Distribution of congestion revenue from interconnectors
Offshore renewable energy plays a key role in achieving the EU’s climate and energy goals set out in the European Green Deal. The EU aims to reduce greenhouse gas emissions by 55% by 2030, and to become the first carbon-neutral continent by 2050.
A significant amount of renewable energy is required to reach a 55% emission reduction. The EU acknowledges this through prioritising and further developing the renewable energy sector. The goals are partly planned achieved by developing offshore wind projects with grid connections to several countries, referred to as “hybrid” grid connections, which in reality will be cross-border interconnectors. In Norway, hybrid grid connections with power exchange to other countries in Europe seem highly relevant for the development of offshore wind in the “Sørlige Nordsjø II” area.
As regards to Sørlige Nordsjø II, the industry has made it clear during public consultations that this area can only be developed without state aid if (i) an offshore hybrid grid is built, and (ii) project developers receive income from hybrid grids’ revenue streams. A key issue is therefore whether congestion revenues, arising from price differences between the price areas where the electricity is produced and delivered, can lawfully be allocated to the project developers.
Current regulation of congestion revenues from interconnectors
Congestion revenues are not a new phenomenon in power exchange between countries. Traditionally, power exchange through interconnectors has generated large revenues due to congestion and occasionally major price differences across national borders.
According to the currently applicable EU/EEA regulations, the revenues from cross-border power exchange are accorded to the operators of the relevant interconnectors, normally Transmission System Operators (TSOs), whose main task is to plan, operate and develop domestic power systems and cross-border connections. The recipient of congestion revenues from interconnectors to Norway has therefore been the state-owned enterprise Statnett, as the country’s designated TSO.
The EU/EEA regulations impose important restrictions for use of such revenues. Norway recently implemented the third EU energy market package, where such revenues are regulated under Regulation (EC) No. 714/2009. Article 16(6) sets out the following main rule:
“Any revenues resulting from the allocation of interconnection shall be used for the following purposes:
(a) guaranteeing the actual availability of the allocated capacity; and / or
(b) maintaining or increasing interconnection capacities through network investments, in particular in new interconnectors.”
In other words, the main purpose of this provision is to channel congestion revenues towards developing, maintaining and increasing the exchange capacity of the transmission network across national borders.
The fourth (clean) energy market package, which is not yet implemented into Norwegian law, contains many of the same main features for the use of congestion revenues. This is stated in Article 19(2) of Regulation (EU) 2019/943. However, the new regulation goes further in some areas, including by adopting a reporting requirement on the use of congestion revenues, according to Articles 19(4) and 19(5).
Does this mean that the industry’s clear views and expectations on having entitlement to congestion revenue remain far-fetched?
EU’s announcement of the “Offshore Renewable Energy Strategy” provides for a new direction
With the development of new hybrid offshore grid solutions with connections to two or more countries, new needs will arise which current regulations are not suited for. A coordinated approach to these issues lead to the European Commission’s preparation and release of a common EU strategy for offshore renewable energy (“EU Strategy to harness the potential of offshore renewable energy for a climate neutral future”, COM(2020) 741) in November 2020. The European Commission states the following in its Commission Staff Working Document, SWD(2020) 273:
“This paper recognises that the electricity market rules were not designed with the specific needs of offshore hybrid projects in mind…”
The main objective of the strategy is to put in place a holistic approach on how best to utilise and scale up the use of offshore renewable energy between EU countries. This is a key element to reach the overall goal of climate neutrality in the EU by 2050.
In the time leading up to 2050, the EU has estimated a need for investment of up to EUR 800 billion in offshore renewable energy to achieve its climate and energy goals. The majority of these investments should be directed towards development of offshore wind projects, with an upscaling from the current capacity of 12 GW up to 300 GW in 2050. These future prospects indicate that the need for investment of capital for offshore renewable energy will be on a much higher level than what has been seen before.
In line with the need for more capital, future investments will to a far greater extent than before depend on parties in the private sector. This raises the question of the use and distribution of congestion revenues from hybrid grid connections, especially with regard to whether these may in the future be allocated to developers of offshore renewable energy.
The strategy proposes, as a measure, that Member States are given greater freedom to distribute the congestion income in offshore hybrid projects than current regulation allows. The Staff Working Document mentioned earlier also states that:
“A way to align these incentives could be an amendment to the rules on the use of congestion income. For example, by opening up the possibility for Member States and NRAs to allocate congestion income to renewable energy producers active in an offshore bidding zone, this could ensure that hybrid projects are no less attractive for a renewable energy investor.”
The EU Commission thus aims to make it attractive to invest and develop the renewable energy sector towards 2050, by mentioning a more flexible allocation of congestion income for offshore hybrid projects. Based on the above, the Commission also seems to believe that distribution of congestion revenues under current regulation may not encourage the most efficient utilisation and upscaling of capacity. The European Commission has stated that proposals to solve this will come by 2022. Legislative changes to the current system regarding the use of congestion revenues thus seem likely.
Although the legal content of future legislative changes remains unclear, there is reason to believe that congestion revenues in the future to a greater extent may be allocated to third parties – such as developers and operators of offshore wind power plants. This represents an incentive to contribute to development in the years to come.