Miriam Noonan’s Thoughts on Seabed Leasing Round 4

Published 11 February 2021

By Miriam Noonan, Analysis and Insights Manager at ORE Catapult

Last week we saw the results of the much-awaited Offshore Wind Leasing Round 4. Four bidding groups were successful across six bidding areas, winning a total potential capacity of just under 8GW, shown in Table 1. The successful bids show how oil and gas companies are starting to really see offshore wind as an industry for them to expand into as they commit to Net Zero within their own operations.

For the first time, bidders have been required to compete in a bidding process using option fees to determine leasing awards. The winning bids, to be paid annually until sites are in construction, proved to be much higher than anyone anticipated and are likely to have a knock-on impact on either return on investment, future strike prices or both.

Project Identifier

Proposed Project Capacity Successful Bidder Option Fee deposit Option Fee bid (£/MW/year)



RWE Renewables





RWE Renewables





Green Investment Group – Total





BP and EnBW





Offshore Wind Ltd, a Joint Venture between Cobra and Floatation Energy plc



6 1,500 BP and EnBW £231,000,000


Table 1

In true Analysis & Insights team fashion, I’ve had a go at modelling the impact of these option fees on the Levelised Cost of Energy (LCOE) based on the 2030 Reference Site set out in my previous blog post ‘Delivering 40GW – Accelerating the UK’s Transition to Net Zero’. LCOE has been estimated based on a 30-year project life. Using a weighted average cost of capital (WACC) of 4.5%, this comes to £36.26 per MWh excluding an option fee[1].

Figure 1 shows the impact of option fee on project LCOE depending on the duration of the development phase of the project. At a minimum, we would expect four years to undertake site surveys and necessary consenting processes. A project could take eight years or more if there are objections or delays in arranging financing. In the 2030 reference site, we see LCOE increase 23% when an option fee of £150,000 per MW is applied over a development phase of four years. At six years, LCOE increases 35% and if the development phase is extended to eight years, LCOE increases 49% versus the ‘no option fee’ scenario for the 2030 reference case.


Figure 1: Impact of option fee on LCOE


Modelling the LCOE of the Round 4 projects based on representative site parameters, we estimate that the option fees increase LCOE by 22 – 42% for the winning sites based on a six-year development phase.

In comparison, the Scotwind leasing round had set a cap of £10,000 per km2 on the option fee[2], paid once at award of lease, rather than annually. At an energy density of 5MW per km2, this represents a fee of £2,000 per MW. Applying this cap as a one-off fee, LCOE increases 0.1% versus the ‘no option fee’ scenario. In the hypothetical scenario that a £150,000 per MW is applied but only paid at award rather than annually, LCOE only increases 6%.

Incorporating more aggressive assumptions on future costs or energy production could bring LCOE within wholesale electricity market forecast, but still at a level above the most recent Contracts for Difference (CfD) auction prices. Given the 60-year duration of the seabed lease, developers may be assuming an effective project lifetime of 60 years with provision for repowering. However, doubling the project’s operating life does not half the LCOE. Increasing the project life of the 2030 Reference Site and applying a second capex phase after 30 years to replace infrastructure (excluding transmission assets), results in an LCOE of £34.62 per MWh; only a small reduction from the £36.70 per MWh base case due to the time value of money. In the scenario where an option fee of £150,000 per MW is paid, the LCOE reduces 10% from £49.11 to £44.04 per MWh, a more compelling figure.

So what does this mean for future offshore wind pricing? Oil and gas developers are familiar and comfortable with the volatility of market pricing. With a CfD auction round only happening every two years, we may see lower take up of CfDs as a route to market, with developers choosing to sell directly to buyers. This could reduce the time required to get to construction and may also enable a higher average revenue per MWh, although as offshore wind makes up an increasing proportion of electricity production, it is likely that price volatility will increase until other balancing mechanisms are in place to smooth out disparities in supply and demand.

These high bid prices reflect the unprecedented demand for offshore wind capacity in the UK and provide an incentive to get projects operating as soon as possible to meet Net Zero targets. This will both increase demand for Scotwind sites*, which are expected to provide an additional 10GW to the UK project pipeline next year and accelerate the need for the next offshore wind leasing round in England and Wales. We’ve also highlighted the need for another near-term leasing round in England and Wales in the Floating Wind Cost Reduction Pathways report (if you haven’t read it already, you really should) to access some of the best resources in deeper waters that have not yet been open for business.

Whether these high bid prices represent a long-term shift remains to be seen. We’re at a moment in time where oil and gas profitability is slipping and demand for offshore wind is far outstripping the availability of new acreage. If Scotwind retains lower upfront costs, we may see higher demand for previously more expensive Scottish sites, and more frequent leasing rounds in England and Wales may reduce the scarcity premium that occurred in this round. I’m sure many in the industry would be happy for this level of option fees to be a blip rather than the new norm.



*Just prior to publication of this article, Crown Estate Scotland has announced a delay to the ScotWind process to allow a re-think of leasing conditions in light of the Round 4 option fee results. Hopefully this article provides good context to the gulf in financial impact for the leasing bodies and bidders in the two leasing rounds.

[1] The previous blog assumed an option fee of £5,000 per MW as representative, with an LCOE of £36.70 per MWh