ScotWind rapid review

Historically, the offshore wind market has matured more slowly in Scotland compared to other parts of the UK. This has been due to a wide range of factors including environmental conditions, planning, and grid.

By the end of 2018, Scotland had around only 300MW of operational offshore wind against a UK total of over 8GW. Only one of the ten Scottish Territorial Waters leasing round sites had progressed to construction.

At that time, evidence stated that on average Scottish offshore wind farm sites cost more to develop and operate than sites in the rest of the UK. This makes them more challenging to progress. The majority of revenue for Crown Estate Scotland (passed to Scottish Government) would come from rent rather than options fees, and higher option fees would deter developers: CES should aim to maximise the number of projects and doing that required us to take into account the fact that Scottish sites are at a disadvantage to those elsewhere in the UK.

In 2020, we procured expert advice on pricing aspects, taking into account changes in the energy sector and in the policy / legislative framework such as the UK committing to a legally binding target of net zero emissions by 2050, reductions (in some cases of over 70%) in the strike price and the economic downturn associated with COVID-19.

This advice reiterated that the average Scottish site costs more than the average English site and that a cap is desirable to help ensure the design of the ScotWind leasing process does not result in Scottish projects being at a further disadvantage compared to English projects. If Scottish projects were disadvantaged, it would ultimately result in fewer projects, less revenue for Scottish Government, and less long-term benefits for Scotland.

Advice also cautioned against an open auction similar to the one undertaken by The Crown Estate in Round 4, stating that a price cap increases the chance of a successful project.

In June 2020, Crown Estate Scotland launched the ScotWind leasing round with option fees set at a maximum of £10,000/km2. Timescales included a close of registration in August 2020 with the deadline for applications dependant on the finalisation of Marine Scotland’s Sectoral Marine Plan for Offshore Wind Energy.

The launch offer document can be found here.

In early 2021, before the deadline for applications, the Rapid Review was undertaken to ensure the pricing structure reflected recent events in the UK offshore wind market. Specifically, it explored the implications of The Crown Estate’s R4 open auction results announced in February 2021.

The scope of the review, as agreed with Scottish Government, included investigating the likely implications of higher options fees, the Supply Chain Development Statement termination threshold, and strengthening change of control measures.

The review resulted in:

• The previous maximum fee increased from £10,000 per km2 to £100,000 per km2;
• The threshold of Supply Chain Development Statement commitments that applicants must meet to request a lease increased from 10% to 25%; and
• Further change of control provisions for resale of options to mitigate the risk of a secondary market in ScotWind lease options developing.

To ensure rigour and provide a robust evidence base, the review was informed by expert external advice on pricing from two different consultants - Aurora Energy Research Limited and JLL (Jones Lang LaSalle).

This report recommended increasing the maximum option fee ten-fold to £100k/km2. This should not disadvantage Scottish projects compared to English ones.

It noted that a balance must be struck between raising the price cap and supporting successful projects. The impact of options fees on overall financial viability is noted.

The report notes that increasing the cap may deter smaller developers and states that bidding at a higher cap increases the total project development cost, hence, decreases the project’s probability of success. However, it could also prevent options being sold on, effectively creating a secondary market (NB. this risk was addressed by introducing further control provisions on the resale of options, ensuring a proportionate share of the resale would be returned to CES.).

More on the implications of increasing the cap is on p12 of the report.

The Aurora report is here.

JLL were commissioned to test the findings of the 2021 Aurora Report.

JLL noted that there is no set methodology for setting option fees, and that little weight can be applied to the evidence (from the results of) The Crown Estate’s R4. It did state however that the increased cost of developing in Scottish waters compared to English, means that ScotWind option fee bids are likely to be lower than for R4.

JLL stated that proceeding without a cap may lead to Special Purchasers paying high fees, but that higher option fees may not align with prudent bidder behaviour.

The JLL report is here.

By March 2021, we had considered a range of approaches which varied from retaining what was then the maximum price level (£10,000/km2) to open market bidding.

Factors considered when examining approaches included income generated, public acceptability, investor confidence, longer term prospects for offshore wind, delivery on net zero targets, risk including legal risk, and impact on supply chain development.

Taking these factors into account alongside our statutory duties to deliver wider benefits and ensure market value, our Board’s preferred approach was to increase the maximum option fee tenfold to £100k/km2, increase the threshold of Supply Chain Development Statement commitments that applicants must meet to request a lease, and increase developer payments to Crown Estate Scotland if any option agreements are sold to third parties.

Given the significance of the Rapid Review and in keeping with our Framework Document, we shared our preferred approach with Scottish Ministers.

The final ScotWind Leasing offer document, published April 2021, can be found here.