Bernard Looney is once more going green. The boss of BP has reiterated his commitment to renewable energy after slowing down his withdrawal from oil earlier in this year. He did this by gaining a portion of an auction worth 12.6 billion euros, namely $14 billion, for the construction of 7 gigawatts offshore wind off Germany's coast. However, there is a chance of blowback due to the foundations of the agreement between Germany, BP, and TotalEnergies, the winning bidder.
Patrick Pouyanné, the boss of TotalEnergies, Looney, and Germany all want to increase their capacity for zero-carbon energy production. Berlin wants to install 30 GW of the offshore wind by 2030, and BP wants to install 50 GW of the renewable energy, which would account for about two-thirds of the United Kingdom's total electricity-generating capability. However, selling the development rights to wind farms is another way that Germany hopes to make as much money as it can. The oil companies want skeptical stockholders eyeing easy gains to know that they are not worsening renewable power's deficient returns by overspending on green programs.
With regard to those considerations, the new agreement benefits Berlin more. Based on a research, the headline price of the auction comes out to $2 billion each gigawatt, which is far more expensive than the $600 million each GW price of a series of UK seabed sales in 2021 and the $400 million each GW price that a US counterpart got last year. Furthermore, neither does it include a state-guaranteed price for the subsequent sale of power to consumers, as is the case in the UK, nor does it cover the many billions of dollars necessary to actually develop the projects.
Nevertheless, Pouyanné and Looney aren't completely out of it. They only need to contribute 10% of the total cost of the project, or 678 million euros and 582 million euros respectively, over the course of the following year; the remaining will only be paid in installments once the project starts to generate electricity, which is probably around 2030. When the cost is discounted back at a cost of capital of 5.5%, Bernstein estimates that it is like $1 billion each GW. From the standpoint of the major oil companies, the situation appears to be more as a financial choice.
If electricity costs remain high, Looney might still decide to employ this option and proceed with the project because he could utilize the power to generate green hydrogen and do it at a profit. But because turbine manufacturers like Vestas and Siemens Gamesa will be raising prices by 30% in 2022, this will negatively affect wind projects across the world. There is a greater likelihood that BP may write off its 678 million euros and walk away if cost constraints like these don't ease, since that will make it difficult for the company to meet its 6% to 8% profit objectives.
Berlin may still get the money and wind power it wants. However, it should raise some red flags because industry veterans RWE and Orsted withdrew from the competition sooner than expected. Shaking down private business is acceptable, but not so if no wind projects are left behind.