approach is also broadly consistent with the approach taken by the European Commission under CEEAG in respect of floating offshore wind, for example concerning offshore floating wind off the coast of Brittany, France.

The competition rules for area rights

The competition for area rights will – in line with the approach suggested also in 2023 – be based on qualitative criteria. There will not be a prior pre-qualification process like in the Sørlige Nordsjø II competition. The Ministry has stated that criteria will be mostly in line with the criteria presented in 2023.

The conditions for participating in the subsequent state aid auction

A prerequisite for the state aid auction is that at least two of the three developers have applied for a production license under the Offshore Energy Act and completed other formalities necessary to participate in the auction, such as providing the required bid guarantees. In order for the developers to be able to submit an application for production license, the developers would have to carry out a project-specific impact assessment according to the Offshore Energy Act § 2-3 and have sufficiently matured the projects in order to be ready to submit a license application. This also means that the developers are dependent on at least one of the other two developers continuing their projects in line with the indicated timeline i.e. whether or not the state aid auction will be held is outside the respective developer’s sole control.

The qualitative criteria

Assuming the scoring will be maintained as originally proposed, the applicants will be scored from 1-10 on each criteria. The five main criteria, and their relative weighting as disclosed in ESA’s decision are:

Each qualitative criteria includes a more detailed explanation and documentation requirements. Pending the release by the Ministry of the final competition rules, we refer to the descriptions in the ESA decision below:

1. Cost levels, realism and maturity: Developers will be ranked on cost estimates for developing a 500 MW floating offshore wind project at Utsira Nord. This criterion will be evaluated by Enova, since it has extensive experience in assessing cost estimates for immature technologies, including floating offshore wind projects. Moreover, this criterion will carry a 35% weight in the overall assessment.

The assessment of the criterion is subdivided into seven distinct sub-criteria, where the numerical cost estimates will only play a minor part. The predominant weight will be based on the following documentation provided by the developer:

1. on the methodology employed in the development and estimation of the cost projections;
2. on delineating the maturation and qualification of the technology;
3. on the processes and dialogue with main suppliers;
4. on calculations of annual energy production;
5. on the computation of operation and maintenance cost;
6. on the execution of uncertainty analysis and the strategy for risk management; and
7. on the developer’s experience and competence in achieving historical cost reductions in relevant fields.

While lower cost estimates will be weighted positively, most weight will be placed on the maturity, realism, strategies, and processes culminating in the final estimates. Unrealistic, immature and/or unsubstantiated cost estimates will give a lower score to mitigate risks of the developers presenting overly optimistic cost estimates.

2. Execution capability: this criterion will be given 35% of the weight in the overall assessment. Developers must demonstrate that they have sufficient financial resources, technical competence, and experience to carry out the project within a timeframe and cost estimates. This is important to ensure that the most realistic and cost-efficient project is chosen. Developers will also have to submit information on reference projects, plans for financing and project plans. This criterion will be assessed by the Ministry, with assistance from the Norwegian Ocean Industry Authority and Gassnova SF.
3. Sustainability: This criterion will account for 10% of the overall assessment. This criterion aims to ensure the environmentally friendly development of the floating offshore wind farm. Therefore, the developers will be asked for a plan for coexistence and minimising impacts on climate and environment. NVE will be responsible for evaluating the applications against this criterion. NVE is the regulatory authority responsible for licensing energy projects, both offshore and on land. It therefore has extensive expertise in evaluating the environmental impact of energy facilities.
4. Innovation and technological development: As part of their applications, developers must describe how their project will promote innovation and technology development that result in reduced costs for future floating offshore wind projects (including estimates for LCOE) and the potential for dissemination. This criterion will account for 10% of the overall assessment. Enova will be tasked with assessing this criterion.
5. Positive ripple effect: 10% of the weight will be put on the possibility of contributing to build experience and developing expertise in the supply chains. The criterion does not include any location-specific requirements and aims to foster industrial development by enhancing experience and competence within the supply chains. The Ministry will assess this criterion.

Following award of area rights, each project must submit its project-specific impact assessment program for approval to NVE within 6 weeks. Thereafter the program will be sent on public consultation and subsequently, based on the comments received, the NVE will determine the project-specific impact assessment program which the developers will have to carry out in order to be able to submit the license application.

The Support Mechanism – Investment Support

Following completion of the project-specific impact assessments and submission of the license application under the Offshore Energy Act, the relevant consortium that have been awarded area rights will be eligible to compete in the auction for state support.

