If you are "free of subsidy", why compete in an auction for subsidies?

Great excitement amongst proponents of intermittent electricity today.

Dong Energy announced that they had won "the right to build three offshore wind projects in the German North Sea."

"The three projects are planned to be commissioned in 2024, subject to Final Investment Decision by DONG Energy in 2021."

They went on to proclaim that "For two of the projects – OWP West and Borkum Riffgrund West 2 – DONG Energy made bids at zero EUR per MWh, i.e. these projects will not receive a subsidy on top of the wholesale electricity price." This became the feature that was highlighted on social media.

But if you genuinely don't need subsidy, why compete in an auction for subsidies? Why not simply sell into the market?

This contract actually includes at least two significant subsidies, one of which Dong were explicit about in their announcement (though not on social media).

1. Connection cost

This is the one Dong were explicit about. Their Executive Vice President of Wind Power noted that "the bid reflects the fact that grid connection is not included." As Tim Worstall noted, "taxpayers coughing up for the grid connection would be a subsidy".

2. Wholesale price

Under the EEG, "Plant operators will market their production directly and will receive a market premium to make up the difference between the their bid price and the average monthly spot market price for electricity." In other words, Dong are guaranteed to receive the average monthly price, regardless of whether their output would have received the average price in the market.

The effect of rising quantities of intermittent generation like wind and solar, whose output is poorly correlated with demand but highly correlated with other generators of the same technology, is to create an excess of supply when the wind is blowing or the sun is shining, and an insufficiency of supply when they aren't. That means that prices are depressed when wind power is being generated, and much higher when it isn't.

If a wind-power project receives the monthly average price, it is receiving a much higher price than it would receive if it contracted freely in the market. This is only going to get worse as more intermittent capacity is added to the network.

These projects are only expected to come online in 2024, and the investment decision will not be taken until 2021. It hinges on an expectation that average wholesale prices will increase. What Dong aren't saying is that that expectation is based on the toxic effect on system balancing of installations like theirs. They have signed up to a "subsidy-free" subsidised contract because they know that it protects them from, and indeed leverages, the harmful impact that they have on Germany's electricity supplies.