Review of Support Mechanisms and Policy Options for Offshore Wind. Prepared by the Center for Wind Energy at James Madison University.

Transcription

1 Review of Support Mechanisms and Policy Options for Offshore Wind Prepared by the Center for Wind Energy at James Madison University August 2012

2 Denmark Denmark s long-term target is to achieve complete independence from fossil energy sources. Denmark s target from the EU is for a 30% share of renewable energies in gross domestic energy consumption by Suitable areas for onshore wind projects are becoming more difficult to identify and so Denmark is counting more and more on the development of offshore wind projects to reach its national and European climate objectives. Priority areas for the development of offshore wind projects in Denmark were identified in 2007, with plans to install up to 4.6 GW by Since then, developers have been able to participate in tenders, organized by Danish Energy Energistryreisen (ENS), for licenses to operate within these priority areas. Alternatively, developers may propose their own projects outside of the priority areas. ENS is responsible for approving offshore wind projects. Project implementation is dependent on Planning permission Building permit Operating license and an environmental impact assessment The TSO Energinet.dk is responsible for the costs of connecting offshore wind projects to the grid. Projects that have undergone successful tender processes are Horns Rev 2 (209 MW), Rodsand 2 (207 MW) and Anholt (400 MW). Along with a license, the successful bidder received planning permission, a building permit and an operating license for 25 years. The EIA is carried out by Energinet.dk. Projects are awarded to the bidder offering the lowest price per kwh. For Horns Rev 2 and Rodsand 2, the FIT was limited to energy production equivalent to 50,000 full load hours, at rates of 6.94 ct/kwh and 8.43 ct/kwh respectively. For Anholt, the only bidder Dong Energy offered a FIT of around 14 ct/kwh for the first 20,000 TWh produced, and was awarded the license in June Developers that propose their own projects are responsible for obtaining the required approvals and conducting and EIA. For these projects, a bonus of 1.3 ct/kwh is applied for 20 years, in addition to the market electricity price. Germany According to a report by the Federal Ministry for the Environment on the expansion of renewable energy, the intention is to install offshore wind capacities of 10 GW by 2020, and 23 GW by 2030 (22). The majority of planned offshore wind projects in Germany are located in the Exclusive Economic Zone (EEZ) and must be approved by the Bundesamt fur Seeschifffahrt und Hydrographie (BSH). Offshore wind projects within 12 nautical miles of the shore are approved by the ministries in the relevant Federal states. Regulations governing development plans for EEZs in the North Sea and Baltic Sea came

3 into force in September and December 2009 respectively. These plans define priority areas for offshore wind generation. The Infrastructure Planning Acceleration Act came into effect in December 2006, requiring German TSOs to connect offshore wind projects to the grid where construction of wind farms began before 31 December Connection costs are shared among all TSOs in Germany. Until 2009, there were significant issues getting TSOs and banks to commit to offshore wind projects. TSOs made grid connection commitments contingent on secured financing. Banks, meanwhile, would not approve lending without such commitments being in place. In 2009, the Federal Network Agency published its position paper on grid connection obligations. The project paper specifies the criteria for project developers to obtain (un)conditional grid connection commitments. The main objective of the position paper is to ensure the timely connection of offshore wind projects to the grid. Project developers must meet the following criteria 1. Required approvals or promise of such approvals by the responsible authority 2. Feasible construction schedule 3. Geotechnical site survey report 4. Procurement contracts for the wind turbine generators and a. Secured financing or b. (pre)contracts for the procurement of key components If the TSO has evidence that criteria 1, 2 and 3 or 1, 2 and 4 are met by the closing dates of either 1 March of 1 September in the respective year, a conditional grid connection commitment must be submitted within two months. The TSO must start a tender process for grid connection immediately and commission the grid connection within 30 months. With proof that all four criteria are satisfied by the closing dates, the TSO must award binding contracts for the grid connection within two months. Despite the increased transparency created by this policy, the connection to the grid continues to pose significant investment hurdles for offshore wind developers. Furthermore, given the high number of connections that will be required in 2012 and 2013, short-term supply bottlenecks are expected, which could result in delays to grid connections even if all deadlines and criteria are met. If the TSO is not at fault, developers have no claim for damage compensation. Both developers and lenders face significant investment risk. The promotions of renewable energies in Germany is based on FITs since the first EEG in In January 2009, FITs for offshore wind increased from 9.1 ct/kwh to 13.0 ct/kwh, for an initial period of 12 years. A further 2 ct/kwh applies during this period for turbines that enter operation before January , called a sprinter tariff, designed to accelerate the implementation of Germany s first offshore wind projects.

