Written on the wind: Investment opportunities in French offshore wind projects
On 16 December 2016, the Ministry of the Environment, Energy and the Sea (Ministère de l’Environnement, de l’Énergie et de la Mer) (the Ministry) launched a tender for the construction and operation of 250-700 MW of offshore wind capacity off the coast of Dunkirk1 in northern France (the “Dunkirk Tender”). The Dunkirk Tender had already been announced in April 2016.2 A tender for a further offshore wind farm off the coast of Oleron island (near La Rochelle) was announced by the Ministry in November 2016 (the Oleron Tender)3 and is forecast for the first quarter of 2017.4
The decree setting out the competitive dialogue procedure that will apply to the implementation of the Dunkirk and Oleron Tenders (the New Offshore Tenders) was passed in August 2016 (the New Tender Decree).5
Drawing on lessons learned from the first two offshore wind tenders of 2011 and 2013, the Government has decided to structure the third offshore wind tender differently from the earlier offshore wind tenders and has also designed a more flexible and co-operative tender procedure through the New Tender Decree.
It is not intended that the New Offshore Tenders trigger an immediate wave of new offshore projects in France; the Government will first want to test the new procedure and also evaluate the projects awarded in the first tenders, which are expected to come on stream between 2020 and 2022. However, 6,000 MW of additional offshore wind capacity is already planned for development by 2023 – the New Offshore Tenders therefore create an excellent opportunity for international developers and operators to enter and position themselves in the French offshore wind market, which is still largely underdeveloped and presents a significant pipeline of future projects.
The offshore wind tenders of 2011 and 2013
When the installed generation capacity of a given source of energy is insufficient to achieve the country’s set objectives in terms of the energy mix, the Energy Code (Code de l’énergie) allows the Government to organise tenders for the development of the missing capacity. The Government has made use of that mechanism for offshore wind energy capacity on three occasions. A first tender was organised in 2005 but the winning project was never completed. A second and a third tender were launched in 2011 (see Figure 1) and 2013 (see Figure 2) respectively, resulting in the award in 2012 and 2014 of six fixed offshore wind farm projects, with an aggregate capacity of 2,900 MW, geographically spread across six sites on the Atlantic coast, to three separate consortia.
As illustrated in figures 1 and 2, and as had been made clear from the outset by the Government, a key objective of the tenders was to foster the development of a national offshore wind industry on French territory. This is evident from the weighting of the selection criteria used in the tender procedures (which were substantially similar in both rounds):
- Price - 40 per cent
- Quality/robustness of the project (qualitè du project industriel), ·i.e. the industrial and economic framework of the project, including the project company’s links with local industry and its technical expertise – 40 per cent
- Environmental characteristics and compatibility with existing usage of the sea at the site (e.g. fishery industry, yachting) - 20 per cent
The Government was seeking a strong long-term commitment from the winning bidders to establish dedicated manufacturing and maintenance facilities close to the offshore wind farms, to use local port facilities and to create local jobs. In that context, national energy champions EDF and Engie, each in its respective consortium with solid and experienced developers, were in a position to win five out of the six projects awarded in 2012 and 2014.
The commitments of the winning bidders in the first two rounds of tenders included significant levels of investment – approximately EUR 11 billion for the six projects – and the creation of 10,000 jobs in aggregate, a significant part of which are located in the coastal regions concerned (Pays-de-la-Loire, Bretagne, Basse-Normandie et Haute-Normandie).
The price payable under the power purchase agreements awarded to the winning bidders in the tenders ranges from EUR 180 per MWh to EUR 200 per MWh. This is significantly higher than the price of offshore wind electricity produced in countries with more mature offshore wind industries, such as Denmark, with prices in the EUR 130-145 per MWh range (not even taking into account the outcome of the most recent tenders, which have achieved significantly lower prices); the United Kingdom, with an average price of EUR 168 for offshore wind farm projects developed in recent years;6 or Germany, where the two rounds of tenders planned for 2017/2018 will set a price ceiling of EUR 120 per MWh. The Ministry now expects prices in the Offshore Tenders to be below EUR 150.
Figure 1: July 2011 tender - awarded 6 April 2012
Figure 2: March 2013 tender - awarded 6 April 2014
The New Offshore Tenders
For the New Offshore Tenders, the Government has changed its approach substantially.
