Bridging borders: Regulatory harmonisation

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In recent times, the attention of project developers, policy makers and energy regulators has started shifting towards the construction of (transnational) large scale far offshore wind farms. This is due to their advantages over conventional energy production facilities, being larger in scale, inducing economies of scale; offering less nuisance related to visual or noise pollution and generally being more productive due to the higher average wind speeds at high sea. However, offshore wind energy also brings several hurdles. At regulatory level these include the formal identification and designation of a dedicated area where these farms are being built and the legal qualification of the cables linking the farm(s) to one or more onshore transmission systems.

The full-scale integration of these far-offshore wind energy farms into the European production portfolio requires new regulatory initiatives at several levels, especially when being built and connected to nearby wind farms in neighboring countries, creating one single, cross-border wind farm. Two distinct reasons could be given to argue and stress the need for a more stringent regulatory intervention.

Regulatory risk exposure

Studies have shown that specific governmental policies and regulation, such as tax legislation and financial incentives, play a prominent role in the encouragement of offshore wind farm investments and drive their development. Specific financial incentives such as sales tax rebates, property tax rebates are useful because they lower the cost base related to the development of the project. For any project developer, a sound economically and financially healthy plan forms the backbone of a potentially successful project.

These incentives generated by the Government can thus help facilitating project investment climate. But other regulations such as rules for fluid green power markets, intraday-trading of generated power, capacity credits and balancing rules also directly or indirectly influence and have a tangible effect on possible new investments.

Analysis also indicates that regulatory systems related to the pure construction and permitting of wind farms have a significant impact on the development of operational wind farms. Criteria such as lease conditions and lease terms or fees, timelines for construction and operational development, site selection competition, proposal selection criteria, EIA obligations, operational environmental constraints and decommissioning regulation are all regulatory issues that can potentially slow down or even halt energy production.

The lack of a harmonised regulatory framework at supranational level only adds to another hazardous risk, namely  ‘regulatory forum shopping’. Project developers, being confronted with a sheer endless multitude of regulations or facing a complete lack of legislation in some fields, could decide to cancel their project in a specific area, to the benefit of other projects in other areas and countries where regulation is less stringent or less ‘contra-pro-ductive’. Especially in Europe, where the political aim is to create an open, competitive and economically viable electricity market, could this tendency destabilise a healthy development of the offshore wind market and result in an undesired concentration of power in specific areas, resulting in massive congestion problems for the onshore grid operators. Under similar circumstances, exactly the opposite could happen. Such evolution could potentially distort market evolution in the production segment. Although there seems some discussion over the fact whether regulatory methods or fees and subsidy policies steer the project developer’s choice, there seems hardly any doubt that project development under its current form is highly influenced by projects’ regulatory risk exposure, composed by the direct and indirect effects of governmental non-regulatory action or by pure governmental regulatory intervention.

Risk exposure of grid connection, market and siting issues

Planning, siting, construction and integration of an offshore wind farm are being confronted with several issues that mould the risk profile and risk exposure of the project. Generally speaking, the main issues governing wind farm project development can be regrouped into three main categories with each of them covering different aspects and related to the different stages of the planning and realization trajectory.

Network issues; include authorisation procedures for the construction of HV-subsea cables, connecting the offshore wind farm to the transmission grid onshore. Furthermore, network issues also cover the criteria for network connection and system integration and the charges levied for any network connection. Finally, the development and/or reinforcement of the onshore transmission systems and/or interconnectors form part of the network issues. This is a problem German wind farms developers are currently confronted with.

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Market issues; covers topics such as gate closure times, trading rules, cross-border market coupling and market integration, balancing rules and reserve market dispositions and the existence of support schemes. These elements greatly define the economic viability of the project and influence the profitability of it during the operational stages. Belgian offshore wind farm developers only managed to get their projects financed once the Belgian government had offered sufficient support mechanisms to safeguard the economic viability of the planned farms.

