New York Bight lease auction – a bittersweet outcome

Wow! USD 4.37 billion bid for the New York Bight. Who saw that coming? Ever since the last BOEM offshore wind lease auction in 2018 those of us watching this space have traded opinions on the bids we would see in the Bight. It became the standard exchange over beers at every offshore wind conference since. “Will we see USD 300 million bid?”, “USD 500 million would be crazy, but we might see it”. Well, the high bid turned out to be USD 1.1 billion! We saw five bidders each commit more than USD 500 million for lease blocks. So what do we make of all this?

Firstly, this is hugely positive news for the US offshore wind industry. We may once and for all stop talking about whether the industry is really going to take off. Oh, it’s off alright. The winning bidders include the who’s who of pedigreed offshore wind sponsors – including EDF, Shell, CIP, EDPR, Engie, RWE and Total. These are veterans of offshore wind who clearly see the US market as a sound investment. We also saw several newcomers bring sizeable checkbooks and mount competitive bids. This is good to see. Hopefully we will see the same depth and diversity of bidders in the upcoming auctions for North Carolina and California later this year.

As we watched the live bidding unfold over three days, we couldn’t help but wonder as the bidding moved into the afternoon of the second day and bids roared past USD 500 million, if this wasn’t just crazy. Had these guys all lost their minds? By the end of the second day we still had twelve active bidders with the top lease block bid sitting at USD 900 million. No, it actually was not crazy. These were rational, sophisticated companies acting according to plan. Many of them had been strategizing, refining competitor analyses and running mock “Bight auctions” for months. The winners had carefully prepared. They were also well aware of the last auction results – not the 2018 Massachusetts auction, the 2021 UK Round 4 auction. The winning bids on a price per MW basis are generally higher than the winning bids for UK Round 4, but not wildly so. The market dynamics in the US logically drove higher bids. This brings us to the downside of these auction results.

At the end of the day, the US federal treasury picked up USD 4.37 billion. Where does that come from? The very rational and sophisticated bidders of course. And why would a rational and sophisticated bidder agree to make those payments? Because they reasonably expect to make it all back selling the electricity from those wind farms. So, ultimately it will be the rate payers whose utilities buy that power who will pay the USD 4.37 billion (plus a reasonable return of course). Hmm.

The New York Bight auction was a tremendous success and validation of the US offshore wind industry. Does the federal government need to make billions of dollars from these leases? No. Should rate payers pay billions of dollars more in their electricity bills to help sponsors recover the cost of these leases? No. Are billion dollar leases ultimately a good thing to support further growth of the US offshore wind industry? No.

There are several approaches to protect rate payers while allowing bidders to continue behaving rationally. Massachusetts offers one example. In each future offtake RfP, the state requires bidders to bid less than the price paid in the prior RfP. This simple approach captures – for the benefit of the state’s ratepayers – what should be the natural cost decline as the offshore wind industry matures. The result will be to force future lease auction bidders to factor this dynamic into their bid models rather than assume the offtake market will bear whatever is needed to recover their lease bid cost.

Onward to North Carolina!