Danes Hammer Out Hesselø Subsidy Scheme

The Danish government and the parties to the Climate Agreement have agreed on a subsidy scheme for the Hesselø offshore wind farm.

To a large extent, the subsidy scheme for Hesselø is similar to the subsidy scheme decided for the Thor offshore wind farm which was based on the recommendations from The Danish Council on Climate Change.

The scheme includes a 20-year period of risk sharing between the Danish State and the concession owner in accordance with the so-called two-way Contract-for-Difference (CfD) model.

The CfD-model gives the concession owner certainty for the investment in the long run, but places more short-term risk by exposing the concession owner to market signals, the Danish Energy Agency said.

The price premium will be calculated as the difference between the offered bid price and a reference price, which consists of the average electricity prices in the previous calendar year. The concession owner receives a premium in years in which the offered bid price is higher than the reference price, but correspondingly pays the Danish State in years in which the reference price is higher than the offered bid price.

The subsidy scheme provides automatic acceptance of the offered bid price given that the prequalified tenderers do not cross the threshold for net-zero subsidies when submitting final tenders by the end of 2022.

If the bid with the lowest offered price in “øre” per kWh amounts to the total subsidy costs over the 20-year period, which are equal to or below the budget evaluation threshold of net-zero, the award is guaranteed without any further approvals. If this is not the case, the parties to the Climate Agreement must decide whether to accept the bid and locate the required subsidy funds or whether to reject the bid.

When evaluating whether the bid will lead to subsidies that are within the net-zero subsidy threshold, the Danish Energy Agency uses its electricity price forecast. However, when the concession is awarded, the actual amount of subsidies to be paid by the Danish State to the concession owner is DKK 5 billion in 2018 prices. In that case, if electricity prices develop significantly lower than expected, the concessionaire still has insurance for their income from the Danish State. This cap on the subsidy payment made by the Danish state is counteracted by a cap of DKK 2.8 billion (2018 prices) on the payment made by the concession owner to the Danish State in the two-way CfD. Both caps are net caps over the 20-year subsidy period.

Thus, the Danish state and the concession owner will share the long-term risk of market prices deviating from the forecasts.

Another feature in the subsidy scheme makes the cost related to renewable energy more transparent since the indirect support, granted as a separate premium as compensation for the feed-in tariff, will not be granted for Hesselø, the agency said.

The feed-in tariff is a tariff paid by the consession owner for the electricity delivered to the transmission grid. Previously tendered offshore wind farms are compensated for this expense through a premium separated from the subsidy scheme. However, for Hesselø, the concession owner will have to take into account the expenses for feed-in tariffs in the bid.

Hesselø is the second offshore wind farm from the Energy Agreement from 2018, the first one being Thor. With the Climate Agreement from 2020, it was decided to advance the tender and construction of the wind farm.

In the autumn of 2021, the Danish Energy Agency will publish the preliminary tender conditions. Applications for pre-qualification to the tender will open at the same time.

The tender will be concluded at the end of 2022, and the wind farm is scheduled to be fully commissioned by the end of 2027, the same time as Thor.

Hesselø will be located north of Zealand in Kattegat. The wind farm will have an installed capacity of between 800 MW and 1,200 MW. A maximum of 1,000 MW can be delivered to the transmission grid through a point of connection in Hovegård, around 50 kilometres from the shore.

The wind farm owner can make use of the extra 200 MW for “overplanting” to optimize the design of the wind farm and cables. The Danish Energy Agency are investigating the feasibility that all or part of the electricity can be used in Power-to-X or battery assets. The agency expects to have a clarification of this at the end of 2021.