Offshore transmission investments How to regulate these investments? Who should act? North Seas Countries Offshore Grid Initiative (NSCOGI) Copenhagen, 18-19 April 2012 Leonardo Meeus (Florence School of Regulation, European University Institute) THINK ()
Background THINK Report #5 Offshore Grids: Towards a least regret EU policy (published in January 2012) Three types of investment Shore to shore Farm to shore Combined solutions How to regulate these investments? Who should act? 2
How to regulate offshore transmission investments? Shore to shore: projects overview Four projects, four regulatory frames: Estlink 350 MW VSC HVDC NorNed 700 MW CSC HVDC BritNed 1000 MW CSC HVDC Nemo 1000 MW CSC HVDC 3
How to regulate offshore transmission investments? Shore to shore: TSOs propose, NRAs approve Planning principle Important due to economies of scale and network externalities Assessment: mainly national planning, while interdependencies across borders Competition principle Important to the extent that there are cost and technology uncertainties Assessment: most TSOs can only be contested with merchant projects, while opportune to also allow third parties to propose projects for a regulated return Beneficiaries pay principle Important to signal costs of demand for transmission Assessment: mainly national tariffs, while these projects create winners and losers beyond national borders In conclusion: the current regulatory framework for transmission investments with a cross-border impact is economically unsound, but this problem also exists onshore 4
How to regulate offshore transmission investments? Farm to shore: projects overview 400 350 300 HVAC HVDC VSC MVAC Distance (km) 250 200 150 100 50 0 1990-50 1995 2000 2005 2010 2015 2020 Year Commissioned 5
How to regulate offshore transmission investments? Farm to shore: strong economic features In comparison with the connection of a typical generator onshore: Stronger network externalities, and economies of scale Higher cost and technology uncertainties Borwin project: Tennet, ABB 6
How to regulate offshore transmission investments? Farm to shore: regulatory experimentation ongoing Planning principle First-come-first-serve does not capture offshore economies of scale and network externalities German model for offshore is a good example of advanced connection planning Competition principle Only allowing TSOs to develop connections does not sufficiently incentivize innovation, while there are high cost and technology uncertainties UK model for offshore is a good example of how competitive tendering can be used Beneficiaries pay principle Generators that do not pay for their connection, do not have an incentive to proactively participate in connection planning Swedish model for offshore is a good example of making generators pay for their connection In conclusion: the current regulatory framework to connect generators needs to be adapted to the stronger economic features of farm to shore investments, which is ongoing 7
Who should act? Standalone offshore lines There is no need for a specific EU intervention for standalone offshore lines Shore to shore the problem is the same as onshore Farm to shore the problem is local Nonetheless, The EU institutions can support the ongoing learning process by comparing the performance of novel regulatory frameworks (e.g. Germany, UK and Sweden) It is also important to continue the implementation of the third package With community-wide transmission planning that already includes shore to shore investments (TYNDP) But, this still needs to be backed-up by an EU level facilitation of the ex-ante investment cost and benefit allocation (Infrastructure package first step in this direction) 8
How to regulate offshore transmission investments? Combined solutions: projects overview Kriegers Flak Denmark, Germany, Sweden 150 M EU grant COBRA cable Denmark, Netherlands 86.5 M EU grant Moray Firth HVDC Hub United Kingdom 74 M EU grant The economic case of these projects is still uncertain, but regulation needs to be proactive to enable this possibly important path to 2050 9
Who should act? Combined solution: analytical approach The difficulties of these investments under the current regulatory framework are tremendous Difficulties are the actual problems faced by these 3 first of a kind projects (Kriegers Flak, Cobra Cable, Moray Firth) Remedies Type of EU involvement Soft Strong Possible role of the EU: Soft EU involvement: guiding and supporting the national and/or regional policy implementation of the remedies; Strong EU involvement: where a regional solution is not viable, a stronger involvement is already recommended today 10
Who should act? Combined solution: difficulties & remedies National frames for transmission investments that are not aligned Kriegers Flak: TSOs in Denmark and Germany responsible for the connection, but not in Sweden Cobra Cable: TSOs in Denmark and the Netherlands could connect German offshore wind, but they are not responsible for it and the German TSO is obliged to connect Type of EU involvement Soft Strong Indicative guidelines that encourage member states to follow the guiding principles of an economically sound regulatory frame for transmission investments (i.e. planning principle, competition principle, and beneficiaries pay principle) 11
Who should act? Combined solution: difficulties & remedies National renewable support schemes that are not aligned Kriegers Flak: not necessarily an issue, because in the current project design each country would continue to import the offshore wind produced in its waters Cobra case: German offshore wind could feed into the Danish or Dutch system, but the Germany renewable energy support is solely for energy delivered into the German system Type of EU involvement Soft Strong Promote the use of the renewable support scheme flexibility mechanisms for offshore wind farms (i.e. joint project and joint support scheme mechanisms) to reduce the distortions coming from the national support schemes 12
Who should act? Combined solution: difficulties & remedies Multi-stakeholder setting with winners and losers Kriegers Flak: 3 TSOs, 3 NRAs, 3 wind developers Cobra: at least 2 TSOs, 2 NRAs, and potentially several wind developers. Moray Firth: only 1 TSO and NRA, but potentially several wind developers Organize the approval of transmission investment project packages (i.e. portfolio approach instead of cost benefit allocation arrangements for individual projects), complemented with a new mechanism to implement the beneficiaries pay principle for combined solutions Type of EU involvement Soft Strong 13
Who should act? Combined solution: difficulties & remedies Grid technology development constrained by typical R&D market failures The technology to use would typically be HVDC VSC, which is relatively new technology that has already been used for standalone lines, but not yet in a combined solution Combined solution systems require more advanced hardware and software that still need to be developed and tested Type of EU involvement Soft Strong Include an offshore grid technology roadmap in the SET-Plan, within an industrial initiative driven by HVDC manufacturers, focused on accelerating offshore grid technology development required for large scale combined solutions (larger than in projects like Kriegers Flak, Cobra, and Moray Firth) 14
Who should act? Combined solution: difficulties & remedies Sequential decision process in a context of uncertainty and irreversibility Dimensions of offshore platforms HVDC systems that operate at a different voltage Retrofitting a converter station to make it multi-terminal Incompatibility of for components coming from different manufacturers Develop improved transmission planning methods and apply them to elaborate a Twenty or Thirty Year Network Development Plan that considers combined solutions Type of EU involvement Soft Strong 15
Thank you very much for your attention leonardo.meeus@eui.eu