Can Transmission Access Guarantees and CfDs work together?

The EU has suggested using a combination of Contracts for Difference and Transsmion Access Guarantees to support the development of offshore wind. We consider the likely effectiveness of these measures and how they could be used together to address the risks facing developers of hybrid generation and interconnection projects.

Norway and the countries around the North Sea have collectively committed to licensing offshore wind developments equivalent to 15 GW each year until 2030. Several of these projects are expected to be developed as so-called hybrid projects, in which the offshore park is connected to multiple points on shore and the offshore infrastructure can, in addition to landing offshore generation, also transmit power from shore to shore.

Generators in such hybrid projects are expected to be located in offshore price or bidding zones, and therefore to be exposed to the risk of operational derating. Operational derating refers to the practice of limiting the transmission capacity made available to the market to flow power between two connected bidding zones. Transmission System Operators (TSOs) undertake operational derating to help manage the manage flows, notably to relieve congestion elsewhere in the network.

Offshore wind developers in hybrid projects are likely to be entirely reliant on cross-zonal transmission capacity to export their generation to shore and their revenues are therefore highly sensitive to reductions in transmission capacity. If the transmission capacity falls below the level needed to land potential generation, prices in the offshore bidding zone may collapse, significantly reducing generator revenues.

The proposed EU electricity market design reforms introduce Transmission Access Guarantees (TAGs), which are designed to compensate offshore wind producers for the impacts of operational derating. The exact design is still unclear. However, TAGs would likely pay out the price difference between a reference market and the offshore bidding zone price based on the extent of any lost generation volumes due to operational derating. This money would be paid by TSOs from the incomes earned on their transmission infrastructure (also known as their ‘congestion income’).

Unfortunately, the proposals under discussion fail to set a clear guiding objective for the design of the TAG regime. In particular, they do not distinguish between two plausible but conflicting objectives. TAGs could be intended to ensure that TSOs only resort to operational derating where it is efficient by making sure that such derating is costly. Alternatively, they could seek to compensate offshore generators against the costs of restricting their output.

Unfortunately, these objectives are liable to come into conflict, with TAGs unable to fulfil both. One reason for this is that offshore wind developers are likely to have a Contract for Difference (CfD), which, in effect, establishes a contracted price for their generation. It is this contracted price that is relevant for establishing their losses and the rate of fair compensation. TAGs, however, will likely reflect market prices, which will probably be different.

If TAGs and CfDs are going to work effectively together, clear and distinct roles need to be defined for each. If generators with CfDs are going to be fairly compensated for lost revenues, this compensation should account for the prices supposedly guaranteed under the CfD. One way to do so would be to have CfDs pay out based on potential generation rather than actual generation, at least when actual generation is restricted by operational derating.

Conversely, if TSOs are going to be incentivised to conduct operational derating only when it is efficient, then they need to be made to pay an amount that accurately reflects the social cost of restricting transmission capacity. This is unlikely to match the compensation owed to the offshore generators, although any TSO costs could form a contribution towards the cost of compensation.

Overall, there is a need to see CfDs and TAGs together and to consider more broadly the set of risks and incentives facing the developers and TSOs involved. Otherwise, the market design may fail to realise any of the potential objectives set out above.

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