Authorities in Denmark are to use a contract for difference – of the type used successfully in the UK – for the country’s next large offshore wind project
Wind Denmark has confirmed that Thor, Denmark’s next large-scale offshore wind project, will be awarded after a UK-style contract for difference (CfD) auction
“The chosen model means that the Danish wind resource can be harvested in a cheap and competitive way,” said Wind Denmark.
The CfD or, in Danish ‘difference contract,’ was selected by the parties behind the country’s energy agreement. A similar model has been used in Denmark before, but the model for Thor more closely approaches that used in the UK.
Wind Denmark chief executive Jan Hylleberg said the new form of tender would build on the Danish model for offshore wind, which has historically ensured high levels of investor security, low financing costs and a high level of competition.
Under the CfD model, the lowest price wins and, if the market price of electricity is below the bid price, the state meets the difference, whereas if the market price is above the bid price, the owner of the windfarm makes a payment to the state.
The difference is calculated based on the difference between the bid price and a reference price, which is the annual average spot price.
The result is that the owners of windfarms are able to hedge against large fluctuations in revenue which, in turn, reduces financing costs. In turn, the state secures a revenue opportunity if the market price exceeds the bid price.
“Politicians should be commended for listening to the sector’s arguments and prioritizing a model that provides healthy competition and the cheapest electricity from Thor, which will be Denmark’s largest offshore windfarm when it enters into operation around 2025,” Mr Hylleberg said.
In total, the Danish state has allocated US$3.7Bn for the difference contract for Thor.
Thor will also differ from previous offshore windfarms in Denmark in as much as the network connection will also be included in the bid price and the developer will therefore build the windfarm as per previous contracts and the grid connection and transformer substation.