4 France On December , the French government published its new multi-year program for investment in electricity generation capacity. (24) The French government aims to expand installed wind power capacity to 25 GW by 2020 (6 GW offshore). In France, the promotion of renewable energies is based on the 2000 electricity law. This sets out the basis for FITs and for tendering. The responsibilities for connecting offshore wind projects to the grid rests with the TSO. There is an initial period of 10 years with a FIT of 13.0 ct/kwh for all offshore wind projects, and a subsequent 10 year period in which the applicable FIT is calculated according to the measured wind yield in the initial FIT period. (3.0 ct/kwh for more than 3,900 full load hours to 13.0 ct/kwh for less than 2,800 full load hours) By tendering licenses, the French governments seek to actively influence investments in offshore wind development. The first licenses were put out to tender in 2005, which saw one offshore wind license awarded (Cote d Albatre). A FIT of 10 ct/kwh, for a period of 20 years was set for this project, but a low FIT by international standards and a cumbersome approval process, the project is still on hold. The French government hopes to streamline and simplify the approval process with the new Grenelle II environmental legislative. (28) United Kingdom In 2009, the British government formulated a renewable energy strategy to achieve its long-term climate change objectives, which stipulates an increase in renewable energies as a share of electricity consumption to 30% by Expansion in offshore wind capacity is expected to be the main contributor to achieving this objective. The British government awarded development licenses totaling 32 GW (for a total of 49 GW overall) as part of a tendering round in January 2010 and has therefore set the stage for large scale deployment.

5 The Crown Estate owns most of the foreshore and all of the seabed up to 12 nautical miles and awards lease agreements for offshore wind projects in these areas. The Energy Act of 2004 gave the Crown Estate the right to award leases for areas in the Renewable Energy Zone (REZ), which is nearly identical to the Exclusive Economic Zone. In 2001 and 2003, the Crown Estate conducted two tenders, Round 1 and Round 2, for offshore wind project development licenses. In Round 1, developers were free to propose their own sites, whereas in Round 2, the Crown Estate defined development zones. The Crown Estate qualified 18 projects in Round 1 and 15 projects in Round 2. Once a development license has been awarded, developers must obtain a number of approvals before a lease agreement can be concluded (31). In Round 1, several projects were never given a lease agreement. In Round 2, development zones were defined based on strategic environmental reviews by the Crown Estate, and the risk of non-approval was reduced. The same system was used for the Round 3 tender process. In June 2009, the UK introduced a new tendering procedure for the construction and operation of grid connections for offshore wind projects. Now, companies authorized by the Office of Gas and Electricity Markets (Ofgem), can apply for a construction and operation license for offshore wind project grid connections. The operator license for a grid connection is initially limited to a term of 20 years. Ofgem sets the network tariffs based on a cost estimate. One of the main purposes of the tender procedure is to promote competition and, consequently, the implementation of cost-effective grid connections. Offshore wind developers are also freed from the investment costs associated with building the grid connection. At the same time, OFTO can engage in bilateral negotiations with the project developer to reduce investment risk by providing guarantees. The UK support mechanism is based on quotas, called headroom for a share of renewable energies in electricity consumption since Electricity suppliers must prove their compliance with these quotas with Renewable Obligation Certificates (ROCs). For 2010/2011 time period, the ROCs equated to approximately 11% of total electricity consumption. Since the introduction of the Renewable Obligation Order (RO) in 2002, one ROC/MWh was granted for all renewable energy technologies. ROC banding was introduced on April 1, 2009, meaning that ROC/MWhs were granted according to the technology s level of maturity and expansion potential. Offshore wind was placed in the post-demonstration category, and the number of ROCs increased from 1.0 to 1.5 per MWh. This amendment to the RO was reviewed shortly after, due to objections from developers that offshore wind was no longer commercially viable due to increased costs and difficulties in obtaining finance. The British government approved amendments to the RO, effective April 1, Increase to 2 ROCs/MWh for projects which obtain full accreditation between April and March Extension of the RO term from 2027 to 2037, to a maximum subsidy period of 20 years

