Posted on January 23, 2023
Further demonstrating the strong demand emerging in the offshore wind energy sector for prime locations, the UK’s Crown Estate concluded agreements for leases on six new offshore wind sites as part of the country’s fourth round of leasing. The annual option fees set by the companies through the auction process stand to provide £1 billion ($1.24 billion) annually to the UK Treasury setting a new record following similar records in the U.S. from 2022’s auction for the leases in the New York Bight.
The Crown Estate, which manages all the UK’s offshore property, decided to launch the auction process in August 2022. Three of the six projects offered are located off North Wales, and the Cumbria and Lancashire coast, while the other three are located in the North Sea. The Crown Estate estimates the locations could provide a further 8 GW of power generation bringing the total rights awarded by The Crown Estate to 41GW of offshore generation capability.
The six agreements for leases were signed by some of the leaders in the industry. The projects are going to companies involving TotalEnergies, BP, RWE, Corio Generagion, EnBW, Cobra IS, and Flotation Energy. The Crown Estate will now establish a steering group for each of the protected sites, comprising government and statutory nature conservation bodies and the relevant project developers, which will drive the development of the detailed plans.
The process in the UK works differently than for example in the U.S. Under the Agreements for Lease, The Crown Estate receives an annual option fee from each project developer, until they are ready to enter into a lease for the seabed site. The option fee sum was determined by the project developers themselves through an open market process to ensure fair value for seabed rights was captured.
The total commitment across all six projects is approximately £1 billion per year, which is being called a major windfall for the U.K. exceeding expectations for the process. The Crown Estate responds that the seabed is a valuable national asset and through Round 4, significant value has been secured for the benefit of the nation. Longer term, these properties will play a critical role in providing renewable energy to an estimated seven million homes.
The term of the Agreement for Lease is for a maximum of ten years. Successful bidders have committed to at least three years of option payments by entering into the Agreement for Lease. The option payments reduce as a project moves into a lease or leases, and cease when a lease(s) for the maximum capacity/whole site is granted, at which point developers will move to paying rent.
The success of this round has created a public relations problem for the British Royal Family as the monies from the option fees will contribute toward The Crown Estate’s net revenue profit, 100 percent of which is paid to HM Treasury. A percentage of it, currently 25 percent, is used to fund the royal family. The BBC reports last year’s Sovereign Grant funded by The Crown Estate was £86.3 million.
King Charles issued a statement today acknowledging the success of the new round of leases while suggesting that the monies should be used for the “wider public good,” rather than the Royal Family. Buckingham Palace said in light of the “offshore energy windfall,” the King is calling for a reduction in the percentage, which is already under review, used to calculate the grant.