OFFSHORE WIND SUPPORT SCHEMES: Current status of European support schemes
With over 70GW planned to come online over the next ten years, offshore wind continues to show exceptional potential and offers some of the best industry growth prospects against a backdrop of maturing onshore developments in the EU.
Indeed, the extreme weather conditions offer higher wind speeds, allowing turbines to produce more electricity than onshore, but these same conditions complicate the installation phase of the wind farm. A sustainable support system for offshore wind is therefore required that offers attractive profit margins to risk-averse investors and avoids unreasonable costs for the end-user.
Europe currently enjoys three main support schemes for offshore wind: the feed-in-tariff scheme, the Contract for Difference Scheme and the tender bid scheme.
Tender bid scheme
Denmark Europe has been the largest offshore wind market since Denmark led the way in 1991 with the construction of the first offshore wind farm. Denmark’s commitment to renewable energy is evinced by their target for 100% of their energy supply to be derived from renewable sources by 2050. Furthermore, the Danish government is currently calling for tenders for 1,450MW offshore wind power before 2020. The successful bidder will be granted a fixed feed-in-tariff for the first 50,000 full load hours of its wind farm for a maximum of 20 years.
The connection of the wind farms to the national grid is to be built and paid by the developers. The national grid operator Energienet.dk is responsible for guaranteeing safe grid access for all wind farms at equal conditions. Consequently, Energienet.dk is obliged to expand the grid where required. However, these costs are borne by the end-users.
France Like Denmark, France’s main support scheme is the call for tender procedure. A first tender was announced by the Ministry for Ecology and Sustainable Development and Energy in January 2011 and should lead to the construction of 600 wind turbines at 5 different sites before 2020. The second and last tender round, with a total capacity of 1GW, was launched in January 2013.
Every owner of a new power plant has to apply to the public distribution system for grid connection and thereafter bear grid connections costs. A grid connection agreement lays down terms on an expansion of the grid. With this system, an electricity price is negotiated in a tender agreement between the operator and the facilities. The operators must sell all electricity produced by the facilities at this tariff. This price is then guaranteed for 20 years and indexed on a yearly basis for different variables, such as main component indices and the labour cost index.
Germany Germany’s support system is in the midst of reform with its new German Renewable Energy Act. The former ‘Sprinter Bonus’ that provided electricity generators a guaranteed fixed remuneration of 184€/MWh during 8 years and 154€/MWh for the following 12 years of support, will be replaced from January 2020 by a lower feed-in-tariff of 154€/MWh for the first 12 years of support with a possible extension of up to 20 years.
The electricity is sold per month to the grid operator on the basis of an anticipated power output. In Germany, grid connection and grid expansion are legal requirements for Transmission System Operators (TSOs).
Contract for Difference Scheme
Belgium As they are connected to the national transmission grid, Belgian offshore wind farms are subject to federal regulations. In December 2013, the Belgian Council of Ministers agreed on an offshore wind support system reform that replaced the former Renewable Obligations by a Contract for Difference system. A strike price is agreed upon in this contract between the wind farm owner and the grid operator, depending on a fixed value of Levelised Cost of Energy (LCOE) -currently around 138€/MWh – which is reduced by the wholesale electricity price. The wind farm owner receives the tariff for 20 years, with a possible 10 year prolongation. The Electricity and Gas Regulation Commission (CREG) is then charged to re-evaluate the prices in order to adapt to electricity wholesale price changes and technology evolution.
The privatised transmission grid operator Elia has to provide access to all wind farms and is responsible for balancing electricity supply. Furthermore, as in the specific case of offshore wind, the facilities bear only two thirds of the connection cost – with a cap at €25m – with the remaining third being incurred by Elia. To compensate the grid connection costs, Elia charges so-called ‘injection costs’ to generators.
UK As in Belgium, the United Kingdom will phase out its Renewable Obligation system entirely from March 31st 2017 and replace it with a Contract for Difference scheme with effect as from 2015. Also as in Belgium, the wind farm owners receive a strike price for every megawatt hour they produce. Electricity is sold in the market, so the state pays the difference between this strike price and the electricity wholesale price. However, if the market price is above the strike price, the generator has to pay back the surplus. This way a stable revenue level should reduce investment risks, with greater price stability ensured for the consumers.
The British regime for connection of offshore wind projects to the grid is based on specific tenders for offshore grid-managers – the Offshore Transmission Owners, OFTO – run by the Office of Gas and Electricity Market (Ofgem). Generators can either construct their own connections and then transfer such connections to OFTOs, or have an OFTO appointed to both construct and operate the connections. OFTOs receive a regulated revenue stream for 20 years via the national grid, which transfers its transmission costs to electricity suppliers through transmission charges.
The Netherlands Until recently subsidies were granted through tender rounds under the Dutch Sustainable Energy Incentive Scheme (SDE+). The construction costs of the connection between the national grid and the wind farm were borne by the wind farm owners if the distance from the wind farm exceeded a certain length. After two rounds under this scheme, the third round tender procedures will be developed under the SDE+ scheme from 2015. With this round, a new total capacity of 3,450MW should be reached by 2023. Support allocation is spread over 6 stages on a ‘first come, first served’ basis, with tariff increasing with each stage. However, as the budget is fixed in advance, late applications run the risk of being rejected due to a lack of funds. Selected energy producers are granted a premium on top of the market price in order to compensate the higher costs of electricity from renewable sources. This premium is paid for a period of up to 15 years, for a maximum of 3,000 full load hours per year.
Along with the third round, a demonstration wind farm will be constructed in 2014 to test and promote Dutch wind energy innovation. The aim is to reduce the subsidy price according to the decrease of constructing and operating costs recorded in this innovative model wind farm, and thus encourage operators to use cutting edge technology for their farms.
Furthermore, on March 20th 2014 the Minister of Economics Affairs along with the Minister of Infrastructure and Environment jointly published the first bill for a new offshore wind act. With this amending bill, competition will be focused on a government license for a single designated area – called ‘kabelbesluit’ – instead of opposing different licences prepared by the companies themselves. Each kabelbesluit determines where and under what conditions a wind farm can be constructed.
On 26 September 2014 the Dutch Government made an official announcement identifying 3 large offshore wind development sites. The zones are off Borssele, in Zeeland in the South West of the Netherlands, off the coast of South Holland and off the coast of North Holland. These are to replace the remaining, smaller wind farms that were consented in 2009. In this new strategy a subsidy will automatically be granted to the winner of the development license, previously organised in two separate processes. The state-owned TSO TenneT will be responsible for connecting the wind farms to the onshore grid. This strategy should lead to cost reduction of €3bn over 15 years. The tender for Borssele could be completed in 2015 followed 2 years later by the remaining wind farms.
The European Wind Energy Association (EWEA) has set a target of 40GW of offshore wind in the EU by 2020. Given the high construction costs and margins in the offshore wind sector, this target implies significant investments that need strong and sustainable political incentives.
Feed-in-Tariffs and Contracts for Difference are sensitive support schemes, as they present the risk of either being too generous – and creating excessive support, or being too meagre – and thus curbing growth. On the other hand, competitive bids have the advantage of minimising the cost of support while providing enough subsidies to make the projects viable.
Although they rely on different policies to support offshore wind power, European countries will only be able to achieve their targets together, through international cooperation. EWEA underlines the necessity to build up “an international offshore grid to give Europe a truly pan-European electricity super highway”.
With thanks to MAKE Consulting