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Wind Economics: Making sense of European offshore tariffs

EUROPE: For technologies such as offshore wind, which cannot yet compete in wholesale electricity markets, setting a suitable tariff is not easy. The problem is compounded as costs change with time.

Costs fell between 1992 and 2000, but then came a period of uncertainty from 2002 to 2014, when construction costs rose significantly. There is now evidence that prices are falling again.

The difficulty with any tariff is that it must be high enough to attract investment, but not so high as to enable developers to reap excessive profits.

The uncertainty in offshore renewable energy prices has been reflected in payment systems, which have fluctuated. The German tariff, for example, was initially set too low and so adjusted upwards in 2009, and again in 2012. It encourages cost reductions by lowering the initial tariff on a year-by-year basis. Modifications were also made to the UK support mechanism, which again rose until this February, when competitive tenders were introduced for Contracts for Difference and these yielded much lower prices.

Under the UK Renewables Obligation, offshore wind operators are paid about €180/MWh, but some negotiated settlements before auctions were introduced led to prices of up to €230/MWh. Auctions, however, yielded prices as low as €158/MWh, very similar to the latest German tariff revision (€150/MWh). However, that price is only paid for 12 years, unless the wind farm is in deep water or more than 12 nautical miles offshore.

Grid effect

The current tariffs for the six leading countries in offshore wind are all different and most are quite complex. There are several reasons for this, including varying approaches to the provision of grid connection. In Denmark, costs associated with grid connection are borne by all electricity consumers, although offshore operators do pay a modest tariff.

At the other end of the spectrum, UK offshore wind developers face the highest costs. Offshore grids are built and operated by transmission operators, who recoup their costs from the operators. The latter can bid to build the link, but that would make little difference to the overall costs. The total operating costs of UK offshore wind farms are therefore the highest in Europe, and this is reflected in the energy price.

Danish offshore developers benefit from geotechnical data from the Energy Ministry, while German developers have access to loans at favourable interest rates, so their cost of capital comes down. Contract terms also influence energy prices, and vary between 10 and 20 years. Although the German tariff is quoted as lasting for 20 years, the last eight are at a modest €35/MWh. Germany, like France, extends the payment period for sites far from shore or in deep water.

No two tariffs are the same, and no doubt there will soon be more variations.

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