The auction will be based on aid per MW for a project of approximately 500 MW and the developers will be ranked based on their required aid amount in proportion to the stated capacity of the project, i.e. the competition for state support among the three consortiums will be a pure monetary price competition. The project with the lowest bid in aid/MW will win the competition for state support and will enter into the aid agreement with the Ministry. As of today it is uncertain whether the form of aid agreement will be available at the time of the competition for area rights.

First-price sealed bid auction

In contrast to the recent auction for the contract for difference for Sørlige Nordsjø II, where the auction was structured as an open auction with descending bids (i.e. an English auction), the auction for Utsira Nord will be a first-price, sealed bid auction, meaning that the bidders will only be able to submit one bid for support and the lowest bid wins thereby, incentivizing the bidders to submit their best and final offer right from the start.

The minimum size of the project

In the ESA decision, it is stated that the competition rules will have a pre-determined lowest and highest capacity threshold for potential project capacity whereby the maximum capacity will be set at 500 MW, and the minimum permitted capacity will be set “slightly below 500 MW”. The stated purpose is to allow the developers to optimize turbine sizes for their projects. In the consultation for the support scheme for Utsira Nord, it has been debated whether the 35 billion NOK budget allocation will be sufficient to attract enough interest from the market given the current costs in developing a 500 MW floating offshore wind project, especially when taking into account the support level comparable floating offshore wind projects benefits from. A solution that has been considered is to lower the project capacity while keeping the 35 billion NOK budget, however based on these statements this is not a viable option, as bids that fall outside of the stated capacity range will not be considered, and if no bids are received within the specified capacity range, the auction will have no winner and no aid will be awarded. It remains, however, to be seen what the exact range will be, i.e. how much less than 500 MW which will be permitted.

Support payment profile

The current available information does not indicate the payment profile of the support, however a point to note is that in the ESA decision it is stated that a substantial part of the total aid will only be paid after the project is completed indicating that the support will not commensurate entirely with the time of the project’s capital expenditures.

Clawback mechanism in the operations phase

Recently, the Ministry carried out a “mini-consultation” on the potential design of a clawback mechanism to ensure that the winning bidder is not overcompensated. As revealed in the ESA decision, it is now confirmed that a clawback mechanism will be implemented. The clawback mechanism will be linked to future electricity prices and take effect in the event of unexpectedly high electricity prices, and corresponding revenues, over a longer period.

In the ESA decision, it is stated that the clawback mechanism will be based on the following main parameters:

1. Income distribution: In the event of extraordinarily high electricity prices, and correspondingly high earnings for the beneficiary, there should be an income distribution between the State and the beneficiary. The distribution principle is set out under ‘Distribution key’ below.
2. Threshold price: The threshold price determines when a share of the income from electricity sales should accrue to the State. The Ministry will set this threshold in advance of the Auction. The threshold price is intended to reflect the level where the electricity prices have become extraordinarily high. The Ministry will use NVE’s latest high estimates when setting the threshold price and add 25%. The Norwegian authorities explain that the threshold price is meant to reflect extraordinarily high electricity prices, therefore 25% is added to NVE’s latest high estimate for NO2. According to the Norwegian authorities, adding 25% to NVEs high price estimate addresses the need to curb extraordinarily high electricity prices, while maintaining a balance between the potential upside and downside price risks for the beneficiary. The threshold price will also be adjusted for inflation.
3. Reference price: The reference price will be calculated as an annual production-weighted average. This will ensure that the calculation to a larger degree reflects actual income.
4. Distribution key: The distribution key will be 50/50, therefore 50% of the income above the threshold price will accrue to the State.
5. Calculation of payment: The income above the threshold price will be calculated annually by determining the difference between the threshold price and the reference price, and multiplying this with the volume sold to spot price. 50% of the income would then be paid from the developer to the State.
6. Duration: The clawback mechanism will apply for 15 years from the date of commissioning of the wind farm.

In the Ministry’s consultation on the clawback mechanism, several of the consortiums argued that the volumes sold under fixed price power purchase agreements to Norwegian industry should be carved-out from the clawback mechanism in order not to prejudice the commercial viability of entering into long term PPAs. Based on the statements in the ESA decision it appears that volumes sold under fixed price PPAs indeed will be carved out from the clawback basis and that the responses from the developers in this respect were adhered to. In light of the structure it can be expected that the winning consortiums will seek to enter into PPAs with offtakers before the auction on state support.

The further details will come in the competition rules that the Ministry is expected to publish within short.