This is an extract from a recent paper by The Oxford Institute for Energy Studies titled “European Union Offshore Wind Strategy.”
In November 2020, the European Commission presented an EU-wide strategy for offshore wind. The strategy includes both the Commission’s vision and targets for offshore wind in Europe, as well as non- binding guidance for European member states on how to reach their individual national goals and contribute to achieving the EU ́s overarching targets for the uptake of offshore wind. The strategy defines a non-binding volume target of 300 GW by 2050, with a subtarget of 60 GW by 2030 for the whole of the EU.
The two main regulatory challenges for the offshore wind industry identified in the strategy are long national permitting processes and a lack of directed infrastructural investments. The latter would enable offshore wind to become an integrated part of the electricity system and market. These challenges are very much related to national legislations and bureaucracy. The Commission is therefore investigating how to adjust the relevant legal texts at EU level to put more pressure on member states to address these challenges. Following Russia’s invasion of Ukraine, the focus has been further strengthened through the Commission’s REPowerEU document of March 2022.
Policy framework and regulations
There are four main policy areas which are expected to play a significant role in future offshore wind deployment
1. National spatial plans
The member states’ national spatial plans play a central role in the EU’s overall offshore wind strategy. The requirement on member states to submit their national spatial plan to the Commission is legally binding as set out in Directive 2014/89/EU. The national spatial plans must consider several aspects, such as the coexistence of all activities at sea and that new establishments take place safely through several processes involving everything from infrastructure planning to public acceptance. The way in which the plans are structured will show many of the risks and issues that the offshore wind industry faces in terms of competition for space and access to infrastructure. It is therefore a major challenge for member states to integrate offshore wind in their plans. In national energy and climate plans, offshore wind is often given a prominent role and priority, but when these are to be coordinated with the national spatial plan, conflicts of interest arise. Given that many maritime areas in Europe are already largely besieged with activities such as fishing, shipping, military, and are homes to a number of different animal species, coexistence remains a challenge for the expansion of offshore wind. Another obstacle faced by the member states when developing their national spatial plans is that the areas where the conditions for offshore wind deployment are the best, are also the most crowded. These are often areas which the military has identified as strategically important from a defence perspective
2. Infrastructure developments
A challenge identified at EU level, but also in most member states, is the need to develop infrastructure that connects offshore production with the onshore grid and market. There are two main aspects that need to be addressed:
· offshore infrastructure development, in other words, offshore high-voltage direct current (HVDC) lines;
· onshore grid expansion.
In the EU Commission ́s offshore wind strategy, government-backed infrastructure investments are identified as a crucial prerequisite to incentivize private investment in new production. The Commission has therefore, through several regulations, strengthened the requirements on member states to present medium- to long-term infrastructure development plans, both onshore and offshore. The EU Electricity Regulation, the EU Electricity Directive, and the Trans-European Networks for Energy (TEN-E) regulation, require member states to plan and implement infrastructure strategies that offer good conditions for both off- and onshore renewable uptake and integration into the electricity system.
Member states are expected to identify ‘go-to-areas’ where offshore wind projects would be most suitable. These areas will most likely provide a base from where the national Transmission System Operators (TSOs) will build out cables and connect so-called energy islands. The concept of energy islands involves linking offshore wind sites and connecting them to shore but it can also involve more than one cable connecting the energy island to several markets.
3. Market rules and renewable energy targets
According to EU institutions, current electricity market designs will have to be adjusted so that offshore electricity production will work under the same regime as onshore production. In short, this means that the EU’s core principles on free and fair competition between all market players will also be applicable to offshore wind developers.
The Commission’s proposal for amendments and revisions of the market rules therefore does not advocate prioritization for renewable production or exemptions to market rules for renewable energy producers, as has been the case in the past. The Commission is clear that market rules in their current form instead stimulate offshore wind growth. However, even though the offshore wind industry is expected to be fully included and to comply with general market rules, the Commission is proposing some amendments that aim to give some support to offshore wind in the existing legal texts. There are, in particular, amendments such as introducing offshore price areas and adjustments to state aid rules and to the Renewable Energy Directive that specifically target offshore wind.
