BP blows away bid rivals with big bet on wind farms

·6-min read

BP is putting its money where its mouth is.

The oil and gas major has been widely derided since, a year ago this week, it announced it was seeking to go net zero by 2050.

Shareholders have been sceptical that BP can achieve the same financial returns from renewable investments as it can from its traditional activities.

Meanwhile some environmental campaigners have also been sceptical about BP's sincerity, even when it made clear later last year that its new priorities will even see it leaving some oil in the ground that would otherwise have been extracted.

BP's seriousness about hitting this target was underlined today when it bid by far the most for the right to add to the UK's offshore wind capacity.

In the first auction of offshore wind licences to be carried out by the Crown Estate since 2010, BP and its German partner, Energie Baden-Wuerttemberg (EnBW), agreed to pay £924m for the option to develop two sites in the Irish Sea around 30km off the coast of North West England and Wales.

It will be BP's first move into the UK offshore wind sector and comes after it struck a deal late last year with Equinor, the Norwegian energy giant previously known as Statoil, to develop offshore wind projects in the United States.

BP said the auction represented further progress towards it rapidly building a "world-class wind energy business".

It said the two leases offered a combined potential generating capacity of three gigawatts, the maximum award possible under the rules of the round, with the leases running for 60 years.

Once operational, the generating capacity would be sufficient to power more than 3.4 million UK households with clean electricity, the company added.

Bernard Looney, BP's chief executive, said: "Success in this round marks BP's entry into one of the world's best offshore wind markets.

"This is both important progress towards BP's transformation into an integrated energy company as well as a significant next step in our long history in the UK.

"These projects - in which we are teaming up with an experienced partner EnBW - are absolutely in line with our determination to invest with discipline into only the very best opportunities.

"We are fully confident that these highly advantaged resources will deliver - at a minimum - the 8-10% returns we demand of our renewables investments.

"Offshore wind is integral to delivering the UK's green industrial revolution.

"Building on the UK's strengths, the government's 10-point plan aims to produce enough offshore wind to power every UK home, quadrupling output to 40GW by 2030 - and BP is delighted to play a part in this."

What is particularly striking about BP's winning bid in this auction is just how much it and its joint venture partner are paying.

BP and EnBW will pay £231m for each of the leases every year until 2025 - when they will take a final investment decision.

Yet the sums that they have agreed are way in excess of the other winning bids in the auction.

BP and EnBW are paying £154,000 per megawatt per year for the leases.

That compares with a payment of £93,233 which will be paid by another winning bidder, Offshore Wind Limited, which is a joint venture between the Spanish energy services company Cobra Instalaciones y Servicios and the British offshore windfarm operator Flotation Energy.

It is also more than the £83,049 being paid by Green Investment Group, a joint venture between the French oil major Total and Macquarie, the Australian investment bank, for an option to develop a site in the southern North Sea, off the coast of Lincolnshire.

The price also tops by some distance what the German energy generating giant RWE, the previous owner of household energy supplier Npower, is paying for its two leases - £88,900 and £76,203 - for options to develop sites in the Dogger Bank off the north Yorkshire coastline.

The knockout bids from BP and its partner underline their seriousness about becoming major players in UK offshore wind.

However, the price they are paying will also rekindle investor concerns about BP's ability to replicate the returns it achieves in hydrocarbons from its activities in renewables.

An un-named executive at another established offshore wind operator told The Times that the price BP and its partner were paying was "ridiculous" and raised doubts that the 8-10% return on the investment promised by Mr Looney was achievable.

The executive told The Times: "They will be lucky if they can even make 2%."

Adding to the sense that BP has paid top-dollar for the assets, a source at Royal Dutch Shell - an unsuccessful bidder in the auction - told Reuters that its offer had been "nowhere close" to the sums being paid by BP and its partner.

Another participant told the news agency that BP appeared to have "radically higher" expectations on the rate of return on the investment.

In total, the Crown Estate will receive just under £879m a year for the next four years for the leases, a total of £3.515bn.

The sums being raised have attracted criticism for the Crown Estate for not having made more leases available.

Melanie Onn, deputy chief executive of the industry body RenewableUK said: "The result of this leasing round shows that while demand for new offshore wind projects has never been higher, too few sites were made available to meet this demand.

"Any auction run on that basis will inevitably lead to high fees like these, and our concern is that this could ultimately mean higher costs for developers and consumers.

"Going forward we need more clarity from the Crown Estate on the timing, size and speed of future leasing rounds.

"Sustainable competition and prices are vital for consumers, industry and the supply chain".

The sums that the successful bidders have agreed to pay today are merely 'option fees' paid annually until the companies involved make a final investment decision - which could be up to 10 years away.

During the last leasing round, in 2010, the Crown Estate charged fixed option fees rather than auctioning them.

RenewableUK said the option fees represented a "very significant sum" for developers.

It said developing and constructing a 1 gigawatt offshore wind farm currently required investment of £2.5bn.

The sums raised may also spark a debate over how the proceeds are spent.

Surplus revenues - in other words profits - from the Crown Estate are paid to the Treasury each year and, under the 2011 Sovereign Grant Act, a set proportion of that sum (currently 25%) is made available in a grant to support The Queen in her role as Head of State, maintain the Royal Palaces and cover the cost of travel to carry out royal engagements.

Some 40 years ago, Britain chose not to turn the windfall it received from North Sea oil revenues into a sovereign wealth fund as Norway did.

The growth enjoyed by that wealth fund means Norway can afford to pay some of the most generous benefits in the world to retirees.

So some politicians would like to see this windfall similarly banked and invested for the future.