Policy framework for the offshore wind industry
The policy framework for the offshore wind industry has to a large extent been linked to available government support schemes. The industry is however evolving quickly and growing larger by the day and the level of subsidies is dropping. A current trend seen in all major markets is an ongoing shift from feed-in-tariff and certificate based systems, to more competitive auctions often involving Contracts for Difference (CFDs). The main reason for this shift is cost reductions made possible due to factors such as industry maturity, rapid technology advancement, economies of scale and political cycle.
Contractors delivering services to developers and operators of offshore wind farm should be aware of the policy framework within which the latter two work. Although reduction of costs is one of the main political and commercial drivers in the industry, the specific policy framework may also impact the way developers and operators approach negotiations with their contractors.
The UK is currently the largest market for development of offshore wind projects with 5.3GW offshore wind capacity already installed. This is anticipated to reach 17.0GW by 2025. Leases for offshore wind farms are awarded by the Crown Estate. The current support mechanism for projects that have not reached final investment decision is through CFDs which last 15 years and are awarded through allocation rounds. In the first round of CFD auctions in 2015, offshore wind projects were awarded with strike prices ranging from £114-120/MWh.
Stakeholders had high hopes for the second round, which results were announced this September. Not even the most optimistic analysts had foreseen the sharp fall in strike prices awarded in this round with the lowest clearing price at £57.50/MWh, implying levelised cost of energy (LCOE) below nuclear projects for the same year. This development illustrates that offshore wind has consistently delivered lower prices than expected and it raises the prospect of a “zero subsidy” future. The UK’s commitment to lead the world in cost-effective clean growth is reaffirmed by the Clean Growth Strategy published by the British government in October 2017.
Despite the UK’s strong position in the market, the absence of UK based players is notable as the industry relies heavily on overseas contractors to fulfil many contracts – highlighted by the fact that Danish Ørsted (formerly: DONG Energy) has the largest portfolio of projects in the UK.
Rest of Europe
Although the UK remains the global leader in this industry, there are other countries in Europe with significant ambitions to participate and grow in the industry and there are several examples of nations with a strong presence in the market. With respect to policy framework there are however significant variations between the countries.
The well-established Danish market is expected to grow from 1.3GW of installed capacity at the end of 2016 to 3.0GW by 2025. To develop and operate projects in the jurisdiction, leases for offshore wind farms must be obtained from the Danish Energy Agency. The Danish government seeks to subsidise further growth through a feed-in-tariff mechanism which guarantees tendered prices for 50,000 generating hours for up to 20 years. There are multiple prominent developers in Denmark, but also in Denmark the largest project owner is currently Ørsted (formerly: DONG Energy). Considering the existing pipeline of projects owned by Vattenfall, it is also expected that this company will take a competitive lead in the coming years.
The Belgian market is expanding rapidly, and is expected to grow from 0.8GW of installed capacity at the end of 2016 to 2.4GW by 2025. The Belgian Government awards leases for offshore wind farms and offers subsidies for development by way of a CFD mechanism. Currently the strike price is set at €138/MWh. Several companies have demonstrated the potential for success in the Belgian market and at the moment the largest project owner in Belgium is Otary, a partnership consisting of eight Belgian companies.
Germany is also taking active steps to ensure its continued participation in the offshore wind industry. In light of the ongoing developments, the German market is expected to grow from 4.1GW of installed capacity at the end of 2016 to 10.0GW by 2025. The previous support mechanism was through a feed-in tariff, which the generator received per megawatt hour produced for the lifetime of the contract. A new Offshore Wind Act (WindSeeG) was however passed into law on 1 January 2017, introducing a centralised planning approach. This inter alia involves a new scheme for awarding CFDs through competitive auctions which will be available from 2021. Large projects in the jurisdiction are well underway, operated and continuously developed by companies such as Ørsted (formerly: DONG Energy) and EnBW. Despite the available support mechanisms 2017 auctions produced bids at “zero-subsidy” levels – an industry milestone demonstrating that the developers in question are willing to build wind farms based on purely commercial incentives.
In line with its goal of relying increasingly on sustainable energy, the Netherlands is also expanding its market participation in this industry. There is currently 1.1GW of installed offshore wind capacity, expected to grow to 4.7GW by 2025. To facilitate this, leases for offshore wind farms are awarded via a competitive tendering procedure monitored by the Ministry of Economic Affairs. Subsidies are available to support new projects through a mechanism for awarding CFDs for 15 years, as well as a 30 year operating licence. Large market players have already shown interest in developing in the Netherlands. Again, Ørsted (formerly: DONG Energy) is the holder of the largest portfolio of near term projects, (although it has yet to develop any projects in Dutch waters). Major oil and gas company, Shell is also making a growing commitment to the offshore wind industry in the jurisdiction and already owns shares in Dutch projects.
In contrast to its neighbouring countries, there is currently no installed capacity in France. This is however expected to change in the near future and it is anticipated that the country will have installed capacity of 2.7GW by 2025. In fact, the French government already has a procedure in place for issuing leases for offshore wind farms. The Energy Ministry (DGEC) shortlists bidders through a competitive tendering procedure and the shortlist of bidders are subsequently advised and assessed by the Energy Regulation Committee (CRE). To stimulate growth, a feed-in-tariff mechanism guarantees a stable electricity price for 20 years. Companies such as EDF and Enbridge have already established significant activity in France and near term projects are expected.
As illustrated throughout this publication, the offshore wind industry is more focused than ever on reduction of the levelised cost of energy (LCOE) and recent European auctions have raised expectations to a zero-subsidy future. The green element of the industry, together with the increased commerciality seen recently, makes the offshore wind industry politically hard to ignore and expansive developments are indeed expected across Europe.
The comparative overview of policy frameworks set out in this article is based on the market report “Norwegian supply chain opportunities in offshore wind” prepared by BVG Associates at the request of Norwegian Energy Partners. We have kindly been allowed to use this material for the purpose of this article.
Levelised Cost of Energy (LCOE): Calculating the LCOE is the most commonly used method for comparing the costs of energy between various generating assets. It is calculated as follows:
LCOE = total cost over lifetime / electricity produced over lifetime
Certificate based system: Renewable energy generators are issued certificates in proportion to the renewable energy they generate, which in turn can be sold to energy suppliers required to show that they source a certain proportion of electricity from renewable sources.
Feed-in-Tariff: Renewable energy generators are paid a tariff for every unit of electricity they produce and for any surplus electricity exported to the grid.
Contracts for Difference (CFD): Renewable energy generators are as per a contractual arrangement paid the difference between the market reference price for electricity in the relevant market and the strike price (a predetermined price for electricity which reflects the cost of investing in a particular renewable technology).