Europe powered by green energy

What will it take to tap the green energy of the North Seas?

 

How do we realise the full potential of the offshore winds of the North Seas at the lowest cost as quickly as possible while ensuring reliability?

To begin with, it will require an updated approach. Until now, the buildout of offshore wind has been the result of a discussion about how much renewable energy we can afford and dependent upon national planning and the allocation of sites and subsidies.

Now that renewable energy has proven to be cheaper than fossil fuels– and with the need to drastically accelerate the green transformation to limit climate change – this approach and our focus must change. We need to change the conversation in order to identify and agree upon the principles on which future policy can be built. We suggest these four as a starting point for this new conversation:

1. Carbon pricing as a driver for investments
2. Collaboration between countries and regulators
3. Competition for full scope of projects
4. Confidence that the green transformation is possible

 

Better carbon pricing

Offshore wind energy is moving closer to the market prices of electricity. While this is great news for the green transformation, incentives are still needed to promote investment in renewables and to decommission fossil generation assets.

Renewable developers and financiers need long term visibility of electricity prices. This means the buildout speed and cost of offshore wind energy is affected by political factors, e.g. by the way market for energy is designed, as well as the price on CO2 emission allowances, as determined by the European Emissions Trading Scheme (ETS). Factors that can increase stability and long-term visibility for investors include:

Increased EU carbon reduction target
To have a fair chance of limiting the global temperature increase to less than 1.5 degrees by 2100, European carbon emissions needs to be reduced by more than 95% by 2050.

Given the cost reductions in renewable energy, increasing the European carbon reduction target to at least a 45% reduction by 2030 compared to 1990 is a realistic option. This could be translated politically into a higher price on carbon emissions, which in turn would increase confidence in building subsidy-free renewable energy and make it more likely to achieve net-carbon neutrality by 2050.

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Comprehensible carbon pricing
Cutting carbon emissions is difficult without a meaningful price on carbon to give market players the right incentives. But the current carbon price is still well below the cost of CO2 emissions needed for the ETS to align Europe with the Paris AgreementCitation E.g. though recently climbing to ca. EUR 13-16 per tCO2e, the current ETS price as of June 2018 is still only a fraction EUR 45-55 that is the expected price range for 2021-2030 within a Paris-compliant ETS. Carbon Tracker, 2018. . There’s a need for stronger market signals. Currently, the ETS is oversupplied with emission allowances. To keep the balance in the ETS, and ensure it has a role in the decarbonisation of the economy, surplus allowances should gradually be retracted from the market and cancelled. An alternative, and supplementary, approach is for countries to form a “coalition of the willing” and voluntarily enforce a mutual CO2 price floor to reduce regulatory uncertainty. This can be done by imposing an additional carbon tax on power producers (like in the UK), which tops up the ETS allowance price to an agreed-upon level.

Stable strike prices
There are many political uncertainties to investors in the European energy sector: Uncertainty about how European policy makers will ensure the Paris commitments are met. Uncertainty about the commitment to the ETS, which has led to a fragile CO2 pricing. And a substantial uncertainty about how coal plants will be phased out to reduce overcapacity and carbon emissions. These uncertainties have great influence on electricity prices. This forces investors to add a risk premium, and it may lead to delays or even cancelations of planned investments.

But the uncertainty can be overcome and managed to ensure the lowest cost and most effective delivery on build out targets, to the benefit of both customers and society. This can be done through a system like the contracts for difference (CfD’s) in the UK, where project developers compete do deliver the lowest bid on a stable strike price – which could become lower than the market price – and therefore gets certainty for the level of income with less risk of construction delays. If electricity prices turn out to be higher than the agreed strike price, rate payers will take all the benefit of the lower strike price. CfD’s are a good tool for overcoming the political uncertainty and risk in current energy and climate politics.

More collaboration between countries

As offshore wind farms grow larger and move further from shore, and as an increasing share of Europe’s energy supply is generated by sun and wind, the need for collaboration between countries increases. This, on the other hand requires coordination of grid planning, integration of energy systems and harmonised regulation.

Grid
Offshore wind farms are typically established with a single grid connection to the nearest shore. But many alternative configurations have been suggested, e.g. clustering of more farms with a shared connection to shore, or hybrid projects with offshore wind farms situated on interconnectors between two or more price zones. Recently, the prospect of creating an artificial island on Dogger Bank in the middle of the North Sea has been proposed, to function as a transmission and service hub for offshore wind power.

