Oil majors join scramble for offshore wind rights in England and Wales

Major oil companies have bid “staggering” prices to secure rights to build offshore wind farms around England and Wales in an auction that could deliver up to £8.8bn over 10 years to the Queen and the UK Treasury.

Consortiums involving BP and Total secured half of the six projects on offer in the first auction in a decade of seabed rights for six new offshore wind farms, which together will provide just under 8 gigawatts of new capacity — enough to power more than 7m homes.

The auction run by the Crown Estate, which manages the seabeds around England, Wales and Northern Ireland on behalf of the UK monarch, surpassed already high analyst expectations as oil majors bid record prices to help meet commitments to increase spending on clean energy.

The auction attracted other new entrants to the UK offshore wind market — the biggest in the world — squeezing out most traditional offshore wind developers.

“This shows there’s real eagerness from the oil majors coming into this market,” said a director of one unsuccessful offshore wind developer.

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European oil majors have been under pressure from environmentalists and investors to help curb global warming, pushing them to back low-carbon power generation. 

For BP, the move will mark its first foray into the UK offshore wind industry although it last year agreed to buy a 50 per cent stake in two US projects from Norway’s Equinor for $1.1bn. Analysts at Jefferies said BP would now leapfrog Royal Dutch Shell to become the second-largest player among the oil majors in offshore wind. Total made its first significant move into offshore wind last year, acquiring a majority stake in an existing UK project.

The highest auction bidder was a consortium of BP and EnBW. It won the rights for two 1.5GW projects, promising to pay the Crown Estate an “option fee” of £231m a year for each scheme, 65 per cent higher than the next highest bidder and resulting in an annual outlay of more than £460m between the two companies for both leases.

Option fees, which did not exist in the last rights auction in 2010, are payable to the Crown Estate for three to 10 years when they are replaced by a “rent” of 2 per cent of a wind farm’s turnover.

The combined option fees bid for the six projects being auctioned are worth almost £8.8bn over 10 years to the Crown Estate, whose profits are handed to the Treasury. However, BP said it would only have to make annual fee payments for four years before making a final investment decision to go ahead with the schemes, off the northern Welsh coast and the coast of Barrow-in-Furness, Cumbria.

A quarter of Crown Estate’s profits return to the royal household as part of its “sovereign grant”, helping to fund the Queen’s official duties and maintenance of royal palaces, with the remainder going to the Treasury.

Analysts have questioned how bidders will make money given the large cost of constructing offshore wind farms. “I am deeply sceptical,” said one analyst, describing the prices as “staggering”.

Alon Carmel, a senior director at FTI Consulting, who advises offshore wind bidders, said the bids marked a “seismic shift” for the industry with the highest price at least 15 times what developers bid in the most recent comparable auction in the US in 2018.

Analysts at Barclays said the “huge step up” in upfront costs would “put up barriers” for utilities and smaller oil and gas companies wanting to diversify into offshore wind. A utility director said it was likely to force traditional players such as Iberdrola, Orsted and SSE to focus on other offshore wind markets.

“For BP in particular this looks like a very expensive ticket for admission into the offshore-wind game,” said Mark Lewis, chief sustainability strategist at BNP Paribas Asset Management.

“When new players enter the market who have to start winning big projects then the offshore wind sector could move rapidly from one of healthy competition to one that quickly becomes much less attractive. Investors will be watching closely to see if this is a one-off or the start of a trend for much more aggressive bidding from new entrants.”

Among the other successful bidders were Macquarie’s Green Investment Group, which formed a partnership with Total for the auction; German utility RWE; and a joint venture between the UK’s Flotation Energy and Spain’s Cobra Instalaciones y Servicios.