For Portugal's offshore wind auction to succeed, price will be key, local companies say

Offshore wind farms are expected to become one of the pillars of renewable energy generation, not only in Europe. However, experience from several recent auctions shows that rising construction costs are having a very strong negative impact on these energy sources. Representatives of Portuguese energy companies say the government will have to offer a sufficiently high price in the auction to avoid a possible failure.

Portugal is preparing to launch its first-ever auctions to support offshore wind farms this year. The auction will also make room for floating wind technology. Although floating turbines are more expensive than conventional ones, they can harness the potential of areas where the sea is too deep for conventional turbines fixed to the seabed.

According to comments made this summer by the country’s energy minister, Duarte Cordeiro, the capacity on offer could range from 2 to 3.5 GW. As recently as May, the government was talking about 1 GW. So far, however, no further details of the auction have been made public, particularly its pricing terms.

The disappointing results of recent auctions in the United Kingdom and the United States show that current auction price caps do not reflect the significant increase in the cost of building these energy sources, driven in part by rising material prices.

“We are not ignoring what is happening in other countries. We always have to be careful when discussing these issues, because we are talking about companies that may or may not submit bids in the auction,” Minister Cordeiro told Reuters.

At a recent conference in Lisbon, Minister Cordeiro said a working group was currently examining an auction mechanism that would include a guaranteed price for producers to ensure the auction’s success.

Disappointing experience abroad

The Portuguese government now faces a difficult task: setting auction terms that are attractive enough to investors while keeping prices within reasonable limits to maintain broad public support. In recent months, the public has had to contend with rising electricity and natural gas prices.

The government can learn from the results of the latest offshore wind auction in the United Kingdom, which attracted no projects. The reason was that the maximum price developers could bid was too low. Experts warned the British government in August that the auction could fail, but the terms remained unchanged and not a single bid was submitted.

The first auction for offshore wind development in the Gulf of Mexico also had a disappointing outcome, with developers having to pay for the sites they bid for. In this case, only one of the three sites on offer was awarded.

“The UK auction received no bids because the guaranteed price was very low,” said Miguel Stilwell, commenting on the disappointing results. According to Reuters, Galp CEO Filipe Silva shares this view.

“If the Portuguese government wants an auction with several participants, it will have to guarantee a higher price than the one we have in the market today,” Silva said.