6 Increase in quotas for the share of renewable energy in electricity consumption, from 8 to 10 percent. Removal of 20% upper limit for energy that falls under the RO subsidy In addition to RO support, offshore wind project operators benefit from tax relief in the form of levy exemption certificates (LECs). These certificates grant an exemption from the climate change levy (CCL) on electricity, coal and gas. The UK continues to offer the most attractive conditions for investment in offshore wind projects, even though revenues are dependent on market prices and therefore carry price fluctuation risks. Market risk is contained by setting quotas for the share of renewable energy in electricity consumption. Moreover, developers emphasized the British government s straightforward and flexible attitude to dealing with potential or actual stumbling blocks. Ireland The approval procedure for offshore wind projects is the same as for onshore wind projects. The only exception being that an additional approval is required from the Ministry for Agriculture, Fishery, and Food - a so-called foreshore lease agreement for the economic use of coastal seas. Requirements include Planning permission from the regulatory authority of the energy market Grid connection commitment from the TSO Building permit and operating license from the regulatory authority of the energy market Foreshore lease agreement Offshore wind projects with other renewable technologies do not have priority rights for grid connections. While the TSO EirGrid is responsible for constructing and operating the connection, developers are responsible for obtaining the approval and for the costs associated with construction and operation. Ireland introduced a FIT system called REFIT in 2006 and added a tariff for offshore wind in Under REFIT, power purchase agreements (PPAs) between power plant operators, based on renewable energy sources, and utilities are subsidized. For an offshore wind project, the REFIT is designed to enable the operator to achieve revenues of 14 ct/kwh and take into account the terms of the PPA as well as market prices. Netherlands The Dutch TSO, TenneT TSO B.V., is responsible for building and operating offshore wind project connections. However, current law also prescribes that the costs for the construction and operation of such connections is the responsibility of the offshore wind project operator. The old tariff system, the MEP program, was allowed to expire in August 2006 and was replaced with the SDE program in April SDE pays a bonus for a time period of 15 years. An adjustment is made to

