Strategic shift paved way for Vattenfall’s record-breaking deal
In September, Swedish state-owned utility Vattenfall won contracts to build two offshore wind farms totalling 350MW in Danish waters, at a levelised cost of energy of €64/MWh.
It was a record low price until last week, when it was beaten by a familiar company: itself.
Vattenfall has now won the tender to build the 600MW Kriegers Flak project in the waters off Denmark at €49.90/MWh, which is the lowest levelised cost of energy for an offshore wind farm achieved so far. In comparison, Dong Energy’s €72.70/MWh at the 700MW Borssele 1 and 2 schemes, which was announced in July, almost looks pedestrian.
How Vattenfall has been able to score two records in such a short time?
Well, at Kriegers Flak, all transmission costs are set to be covered by Danish grid operator Energinet.dk. This contributes to cost cuts for Vattenfall. However, Dong’s €72.70/MWh at Borssele also discounts transmission costs, so it is a fair comparison.
In our view, this new record owes more to the utility’s strategy over the last three years.
Vattenfall has been focusing more on its wind investments since it started a wider review of its business strategy in 2014, to shift from conventional power to low-emission power sources. It has chosen wind energy as leading resource to drive this shift and, in January 2015, it created a separated division to focus only on the sector. This focus on wind has bolstered Vattenfall’s ability to win tenders. Now it has to deliver the projects.
Overall, falling prices are good news for consumers and the long-term health of the industry. They allow wind to become a cheaper source of energy and, hence, to become more competitive compared to other sources, and attract more investment.
However, ever-cheaper auction prices also squeeze profit margins. The risk is that prices could go so low that they make it more difficult for winning bidders to bring their projects to completion. Vattenfall is betting that ongoing advances in technology and favourable financing conditions, due to record low interest rates, will help to mitigate that risk by the time Kriegers Flak completes in 2021.
And we think it is right to be positive. We have seen in the last few years that cost-cutting in offshore wind happens much faster than we think. If this continues then Vattenfall will be well-placed to benefit.