Britain's energy regulator, Ofgem, and the Department of Trade and Industry (DTI) have jointly launched the consultation on one of the key issues needing resolution before any of the project sponsors behind the UK's second round of larger offshore wind farms is willing to invest in their multi-million pound projects.
"The development of round two offshore wind has a vital part to play in reaching our renewable energy targets," says energy minister Malcolm Wicks. "It is critical to introduce a regime that allows offshore wind farms to connect at an acceptable cost both to developers and electricity customers."
The long awaited consultation has been delayed due differences between the DTI and Ofgem over recovery of offshore transmission costs. Ofgem favours exposing wind generators to the full economic force of locational signals for siting wind farms, so that projects are sited where their overall costs will be cheapest. The DTI believes, however, that capping transmission costs for project developers through a system of limited charges could provide the additional support needed for round two projects to be viable. Its view is revealed in an analysis of predicted costs and revenue accompanying the consultation.
The study shows that under a range of scenarios, offshore wind projects would have a negative net present value. "This is the closest I have seen the DTI to stating that there could be a funding gap for round two projects," says Richard Ford from the British Wind Energy Association (BWEA).
Fifteen round two projects were granted development licences in December 2003 in three areas off the British coast: the outer Thames estuary, the Greater Wash, both on the English east coast, and northwest England. The projects range in size from 64 MW to 1200 MW and have a combined capacity of 7.2 GW. A study by network consultants Econnect, released earlier this year, shows that the most economic method of connecting each wind farm would be by 132 kV or 245 kV cables, each capable of transmitting 200 MW to 350 MW of offshore wind capacity to customers on shore. Typically, one or two cables would link smaller projects with the onshore grid, while larger projects would need three to five cables (Windpower Monthly, March 2005).
The Econnect study concludes there may be economies of scale to be gained in a few cases where two offshore wind farms could share the same transmission link. But a full-blown grid of offshore transmission cables would not be viable, it says.
Ofgem and DTI are seeking views on two options. The first is a licensed price control approach, similar to the transmission regime that operates throughout the onshore British grid: the offshore connection would belong to a transmission owner who recovers the cost through charges on users of the system under price controls agreed with Ofgem. The second is a "licensed merchant" approach, where the generator would meet all the costs of developing the connection links and receive a licence to transmit through them. This is the model used for round one projects.
The consultation document points out that under a price control approach there is more scope for stranded assets, since inefficient investments would be borne by consumers, not generators. It would also be more complex and lengthy to implement because Ofgem would need to agree to investment decisions ahead for each year of a price control period. This could delay offshore projects and risk the government missing its 2010 renewable energy target. An advantage, however, would be consistency with onshore arrangements where the National Grid Company (NGC) is the transmission system operator for Great Britain. The offshore transmission lines could either be operated by NGC or by a separate transmission owner.
The government worries, however, that high charges could deter offshore developers. "It might be appropriate to find a way of capping these charges," says the document. The shortfall would be recovered from other system users -- either all generators and suppliers, or a single category of system users.
A licensed merchant approach, on the other hand, would need relatively "light touch" regulation. It could also be introduced sooner. But the government is concerned that developers could again be deterred from investing in offshore wind -- this time by having to meet all the costs of developing the transmission links and raising finance which would push up the end price of wind power.
Richard Ford believes most offshore developers responding to the consultation will prefer the price control approach, with NGC as system operator. This method is the most flexible for the design of offshore networks. It is the most consistent with existing connection arrangements and also with the "shallow charging" policy adopted onshore, and is therefore less discriminatory to offshore users than the licensed merchant approach, he says.
Ford points out that some developers are likely to be ready to commit to investing in their projects before the arrangements are fully in place and the system operator appointed. "Companies may want to crack on and start putting assets in the sea before the i's are dotted and the t's crossed," he says. "It would be wrong for those assets to be treated differently from subsequent projects. We would need them to be brought into the regulatory arrangements in some equitable fashion."
The consultation closes October 19. The government and Ofgem hope to publish their decision by the end of the year, with all regulatory arrangements finalised and implemented by the end of 2007.