Economically viable solutions for offshore wind

Norway is facing a period of strong growth in electricity demand. To meet the growth in demand, large investments in new generation capacity are necessary. Offshore wind will be a key technology. Therefore, it is necessary to find solutions that allow a sensible development of offshore wind that can become profitable over time.

Samfunns- og bedriftsøkonomisk lønnsomme havvindløsninger

In THEMA’s “Veikart til lønnsom havvind” (“Road map to profitable offshore wind”) prepared for Renewable Norway, we discuss key conditions for the profitability of offshore wind production, both in the corporate and socio-economic sense. The socio-economic profitability depends on the cost development of the technology, the sales value of the power, bottleneck revenues from trade in cases of multinational connections, the producer and consumer surplus from power consumption onshore and the choice of grid solution. Central to the economic profitability of investors in offshore wind farms are the income from power sales and the costs of offshore wind and the grid, the regulation of the offshore grid and market design.

In the report, we point out that after a long period of declining costs for offshore wind, we are now experiencing an increase in costs. However, we see the first signs that this increase is leveling off and we expect that offshore wind costs will fall again in the medium term.

Furthermore, we see that the socio-economic benefits of offshore wind will be greatest by developing hybrid solutions rather than radial connections. These are the solutions that have the greatest price impact in Norway and provide the most additional transmission capacity.

It is important that the market solutions offshore are designed to achieve the greatest possible value. The regulation should contribute to a distribution of income and costs between the actors so that socially economically profitable hybrid projects can become commercially profitable for all parties.

Offshore bidding areas provide the most efficient use of the infrastructure. However, a central challenge with offshore bidding areas is that revenues are shifted from the power producer to the grid owner. To create sufficient corporate economic profitability for all parties in a hybrid project when there are independent owners of the grid and offshore wind farm, a solution is to redistribute the bottleneck revenues.

However, redistribution of bottleneck revenues is not immediately possible with the current EU regulation of bottleneck revenues. Our assessment is that there is reason to look at this question again. A key point is that the redistribution of bottleneck income cannot be regarded as aid without further ado. Offshore wind farms and hybrid grids are mutually dependent investments where the income streams cannot be seen separately but are influenced by market design and choices in system operation.

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