A report prepared by engineering, design and advisory company AFRY on behalf of the Ministry of Economic Affairs and Climate Policy in the Netherlands suggests that some form of financial support for offshore wind may continue to be needed, despite recent zero-subsidy bids
The report, The business case and supporting interventions for Dutch offshore wind, questions whether zero-subsidy, merchant risk projects are economically sustainable, even as costs fall. It also questions whether unsubsidised projects will be able to secure the finance they need if returns and ‘capture prices’ from offshore wind develop as projected in the Dutch Government’s reference case.
“That offshore wind projects have been tendered at zero-subsidy in the Netherlands demonstrates a huge achievement by the industry in bringing costs down over the last decade,” said the report.
“The technology itself is continuing to improve with ever-larger turbine sizes and adaptations to enable exploitation of a wider range of sites. There is potential for cost reductions to continue. With the increasing push towards decarbonisation around the world, the opportunity for offshore wind is vast.
“It is, however, still early days,” said AFRY. “No country has yet achieved 11 GW of operational offshore wind, the 2030 target for the Netherlands. No merchant project has yet been commissioned, although the first is expected in 2022, so there is relatively little experience in the investment community of the risks involved.”
AFRY also highlighted what it said were risks associated with tender processes for important offshore wind in Europe. “These can be highly competitive, given the current level of interest. Tenders have many benefits and have been a considerable driving force behind cost reduction, but it should also be remembered that tenders do not always deliver.
“Our modelling suggests that it is right to raise these questions,” AFRY said. “Projects currently appear to be going ahead despite relatively low expected returns for merchant investments.
“If this is for strategic reasons, zero-subsidy offshore may indeed not be sustainable in the longer term, particularly as the pool of capital investors are willing to commit at these return levels is likely to be limited. Over time investors may increasingly be attracted to alternative markets where returns are more secure.”
However, AFRY concluded that there is “some cause for optimism” if capex and opex costs continue to fall rapidly, so that returns improve over time, attracting a wider range of investors.
“To increase the chances of these higher returns, other interventions can be made to shore up revenue streams,” said the authors of the report. “This includes ensuring demand and supply grow in tandem and encouraging deployment of new technology such as green hydrogen and demand-side flexibility to enable offshore wind to capture a greater proportion of the value in the wholesale electricity market.
“Increases in financing costs may also be at least partly tempered by acceleratng innovative financing arrangements and developing risk management products better suited to intermittent generation.
“Ultimately,” said the report, “there remains a risk that if returns progress as anticipated… and there are high levels of competition for finance, or some of the downside risks emerge, policy intervention will be necessary to offer price stabilisation or an alternative form of regulation to reduce financing risk to ensure 2030 targets are met.”
Requiring governments or end-users to take on risk for large infrastructure investments is not unusual and is regularly seen in major infrastructure projects. This is because governments and end-users are generally better able to absorb the risks by socialising them across a large proportion of the population. This has the potential to lead to considerably lower financing costs and so can mean lower costs for consumers overall.
“The challenge is to avoid distortion of the market with unintended negative consequences,” AFRY said, noting that there have been ‘many examples’ in the history of renewables policy in a number of countries where risks have not been identified early, with damaging consequences for the renewables industry.
It believes consideration should be given to whether a policy ‘back stop’ should be put in place from the start or only initiated once there is a sign of trouble.
The study focused on the business case for merchant offshore wind, but in practice, decarbonisation will require deploying a wide range of low carbon technologies. Many of these will impact on the offshore wind business case, such as electric vehicle and heating technologies, storage and technologies to better enable demand side flexibility, and they are also likely to impact on the business case for other technologies. Any policies designed to support offshore wind will therefore need to be considered in this wider context.
“One thing is not in doubt,” AFRY concluded. “The energy market will continue to evolve and the immediate outlook and balance of risks will change. Ensuring the regulatory environment is sufficiently supportive for offshore wind to meet 2030 targets without causing undue costs to consumers or distorting the electricity or wider energy market remains a challenge.”