With the creation of a national offshore wind industry base having already been secured in the earlier rounds, the Government has changed its priorities.7 The central theme of the New Offshore Tenders will be to achieve a substantially lower tariff for offshore electricity by:
- limiting technical uncertainties;
- providing more flexibility for bidders to determine their technical solutions; and
- optimising the risk allocation.
Contrary to what had originally been announced by the Government, the pre-qualification document (document de consultation) does not provide that the right to occupy the public maritime domain (concession d’occupation du domaine public maritime) will be issued upon award. This would have been a significant step forward towards the acceleration and streamlining of the permitting process.
The tender will no longer be based on the feed-in tariff (FIT) system (obligation d’achat) that applied to the first tenders but on the new contract for difference system (complement de rémunération), which is now replacing the former FIT system.
The new rules applicable to the tendering of offshore wind projects are now aimed at fostering competition by attracting a wider range of bidders, with bidding and pricing strategies that will be very different from those imposed by the rigid tender terms applied in the first two rounds.
Competitive dialogue
In the first two offshore tenders, bidders were required to submit a proposal based on the terms of reference issued by the energy regulator (Commission de régulation de l’énergie (CRE)), with only very limited information on the sites of the maritime zones in which the wind farms were intended to be constructed and operated. While certain bidders had already carried out maritime surveys and feasibility studies, those who had not done so, whether for time or cost reasons, were at a disadvantage and some even dissuaded from participating in the tender. In any event, the timing of the tenders did not allow bidders to carry out sufficient studies to fully assess all of the risks of the relevant zones. This resulted in bidders factoring a substantial risk premium into the price offered in their bids.
The new competitive dialogue procedure (dialogue concurrentiel) introduced by the New Tender Decree will allow for detailed discussions between the Ministry and the bidders on project risks and risk allocation before bidders submit their binding bids. The “dialogue” will be based on on-site maritime surveys and other technical, meteorological and environmental feasibility studies commissioned by the Ministry and disclosed to all bidders. Bidders will also have the option to carry out their own studies.
The aim of the procedure is to allow bidders to gain a better understanding of the actual environmental and technical risks of the project in the preparation of their bids, while allowing the Government to progressively develop final terms of reference (cahier des charges) tailored to the particulars of the project on the basis of the outcomes of the dialogue. Unlike in the earlier rounds, bidders will now be in a position to submit better informed bids on the basis of detailed and specific terms of reference.
It is therefore expected that the competitive dialogue procedure will allow bidders to reduce their tender and pre-development costs, attract more bidders as a result, and, ultimately, lead to competitive pricing, thereby pushing down the price of offshore wind electricity.
Procedure
In summary, the competitive dialogue procedure has three stages8:
- A pre-qualification stage, based on the terms of a pre-quaification document (document de consultation) setting out the key terms of the tender: the purpose of the competitive dialogue; the provisional timetable for the tender; the technical and financial qualifications required for candidates to be eligible as bidders; and the criteria for the selection of the best final offer.
- A competitive dialogue stage organised by the Ministry, in which the Ministry and pre-qualified bidders exchange information and views about the request for proposals, including the timetable and the draft terms of reference (cahier des charges). The purpose of the dialogue is to adjust and refine the terms of reference on the basis of which bidders will formulate their binding offers.
- The offer stage in which bidders submit their offers. The bids are examined by the CRE, which makes a recommendation to the Ministry. The winning bidder is declared by the Ministry (after consultation with the CRE if it decides to deviate from the recommendation of the CRE).
The winning bidder will then sign a contract for difference (contrat de complément de rémunération) with EDF in accordance with the terms and conditions of the tender and the terms of its bid.
Selection criteria
Pursuant to the Energy Code, the key criterion for the evaluation of bids is price.9
This criterion may, however, be complemented by other criteria (critères complémentaires), such as the “quality” of the bid (i.e. its technical and/or financial robustness), the project return, or the security of supply guaranteed by the project.
The pre-qualification document for the Dunkirk Tender sets out the following criteria, in order of importance:
- Price
- "zone optimisation" (optimisation de l'occupation de la zone), taking into account specific constraints in the area (Dunkerque semaphore, Gravelines nuclear site) and compatibility with other usage (fishery industry, commercial shipping traffic, leisure activities); and
- management of environmental issues, taking into account the biodiversity of the two Natura 2000 protected sites within the area, as well as the impact of the project on the landscape.