Siting issues; these are composed of maritime spatial planning and leasing regulation, site ownership and ownership arrangements, infrastructure ownership arrangements, marine spatial planning aspects, environmental constraints, safety regulation and environmental impact assessment procedures or decommission regulation.

Regulatory issues when building transnational wind farms

The tendency to construct far-offshore wind farms, spanning the borders of national states, is a relative novelty, requiring substantial changes in regulation. Despite the fact that the aim is to create a single, ‘borderless’ energy market, the development of offshore wind farms still largely depends on the powers of the coastal states, in relation to the actual position of the farm. The situation becomes even more intricate and poignant in the case of transnational wind farms. Here, developers face a multitude of legal frameworks, with hardly any harmonisation or alignment at European level.

Marine spatial planning. This includes the nomination of preselected and/or preferred areas for the production of renewable energy. Such nomination can be defined either broader, with the zones sometimes called ‘renewable energy zones’, or narrower, the ‘exclusive zones’. Maritime activities in the vicinity of offshore wind farms increase the risk of collision between vessels and wind farm assets. This aspect includes the ‘marriage’ of site selection and maritime traffic/ maritime safety, the exclusion or co-existence of shipping lanes and preferred/preselected areas and precautionary measures taken when installing offshore wind farms sites near areas with shipping or other maritime activities, such as sand dumping, ammunition dumps, naval training areas, anchoring areas, recreational areas or fishing grounds. Efforts to harmonise have been undertaken here, but regulatory deficiencies still remain. Another specific regulatory barrier refers to the cumulative aspects of EIA and SEA. A lack of criteria for evaluation, a difference in the assessment procedures, missing common methodological terms are all examples of a missing harmonised regulation. Furthermore, it is unclear whether a separate, a common or combined environmental assessment is the best option for the evaluation of a combined project.

OW9_compleet.jpg 20 02Site location, selection and site restrictions. This covers the preference by governments to locate offshore wind farms either in territorial waters or in the exclusive economic zone (EEZ). This in turn defines the powers of the coastal states involved. Consequences of a siting in one of these areas will also be evaluated under this criterion. It describes the parameters used to define and delimit the areas where offshore wind energy production is allowed.

Finally, it refers to the co-habitation of offshore wind energy activities and areas defined and exclusively reserved by environmental regulation. In Europe, constraints are put on project development at sea by environmental regulation, such as the Birds-directive, the Habitat-directive or the Natura 2000-directive.

Ownership arrangements. Once areas or sites have been identified, governments have to decide on ownership issues related to these locations. This criterion covers lease arrangements, lease fees, lease obligations as well as lease duration. Here we see inconsistencies between asset ownership arrangements in individual Member States.

Grid connection. According to UNCLOS article 87, states have the freedom to install submarine cables. The right to regulate these subsea cables varies however, according to the qualification of the cables as being connected to offshore wind energy production or not. A regulatory initiative to classify these cables (intra-field, pure offshore-onshore connection, transit cables or pure interconnectors) would thus be needed here.

Analysis conducted, using the joint German-Swedish-Danish Krieger’s Flak project as an example and benchmark, showed several incompatibilities between current regulation and the strategy to build more offshore wind farms. The outcome of the analysis shows that the lack of a harmonised regulatory regime hampers and blocks the increased deployment of wind generation far-offshore. It is suggested that a more dedicated harmonised European regulation is needed for several reasons. From a market oriented approach, more harmonising regulation is needed because of the increasing cross-border electricity trading, the market integration and the ongoing development of regional power trading markets. From a more economically inspired viewpoint, harmonisation would be needed to foster cost-sharing on internationally developed wind farm projects and finally because of the pressure originated by the accrual of renewable energy targets between Member States.

With thanks to Emmanuel de Corte, MSc. Law, BSc. Economics, MSc. Finance, MBA, Service Line Leader, Markets and Regulation, KEMA, The Netherlands and Researcher/Ph.D. Candidate, TILEC – Tilburg University, The Netherlands