The European Commission has now published its long-awaited offshore renewable energy strategy document. One of the most striking features of the document is the scale of ambition for offshore generation, with the EU’s offshore wind capacity planned to grow from around 12 GW currently (excluding the UK), to 60 GW by 2030 and 300 GW by 2050.
Generation at this scale implies a rethink in both project and market design. Mass offshore wind deployment is more likely to favour a more meshed and interconnected offshore transmission system. Of particular interest is the use of so-called hybrid projects, in which offshore generators are connected to multiple shores in different countries. As our work makes clear, hybrid projects raise potential challenges for market design, particularly if, as has been the case to date, offshore generators are simply incorporated into existing (onshore) bidding zones. The creation of new offshore bidding zones might offer a solution to these problems, enabling the market to ‘see’ the technical limitations of the offshore network. However, this approach also risks reducing the commercial incentives for investment in renewable offshore generation.
To date, most offshore generation projects have been realised with direct transmission connection to the shore. Under this setup, the associated transmission infrastructure is used exclusively by the offshore generator and therefore only to the extent the generator is generating. A meshed offshore transmission system allows for fewer cables and higher utilisation, thereby reducing costs, environmental impacts and the use of scarce maritime space. Hybrid projects are distinguished by the fact that the transmission infrastructure can be used not just to land offshore generation, but can also be used to flow power between different bidding zones or countries. This doesn’t just help ensure that power is directed flexibly to where it is needed most, but might also allow for offshore generation projects at more remote sites.
The fundamental problem when including offshore generation in existing bidding zones is that the market design fails to reflect the physical limitations of the offshore network. Since the available transmission capacity must be divided between landing offshore generation and flowing power between different bidding zones, the capacity that can be made available to trade power between zones is heavily dependent on offshore generation. When this generation is treated identically to all other onshore generation in the zone, the market can struggle to identify what is and isn’t technically feasible.
In practical terms, extending onshore bidding zones to include hybrid projects offshore means that system operators will be forced to declare the volume of trade that can occur between zones based on their forecasts of offshore generation. In other words, system operators will need to make an educated guess as to the volume of capacity that won’t be needed by offshore generators. When these forecasts inevitably turn out to be wrong, system operators will then need to step in to reverse trades and redispatch plants so as to prevent the limited transmission capacity available from becoming overloaded.
The extension of existing zones offshore is also likely to run afoul of existing European regulation, which requires that no less than 70% of transmission capacity between bidding zones be offered up to the market for cross-zonal trade. Where more than 30% of the capacity might be alternatively used for landing offshore generation, this well-intentioned regulation might imply the need to constrain down excessive offshore wind generation just to keep the lines open for trade. Such an outcome would amount to giving up free renewable power and is both inefficient and harmful to the realisation of European energy and climate targets.
The creation of new offshore bidding zones might offer a solution to these problems, enabling the market to ‘see’ the technical limitations of the offshore network. However, as our report makes clear, the use of such zones raises a series of practical and political questions.
Although such zones could conceivably be confined to a single European member state, it may make sense for some offshore bidding zones to be multinational in nature. In this case, system operation and governance arrangements would need to be adapted to facilitate this. The good news is that multinational bidding zones are not unprecedented in Europe. Ireland, in particular, represents a potentially instructive example for how arrangements could be developed to meet the needs of a multinational offshore bidding zone.
More problematic is the fact that offshore bidding zones result in a different distribution of market revenues, with less revenue ending up with offshore generators and more revenue accruing to transmission owners. In the power system modelling conducted as part of the work, the use of offshore bidding zones reduced total generator revenues by 1-5%, albeit with significant variation between projects. Whereas some projects are unaffected by the choice, the worst-impacted projects saw generator revenues reduced by 11%.
This represents a potential threat to the mass commercial deployment of offshore wind, particularly at the scales envisioned by the Commission. Consequently, our work also explores potential solutions. These include arrangements to redistribute revenues and risks between offshore wind developers and transmission owners. This possibility is reflected in the Commission’s offshore strategy itself and THEMA looks forward to working further with our clients to identify arrangements capable of unlocking the sector’s potential.