Initial financial support is a key factor in scaling up and creating growth in new technologies, together with political signals and clear regulatory frameworks. The EU Commission has identified offshore wind and hydrogen as crucial for the EU to reach its climate targets for 2030 and 2050. The Commission has identified that €800 billion in investment will be needed to meet its offshore wind target for 2050 and a large chunk of that is expected to be private investments but EU funding is also available. Up until now, the EIB has been the dominant financial institution financing offshore wind projects. Since 2003, the EIB has allocated loans to offshore wind projects amounting to €9.4 billion, including to the UK.
After a review of EU funds so distributed to energy projects, hydrogen projects stand out both with respect to the number of projects that have received allocated funds/loans but also the size of the funds paid out. This can, to some extent, be explained by the fact that there are several regulatory ambiguities and planning challenges regarding offshore wind which have contributed to fewer projects applying for funding and loans. If the planning framework is improved and the legislation made clearer, there is a good chance that more projects will apply and thus funds will be allocated.
The issue of permitting processes is frequently discussed in the offshore wind industry, and national governments are often criticized for not offering more effective frameworks. The permitting process plays a central role in offshore project planning, and in countries where shorter and more effective processes are offered, the uptake in offshore wind deployment has been faster, less risky and more attractive for private investments and therefore lowered the public cost. In the permitting process, roles and responsibilities are divided between policymakers, government agencies, grid operators, and private developers. European member states divide roles and responsibilities differently and there are three main structures that are used: central, decentralized, and hybrid models.
In the centralized model, the government finds suitable offshore areas for wind deployment, selects the sites and conducts preliminary site investigations. In the centralized model, the government carries both the project’s financial and development risk. This model requires government and/or state agencies with technical expertise. A disadvantage of it is the lack of competition for cost reduction.
In the decentralized model, the private project developer plays a key role in planning the site selection, investigation, permitting, and, in some cases, the grid development. In this model, the government is only working as the counterpart to the private project developer in the permitting process. This model opens the door to more competition and broader technical expertise while the private project developer bears all the project risk.
The hybrid model is a combination of the central and decentralized model and often allocates initial responsibility to the government, while the private project developer takes over in the latter more costly stages when technical know-how is needed.
The role of auctions
Auctions for offshore wind projects have come under scrutiny lately for several reasons. One is that many of the auctions that have been held have sparked a race to the bottom, ultimately placing the project at risk.
The general view is that the earlier in the process an auction is held the better, as it lowers financial risks for project developers and leaves the more costly parts of the site investigation and technical planning until after the auction result. However, a disadvantage with holding early auctions is that the commissioning period after the auction result is longer, meaning that it can be many years from the time the winner of the auction is announced to the final investment decision or project start. This creates a lot of uncertainty for the developer in terms of capital, turbine costs (access to the supply chain), and the development of a revenue stream, in other words, the electricity price. However, one way of tackling the uncertainty related to early auctions could be to introduce a CfD structure, as in the UK model, in order to provide a predictable revenue line and give the financiers a time horizon for the risk exposure.
A permitting process without auctions
A permitting process can also be structured without the auction element and, even though it is not general practice, models with sole permitting processes can be found, for instance in Sweden where a private developer hands in an application for an environmental permit to the government under the Swedish Environmental Code and a permit for water activities. The permitting process then includes an environmental impact assessment and a consultation with the relevant authorities, organizations, and individuals. The process is slightly different if the site is located in territorial water or in the exclusive economic zone, and the developer who first hands in the application is prioritized in the permitting process.
This paper has investigated how the current policy and regulatory framework enables or challenges the uptake in offshore wind deployment and there are four main conclusions which can be drawn from this:
- Clear and ambitious targets as well as strong policy-signals from the EU support a strong and fast uptake in offshore wind deployment.
- There are few policy support mechanisms specifically directed to offshore wind projects and existing regulations for electricity markets will be amended to include other offshore wind.
- The EU aims to harmonize national regulations and procedures, but there are still significant differences between member states.
- Permitting processes and spatial planning are causing both delays and costs for projects.
Regulatory risks are causing delays and extra costs, but the offshore wind industry is also facing initial challenges when it comes to reducing project and production costs. The LCOE outlooks, especially for floating technologies, show that reaching grid parity before 2030 is a challenge and the estimated cost reduction depends on significant growth in installed floating capacity. Another important issue is the idea of qualitative criteria in permitting processes and auctions.
This Energy Insight therefore argues that the cost gap could be bridged through more holistic business strategies that build on strategic and long-term cooperation with offtakers on a path to decarbonization, innovative technologies, and constrained markets.
The complete paper can be accessed here