7 account for the difference between the SDE tariff and market prices. The Dutch Ministry for the Economy defines the tariff and adjustment on an annual basis. The SDE program started to apply to offshore wind projects since January After obtaining a construction permit, project developers apply to the authority in charge Noordzeeloket to participate in the SDE program. The first round of bids started in January The responsible authority, SenterNovem, requested bidders to apply for SDE participation on the basis of a minimum tariff per kwh (15-year term). Taking into account varying distances to the shore and water depths for offshore wind projects, the authority stated that it would consider the most competitive bidders, up to a maximum subsidy of EUR 5.3 billion. Twelve applications, totaling 3.2 GW of planned capacity, were admitted for the first SDE bid two Bard Group projects with a planned total capacity of 600 MW were selected to participate in the SDE program. No information about the applicable tariff has been disclosed. Two months from the announcement, successful applicants must provide bank guarantees of EUR 20 million per project as security. Sweden In addition to obtaining a building permit for the offshore wind project, developers also require a permit to build and operate connection to the grid. The TSO, Svenska Kraftnat, passes on connection costs to project developers by way of fees for using the grid. Sweden s support mechanism for renewable energies is based on quotas, and was set out in a 2003 law of electricity certificates. For every year until 2030, energy suppliers are required to provide evidence that they meet their specified quotas for renewable energies in electricity consumption. They use certificates 1, issued by the TSO, which can be traded within Sweden and can only lapse once offset against a quota obligation. The price of a certificate in July 2010 was around 2.4 ct/kwh, producing an overall tariff of 6.76 ct/kwh, which is low by international standards. The expansion of offshore wind is also supported by a government subsidy program, which has a EUR 350 million budget. The government energy agency acts as the approving authority for these subsidies, which are for research and development projects related to wind power. They focus on environmental protection measures, procurement of technology and developments prior to market introduction. Assessment of general conditions The support mechanisms used to promote offshore wind differ considerably by country. In general, support mechanisms can be divided into tender-based systems (Denmark, Netherlands), market-priced based systems (UK, Sweden) and fixed FIT systems (Belgium, Germany, France, Ireland). In addition to the support mechanism itself, the general framework, most notably provisions for grid connections or existing infrastructure, such as ports, are also significant for project developers. 1 Each certificate corresponds to one MWh

8 Resources for the development of offshore wind projects are limited, in particular with regards to financing. All the EU countries systems reviewed above show that there is a push to expand offshore wind through the private sector, where national support mechanisms provide genuine competition for investment. There are advantages and disadvantages to all systems. For example, the FIT tender-based process implemented by Denmark has shown limited value for the comprehensive development of offshore wind. Tenders for new offshore wind power capacity are limited in Denmark to a few select individual projects (Stop-and-Go policy). Other projects are not commercially viable due to low FIT applied to them. This means that despite an extensive project pipeline, it is not possible to achieve the dynamic growth experienced in the UK. Moreover, since cost pressures are transferred to the developer, the tender process is not competitive in the context of a Europe-wide competition. In general, fixed FIT systems offer offshore wind developers a higher degree of investment security, but the success of the fixed FIT is dependent on the level of subsidy and other framework conditions. Measured by the expansion of the offshore wind sector, none of the countries with a fixed FIT can be classed as successful. Following extensive adjustments to the EEG, Germany has successfully entered the market, albeit with considerable delay. Yet despite completion of the Alpha Ventus test site and the two offshore wind projects under construction, future market development remains uncertain. Significantly higher cost expectations reduces the profitability of offshore wind projects, and the provision for connections to the grid is another significant hurdle despite efforts to relieve the burden on project developers. Finally, there is the risk of a supply bottleneck for which developers would not be entitled compensation. Offshore wind developers are therefore demanding that the German government develops a grid expansion plan to ensure that the four offshore wind project clusters in the North Sea receive grid connections in time. The UK continues to offer the most attractive conditions for investment in offshore wind projects, even though revenues are dependent on market prices and contain price fluctuation risks. Moreover, the British government s willingness and flexibility to remove obstacles helps to maintain the speed of implementation and makes the UK an attractive investment destination for wind projects Market Survey A KPMG 2010 market survey of the European offshore wind markets confirmed that the UK offers the best conditions for offshore wind project development, followed by Germany, Belgium and the Netherlands. These four countries are well placed to achieve their expansion targets. An unfavourable assessment of expected returns puts the expansion plans for offshore wind in Ireland, Denmark, France and Sweden into question.

9 Germany received the highest approval ratings for its willingness to provide support to offshore wind, followed by the UK following the recent amendments to the EEG and RO respectively. The Netherlands have also made considerable gains in this regard, whilst market participants are losing confidence in France and Spain. The results of this market survey and an analysis of offshore wind farm development across Europe show that good support mechanisms for offshore as well as political support to finance projects and remove barriers shows dividends when it comes to project approval and development. While the offshore wind industry has flourished in the UK, the industry is non-existent in France, and is slowing down in Denmark.