No solution should be ruled out. But it’s important to take a stepwise approach, continually exploring the feasibility of different solutions, as technology and regulatory regimes advance. As wind farms move further from shore and projects grow in size and complexity, regulators should acknowledge the competences of project developers and other industry players, e.g. by letting them design and build the optimal offshore grid solution.

To allow this to happen, a framework should enable developers to include interconnectors as part of new projects where feasible, subject to the approval of national transmission system operators (TSOs).

Better interconnectedness
Finding a way to bring the energy from offshore wind power plants to the consumption centres of Europe is a significant challenge. Securing European interconnectedness is not just a matter for offshore wind power but for any of solar, onshore and offshore wind power. Interconnectedness is a necessity for making the European green transformation a success.

Therefore, states and TSOs could be incentivised to optimise planning and operation of transmission grids and interconnectors from a regional perspective, and to overcome potential bottlenecks in the European transmission grid.

Regulatory differences
Many technical standards and requirements regulating offshore wind farms are formulated nationally. This hampers synergies across borders, as wind farms, crews and vessels must follow different letters of the law, though often with the exact same intent – e.g. regarding paint for foundations, markings for aviation and navigation or vessel equipment.

Currently, work is undergoing to harmonise the standards and rules regulating the offshore wind energy sector. Accelerating this work will further reduce the cost and enable realisation of the potential of the North Seas.

Competition for full scope of projects

Regulation should leverage the competences of the industry by enabling competition between developers for the full scope of projects. This would lower the cost of offshore wind energy even further.

Full scope
While the cost of energy from offshore wind farms has more than halved over the past decade, grid connection and transmission hasn’t followed the same downwards cost curve. In part, because these elements are not subject to the same competition as the production assets, meaning TSO’s aren’t sufficiently incentivised to ensure lowest possible cost to consumers.

Currently, several countries let the market actors bid for the contract of the wind farm, and then ask the TSOs to build the transmission. Estimates based on cost development in markets with competition for full scope show that including transmission assets in the project scope can help reduce cost of transmission by 10-30%, totalling a significant proportion of the final project costCitation Public available data, internal Ørsted cost assumptions and own calculations. Total levelised cost of energy delivered (LCOE) of transmission assets including CAPEX and OPEX, onshore and offshore project elements included. Detailed cost assessments based on 12 German, Danish and Dutch transmission. Projects commissioning from 2015–25. Project size from 400–900MW. Total project cable length 60–260km. Both HVAC and HVDC projects. Projects include: DolWin1–3 and 6, BorWin3 and 5, SylWin2, Borssele 1 and 2, Ostwind1, Horns Reef 3, Kriegers Flak.* Denmark is currently considering including the full scope for upcomming offshore wind farms .

Flexibility in choosing sites for projects
Developers are in a unique position to identify the most optimal sites based on wind conditions, water depths and sea bed conditions as well as synergies with existing or future project. This is why governments should aim for an open-door approach, where larger gross areas are designated, and market actors are able to scope for the best sites. States and/or TSOs should of course continue to determine grid capacity based on how much power production a region can absorb.

Giving developers full scope could drive cost further down

The full scope of an offshore wind project.

More confidence

It may sound strange, especially coming from an energy company, but the fourth principle is to demonstrate more confidence. One of the main requirements for creating a Europe running entirely on green energy is the belief that it’s possible. The last decade of debate about green energy has demonstrated a tendency to look at the existing energy system, technologies and capabilities and then assume that the prevailing trends will continue or that similar methods will apply in the future.

This has inevitably led to the conclusion that the green transformation cannot happen or will be too expensive.

But the green transformation will and should be disruptive. It will radically reshape the energy infrastructure that has fuelled the economic growth of the past century. We cannot assess our chances of building the energy system of tomorrow based on the technologies of yesterday

In this situation it matters how we dare to think. If we think of the green transformation as too challenging and risky, we’ll design a policy that is shortsighted and aimed at protecting what already exists.

On the contrary, when we allow ourselves to be optimistic, we take calculated risks and adopt policies that allow for new technology to be developed. We’ll see challenges as opportunities to learn and innovate.

The fact that renewable energy has become cheaper than fossil fuels is a testimony to the value and effect of this confident approach.

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The next phase of the green transformation