Denmark Announces An Offshore Wind Procurement Procedure That Could Solve Many Challenges Facing The Sector Globally

Denmark is embarking on an ambitious journey towards sustainable energy with the launch of its largest offshore wind tender to date. In a bold move, the government offers no subsidies to companies vying to erect turbines across six sites, boasting a staggering capacity of up to 10 gigawatts (GW). 

The initiative, spearheaded by the energy and climate ministry, will underscore Denmark's unwavering commitment to combating climate change and transitioning towards a greener future. Upon completion of the wind farms, which is slated for 2030, Denmark hopes to slash CO2 emissions by 70% from 1990 levels by the decade's end. 

The country, also home to Vestas and Orsted, globally leading renewable energy companies, has offered six strategically chosen sites to serve as the canvases for Denmark's renewable energy masterpiece. The sites will allow for the construction of at least 6 GW of offshore wind capacity. However, project winners will be granted the flexibility to install as many turbines as possible and the total capacity could surpass 10 GW.

Such a monumental surge in wind power production promises to meet Danish consumption needs and provide an opportunity to export surplus green energy to neighbouring nations or use it for hydrogen production, thus bolstering Denmark's position as a green energy powerhouse.

According to the ministry, the cost of building 1 GW of offshore wind will be approximately 16 billion Danish crowns ($2.3 billion). Denmark’s existing offshore capacity stands at 2.7 GW.

However, the most exciting aspect of this recent announcement is its departure from conventional practices that we have witnessed before in other offshore wind auctions. In Denmark’s case, participants in the tender must submit bids specifying the price they are willing to pay to the state over 30 years to secure the rights to establish and operate the wind farms. Furthermore, the state will retain a 20% stake in each tendered project. 

Last year alone, more than ten offshore wind projects were cancelled in the US and UK due to cost increases that made them financially infeasible. In the UK, for instance, the summer offshore wind auction failed as renewable energy companies deemed the government's offer unprofitable in the short and long term.

Denmark’s approach addresses some of the problems faced by other ownership models in the UK, for instance. By holding a 20% stake, the government shares in the financial risks and rewards of the project. Since offshore wind projects involve substantial upfront costs for construction, installation, and maintenance, maintaining a stake ensures that the government has a vested interest in the project’s success. If the project performs well, the government benefits financially.

An uncertain political and regulatory environment has been cited as a critical driver for offshore wind project cancellation. With the government owning a stake in the projects, it will be compelled to create a regulatory environment conducive to their success. Energy self-sufficiency is a matter of strategic interest for any country, especially as countries transition away from fossil fuels.

It will also ensure that the necessary infrastructure is available to connect the generated power to the national grid. Connection wait time for renewable energy companies has been a significant challenge. On average, it currently takes about four years from the initial application to the actual grid connection for renewable energy projects, with some sites in the UK in the waiting line for as long as 15 years. 

The 20% stake will also give the government a say in the project's decision-making and strategic control. This includes project design, environmental impact assessments, and operational guidelines. Strategic control ensures the government can align the project with national energy goals and policies. 

Strategic control is vital as there’s a growing interest in public ownership of offshore wind projects. Some entities advocate for publicly-owned generation companies to ensure that energy benefits remain within the country. For instance, payments to offshore wind generators owned by foreign state entities have raised discussions about the level of public ownership in the sector, and Denmark’s approach addresses this.

As Denmark looks forward to achieving its ambitious goal with this offshore wind procurement procedure, its approach has opened a new path that other countries, such as the UK, could emulate to achieve their renewable energy targets.