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United Kingdom

Pragmatism wins over market idealism -- Managed not market approach to offshore transmission

The crucial question of who should build, own and operate the transmission lines for Britain's offshore wind farms -- a key issue for the economics of up to 7.2 GW of large projects with construction licences from the second round of permitting in 2003 -- has been settled by government to the satisfaction of the wind industry. The offshore assets will belong to a transmission system owner, with the costs recovered over time from the wind project owners.

The decision adopts the same "shallow charging" principle used to cover the costs of the onshore transmission system. The Department of Trade and Industry (DTI) proposes that the existing onshore system operator, National Grid Transco, should also operate the offshore system.

As a regulated "price control" approach, it has a number of clear advantages, says energy minister Malcolm Wicks. It increases the viability of offshore wind projects by spreading grid connection costs over a number of years, ensures consistency with the onshore arrangements and will encourage a co-ordinated development of the offshore network, reducing duplication of transmission assets. Responsibility for developing the offshore connections will be shared by the system operator and the transmission network owner.

The majority of the costs of building the new offshore connections will ultimately be met by wind developers, says Wicks. But they will be staggered over several years and will be funded by a regulated rate of return -- a rate still to be determined, but likely to be lower than the market rate. Wicks adds that the regulatory framework will also benefit wave and tidal marine renewables, which are still emerging technologies.

Price control

The minister rejected the option preferred by the energy regulator. Ofgem favoured a "licensed merchant" approach where the generator would meet all the costs of the connections upfront. But Wicks believes this would not deliver the substantial amount of offshore capacity needed to meet the UK's renewables targets. In the DTI's consultation on a regulatory regime for offshore transmission, 20 responses -- including all the offshore developers -- favoured some form of price control approach, compared with just four who preferred the licensed merchant option.

Richard Ford from the British Wind Energy Association (BWEA) says the industry is "delighted" that the government has finally agreed a regulatory framework for offshore transmission. "Now the hard work begins on the details of how this framework should be implemented," he says. "BWEA is looking forward to working with government and Ofgem to deliver this."

Ofgem has issued a scoping document as a first step towards setting up the price controls that will determine how much owners of the offshore networks will be able to charge for their use. It identifies a number of questions which Ofgem needs to resolve with the industry and DTI. These include how licences for transmission operators will be issued, what geographic areas they will cover and the technical rules for offshore transmission.

It will be at least 18 months, though, before consultations are completed to determine the level of charges for use of the offshore wires. By that time, the government will have concluded its broad review of energy policy, which could recommend additional support for offshore renewables projects in the form of reduced transmission charges.

Extra support is needed, says BWEA. The government's proposed regulatory regime is still not enough to allow the majority of round two offshore projects to go ahead. In its report: Offshore Wind: At a Crossroads, the BWEA states that offshore wind could deliver 8000 MW by 2015 and meet some 6% of UK power needs -- a significant proportion of the government's 15% renewables target for 2015. But without additional support, only 2000 MW is likely to be built, it claims; just 25% of what is possible over the next ten years.

Analysis

The report, launched at the BWEA's offshore wind conference in April, is the result of interviews with over 30 companies involved in offshore wind. "What it gives us is a reliable analysis of our ability to deliver," says Gordon Edge of BWEA. The research will feed into the government's energy review.

Three offshore wind farms are operating in British waters today, with two under construction. More round one projects are in the tendering process, but development of the UK offshore wind sector has been slower than industry expectations. "We have progressed at the rate of one project being built per year for the last four years," points out Edge. Project developers are meantime working on their larger round two projects. Four have lodged applications for consents totalling 2550 MW and four further applications are expected this year.

While developers of some of the round two capacity off the east coast of Britain expect to press ahead with their projects, most others claim there is an economics gap between the costs of building offshore wind farms and the revenue expected under the Renewables Obligation (RO) equivalent to up to 25% of installed project cost. "We have very difficult market conditions and issues to do with how we contract for these projects," said Edge at the BWEA conference. Foremost of these market difficulties is uncertainty over future prices of Renewables Obligation Certificates (ROCs).

Changing the RO, or not

From Shell, Andrew Murfin believes that change to the RO is inevitable and delaying it merely exacerbates the problem. "The fundamentals are strong for offshore wind, but the RO is not delivering." Investors and off-takers do not like change, but the government and Scottish Executive are already tinkering with the RO, he said. The important thing is to act now. "But whatever we do, let's keep it simple," he adds.

Alan Mortimer of ScottishPower argued against tampering with the RO market. "The RO is working; the growth in wind energy is really impressive," he pointed out, saying the mechanism just needs time to prove itself. He warned against diverting support from onshore wind to offshore. "Onshore success is crucial for us all, not only in justifying extension of the grid, but also in maintaining confidence in the industry's ability to deliver," he said. "Anything that diverts money from onshore to offshore will reduce onshore deliverability." Relatively simple measures on grid access, planning and technical areas will speed up offshore development, said Mortimer. "Do not throw the baby out with the bathwater; the RO is a good mechanism, we should maintain it."

Airtricity's Paul Dowling agreed. "The UK government has done an exceptional job in giving strong market signals. It has been less successful in tackling grid and planning barriers," he said. This pushes up the cost of onshore wind in Britain. "Tinkering with the RO is not going to solve that problem."

The gap between the economics of development onshore and offshore is closing, he continued: "Not because the economics of offshore wind are getting better, but because the economics of doing onshore developments are getting worse." Airtricity hopes this year to receive consent for its Greater Gabbard offshore project in the Outer Thames Estuary and plans to forge ahead with construction.

Exceptional good sense

"We will be building offshore capacity because it makes exceptional economic sense. We live in an era that is changing; global commodity prices are rising as the industrialisation of India and China increases." This changes how people will view renewables, he said. "Projects built early will look hugely economic in ten years time. I would be very bullish about building offshore."

But even with an extra policy impetus from government -- whether in tackling site permitting and the grid or through financial support -- a major pinch point in offshore wind power development will be wind turbine supply, the BWEA report finds. This will be particularly acute between 2009 and 2012. Currently, only three wind turbine manufacturers are interested in and capable of supplying the UK offshore market. With the current huge global demand for turbines, all three are stretched in delivering to the lower-risk onshore market. "I have an internal marketing issue within my company," admitted Anders Søe-Jensen of Vestas at the conference. In January, Vestas created a subsidiary, Vestas Offshore A/S, to handle the riskier offshore side of its business.

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