It has not yet been determined precisely how these three criteria will be weighted. In any event, the price criterion will remain paramount. No “offshore wind industrial base development” criterion is explicitly mentioned in the Energy Code, nor in any announcement of the Government. This is confirmed by the terms of the pre-qualification document for the Dunkirk Tender, which no longer makes any explicit reference to the “quality and robustness of the industrial project” (qualité du projet industriel), which was a key selection criterion in previous tenders. While that criterion is no longer present in the New Offshore Tenders, the manner in which bidders will potentially use the industrial base developed for the construction and operation of the projects awarded in the first two rounds, and thereby contribute to their long term viability, is likely to play a role in the evaluation of bids.
Current status and prospects
The pre-qualification document for the Dunkirk Tender required candidates to submit three documents in order to apply for the pre-qualification stage:
- a letter of application (letter de candidature) describing the basic features of the candidate (e.g. legal form, ownership structure, capitalisation, etc.);
- a 15 page note (note dètaillèe) allowing the assessment of the candidate's financial standing and creditworthiness. The note is to contain the candidate's references in relation to energy projects requiring investments in excess of EUR 500 million. The note is also required to contain information on the borrowing ability of the candidate; and
- A detailed 20-page note describing the candidate's technical capacity and abilities in order to assess its ability to build, operate and maintain a project similar to the project being tendered. This note is required to specifically described the candidate's offshore wind farm experience and track record.
The closing date for pre-qualification applications was 28 February 2017. An Engie/EDPR consortium and ED FEN have submitted bids, and Vattenfall has also been reported to be a bidder.
The names of the candidates selected to participate in the competitive dialogue are to be announced at the end of a one-month review process by CRE so that the competitive dialogue stage can begin in April 2017. The pre-qualification document indicates that the duration of the competitive dialogue is expected to be four to six months.
Representatives of the wind industry have voiced disappointment at the limited capacity to be awarded in the third round (Dunkirk Tender). However, the rapid launch of the Oleron Tender must be seen as a positive sign of the Government’s commitment to comply in the short to medium-term with its multi-annual plan for energy,10 which expressly contemplates the development of up to 6,000 MW of offshore wind capacity by 2023. The launch of further projects will, however, very much depend on the ability of energy companies to substantially cut the cost of offshore wind farm projects and deliver lower, more competitive tariffs. The Government has also confirmed that in the meantime it will continue the process of identifying appropriate maritime zones for the development of further offshore wind farms.
Notes
1. http://www.cre.fr/documents/appels-d-offres/dialogue-concurrentiel-n-1-2016-portant-sur-des-installations-eoliennes-de-production-d-electricite-en-mer-dans-une-zone-au-large-de-dunkerque
2. Press release issued by the Ministry of the environment, energy and the sea (Ministère de l’Environnement, de l’Énergie et de la Mer) on 3 April 2016
3. Press release issued by the Ministry of the environment, energy and the sea (Ministère de l’Environnement, de l’Énergie et de la Mer) on 23 November 20164. Source: Les Echos 28 November 2016, “La France veut abaisser les coûts de l’éolien en mer” http://www.lesechos.fr/industrie-services/energie-environnement/0211539579336-la-france-veut-abaisser-les-couts-de-leolien-en-mer-2046266.php
5. Décret n°2016-1129 du 17 août 2016 relatif à la procédure de dialogue concurrentiel pour les installations de procédure d’électricité, amending and completing the Energy Code (Code de l’énergie). We note that while the tender procedure is not applicable only to offshore wind farm tenders, it was designed specifically with the Dunkirk Tender in mind.
6. Source: Financial Times, 5 June 2016 - https://www.ft.com/content/c0b56810-29b9-11e6-8b18-91555f2f4fde
7. This mirrors the approach taken in the UK, where the Government has taken steps to implement its policy that it will only support offshore wind if its cost is reduced. Under the new UK Contracts for Difference regime, in the first competitive allocation round, the two offshore wind farm projects that were successful received support at £114.39 and £119.89 per MWh (so-called strike prices). For the second allocation round, announced recently, the strike price has been capped at between £100 and £105 and it expected that the actual prices awarded as a result of the auction may be lower. The UK Government has said that the expected price reductions will continue to be accelerated, with projects needing to aim to be viable at a strike price support rate of £85/MWh by 2026.
8. Article R.311-25-1 et seq of the Energy Code
9. Article L311-10-1 of the Energy Code
10. As approved by Decree no. 2016-1442 of 27 October 2016 on the multi-annual plan for energy.
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