The first round of the Danish auction without incentives, aiming to allocate three areas in the North Sea for the construction of offshore wind farms with a total capacity of at least 3 GW, received no bids. The deadline for submissions expired last week.

The second round of the auction, which will allocate an additional three coastal areas in Denmark with a capacity of 3 GW, has a deadline of April 1, 2025. The procedure for both rounds was launched in April 2024.

The Danish Ministry of Climate and Energy has asked the Danish Energy Agency to investigate why no bids were submitted.

The areas are allocated without state subsidies, and developers must pay a lease to the state for 30 years. Additionally, the state will own 20% of each project.

According to the industry association Green Power Denmark, the lack of interest is due to rising costs for wind turbines, materials, and interest rates. Denmark does not offer incentives, and investors face uncertainties regarding the prices at which the electricity production can be sold. Specifically, there is uncertainty about the use of electricity in hydrogen production.

Mikkel Kring, a partner at the consultancy Our New Energy (ONE), explains that the lack of interest is closely tied to characteristics of the Danish PPA market, currently being oversupplied combined with having limited demand growth, ultimately discouraging signing of long-term power purchase agreements (PPAs). Without PPAs or state incentives, investors are unwilling to risk building new facilities.

«We have advised several potential bidders over the past 18 months,» says Kring. «Our analysis shows that the Danish PPA market is and will continue to be oversupplied, which explains the limited interest.»

On the supply side, there are already many projects seeking PPA contracts, creating an oversupply. At the same time, several major Danish companies have already signed long-term agreements, leading to market saturation.

On the demand side, the electrification of Danish consumption is lagging, and the expected increase in energy demand from P2X projects, such as hydrogen production, is delayed by economic challenges and unclear political support. Furthermore, Denmark has few energy-intensive industries.

These factors create a gap between the prices buyers are willing to commit to in long-term agreements and the prices demanded by investors. Currently, PPA price bids are often below the costs of new facilities.

«The gap between LCOE (levelized cost of energy) and market prices means that PPA prices are in some cases lower than the actual construction costs,» explains Kring. He adds that ONE has developed a proprietary PPA pricing tool  to price PPAs, that shows prices are below the LCOE for offshore wind in Denmark, mainly attributed to rising interest rates and high capital expenditures.

The Danish energy system would struggle to absorb the production from the three new offshore wind farms, which could add approximately 12 TWh to the grid. To absorb all this production, additional demand is needed from industrial electrification, P2X projects, and hydrogen exports to Germany.

In 2023, Denmark produced 58% of its electricity from wind and 10% from solar, according to AIE. That same year, the country was a net importer of 10% of its demand.