Florence School of Regulation
When in energy policy is gradual change not enough?
The case of offshore grids
9th International Conference on the European Energy Market (EEM 2012)
Florence, 10-12 May 2012
Isabel Azevedo
THINK (http://think.eui.eu)
http://think.eui.eu
Background
THINK Report #5
“Offshore Grids: Towards a Least Regret EU Policy”
(published in January 2012)
• Offshore grids may be key in the accomplishment of the EU energy and
climate objectives: for the integration of RES and for the EU internal market
• There is uncertainty regarding future developments – a multiplication of
standalone lines, or a combined solution?
• But regulation needs to be proactive to avoid compromising any possible
future offshore grid development
How to regulate these investments?
Who should act? Is there a need for EU-involvement?
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How to regulate offshore transmission investments?
Three types of investments
STANDALONE
LINES
1. Shore-to-shore
2. Farm-to-shore
3. Combined solution
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How to regulate offshore transmission investments?
Shore to shore: three guiding principles
Planning
Competition
Beneficiary pays
• Important due to
network externalities
and economies of scale
• Important to the extent
that there are cost and
technology uncertainties
• Important to signal
costs of demand for
transmission
• Currently, mainly
national planning while
there are
interdependencies
across borders
• Currently, most TSOs
can only be contested
with merchant projects,
while opportune to
allow third parties to
receive regulated return
• Currently, mainly
national tariffs, while
these projects create
winners and losers
beyond national borders
The current regulatory framework for transmission investments with a cross-border
impact is economically unsound, but this problem is not specific to offshore
 Infrastructure package is the first step towards a solution
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How to regulate offshore transmission investments?
Farm to shore: an example
Borwin project
1200 MW, HVDC VSC technology, €1200
In comparison with the connection
of a typical generator onshore:
• Stronger network externalities
• Higher economies of scale
• Higher cost and technologies
uncertainties
Due to the economic characteristics, regulatory frameworks typically used for the
connection of onshore are not adequate. There is the need to follow the guiding
principles of transmission investments.
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How to regulate offshore transmission investments?
Farm to shore: experimentation is ongoing…
Planning
Competition
Beneficiary pays
• Typically used “firstcome first-serve”
procedures do not
capture offshore
economies of scale
• Typical restriction to
third-parties to develop
connections will not
sufficiently incentivize
innovation
• Typically generators do
not pay for their
connection - no incentive
to proactively participate
in connection planning
• The German model for
offshore is a good
example of advanced
connection planning
• The UK model for
offshore is a good
example of competitive
tendering
• The Swedish model for
offshore is a good
example of making
generators pay
The current regulatory framework to connect generators needs to be adapted to the
stronger economic features of farm to shore investments. But adaptation processes
are already ongoing at national level
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Who should act? Is there need for EU involvement?
Standalone offshore lines
There is no need for 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 benchmarking
novel regulatory frameworks (e.g. Germany, UK and Sweden)
• It is also important to continue the implementation third package
• With community-wide transmission planning that already includes shore to
shore investments
• That 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
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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
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Who should act? Is there need for EU involvement?
Combined solutions: analytical approach
Difficulties of these investments under the current regulatory frameworks
are tremendous. We identified…
5 main difficulties and respective remedies
By looking at the 3 first of a kind projects
Possible role of the EU to support the implementation of each remedy,
distinguishing between:
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
Soft
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Strong
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Who should act? Is there need for EU involvement?
Combined solutions: difficulties and remedies
National frames for transmission investments that are not aligned
• E.g., the TSOs in Denmark and Germany are responsible for the connection, but
not in Sweden
Harmonizing into economically sound regulatory frames for offshore
transmission investments
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)
Soft ✔
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Strong
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Who should act? Is there need for EU involvement?
Combined solutions: difficulties and remedies
National renewable support schemes that are not aligned
• E.g., support often linked to import
Harmonizing the renewable support schemes for off- shore wind farms
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
Soft ✔
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Strong
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Who should act? Is there need for EU involvement?
Combined solutions: difficulties and remedies
Multi-stakeholder setting with winners and losers
• E.g., in Kriegers Flak - 3 TSOs, 3 NRAs, 3 wind developers
Facilitating the ex-ante allocation of costs and benefits of offshore
transmission investments
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.
Soft ✔
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Strong ✔
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Who should act? Is there need for EU involvement?
Combined solutions: difficulties and remedies
Grid technology development constrained by typical R&D market failures
• E.g., HVDC VSC, and DC breakers and control systems for larger scale applications
Speeding-up offshore grid technology development
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)
Strong ✔
Soft
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Who should act? Is there need for EU involvement?
Combined solutions: difficulties and remedies
Sequential decision process in a context of uncertainty and irreversibility
• E.g., decisions such as the size of the offshore platform, HVDC system voltage, etc.
may cause irreversibility problems and need to be taken in early stages of the
project
Adapting the Community-wide transmission planning to offshore grids
Develop improved transmission planning methods and apply them to elaborate a
Twenty or Thirty Year Network Development Plan that considers combined solutions
Strong ✔
Soft
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Florence School of Regulation
Thank you very much for your attention
[email protected]
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