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Offshore transmission investments How to regulate these investments? Who should act? North Seas Countries’ Offshore Grid Initiative (NSCOGI) Copenhagen, 18-19 April 2012 Leonardo Meeus (Florence School of Regulation, European University Institute) THINK (http://think.eui.eu)

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Background THINK Report #5

“Offshore Grids: Towards a least regret EU policy“ (published in January 2012)

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Three types of investment Shore to shore Farm to shore Combined solutions

How to regulate these investments? Who should act?

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Four projects, four regulatory frames:

NorNed 700 MW

CSC HVDC

Estlink 350 MW

VSC HVDC

BritNed 1000 MW CSC HVDC

Nemo 1000 MW CSC HVDC

How to regulate offshore transmission investments? Shore to shore: projects overview

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How to regulate offshore transmission investments? Shore to shore: TSOs propose, NRAs approve

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Planning principle • Important due to economies of scale and network externalities • Assessment: mainly national planning, while interdependencies across borders

Competition principle • Important to the extent that there are cost and technology uncertainties • Assessment: most TSOs can only be contested with merchant projects, while

opportune to also allow third parties to propose projects for a regulated return

Beneficiaries pay principle • Important to signal costs of demand for transmission • Assessment: mainly national tariffs, while these projects create winners and losers

beyond national borders

In conclusion: the current regulatory framework for transmission investments with a cross-border impact is economically unsound, but this problem also exists onshore

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How to regulate offshore transmission investments? Farm to shore: projects overview

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HVACHVDC VSCMVAC

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How to regulate offshore transmission investments? Farm to shore: strong economic features

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In comparison with the connection of a typical generator onshore:

• Stronger network externalities, and economies of scale • Higher cost and technology uncertainties

Borwin project: Tennet, ABB

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How to regulate offshore transmission investments? Farm to shore: regulatory experimentation ongoing

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Planning principle • First-come-first-serve does not capture offshore economies of scale and network

externalities • German model for offshore is a good example of advanced connection planning

Competition principle • Only allowing TSOs to develop connections does not sufficiently incentivize innovation,

while there are high cost and technology uncertainties • UK model for offshore is a good example of how competitive tendering can be used

Beneficiaries pay principle • Generators that do not pay for their connection, do not have an incentive to proactively

participate in connection planning • Swedish model for offshore is a good example of making generators pay for their

connection

In conclusion: the current regulatory framework to connect generators needs to be adapted to the stronger economic features of farm to shore investments , which is ongoing

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Who should act? Standalone offshore lines

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There is no need for a 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 comparing the

performance of novel regulatory frameworks (e.g. Germany, UK and Sweden) • It is also important to continue the implementation of the third package

• With community-wide transmission planning that already includes shore to shore investments (TYNDP)

• But, this 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

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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? Combined solution: analytical approach

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The difficulties of these investments under the current regulatory framework are tremendous • Difficulties are the actual problems faced by these 3 “first of a

kind” projects (Kriegers Flak, Cobra Cable, Moray Firth) • Remedies

Possible role of the EU: • 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

Type of EU involvement

Soft Strong

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Who should act? Combined solution: difficulties & remedies

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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)

National frames for transmission investments that are not aligned • Kriegers Flak: TSOs in Denmark and Germany responsible for the

connection, but not in Sweden • Cobra Cable: TSOs in Denmark and the Netherlands could connect

German offshore wind, but they are not responsible for it and the German TSO is obliged to connect

Type of EU involvement

Soft Strong

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Who should act? Combined solution: difficulties & remedies

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National renewable support schemes that are not aligned • Kriegers Flak: not necessarily an issue, because in the current

project design each country would continue to import the offshore wind produced in its waters

• Cobra case: German offshore wind could feed into the Danish or Dutch system, but the Germany renewable energy support is solely for energy delivered into the German system

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

Type of EU involvement

Soft Strong

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Who should act? Combined solution: difficulties & remedies

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Multi-stakeholder setting with winners and losers • Kriegers Flak: 3 TSOs, 3 NRAs, 3 wind developers • Cobra: at least 2 TSOs, 2 NRAs, and potentially several wind

developers. • Moray Firth: only 1 TSO and NRA, but potentially several wind

developers

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

Type of EU involvement

Soft Strong

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Grid technology development constrained by typical R&D market failures • The technology to use would typically be HVDC VSC, which is

relatively new technology that has already been used for standalone lines, but not yet in a combined solution

• Combined solution systems require more advanced hardware and software that still need to be developed and tested

Who should act? Combined solution: difficulties & remedies

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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)

Type of EU involvement

Soft Strong

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Who should act? Combined solution: difficulties & remedies

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Sequential decision process in a context of uncertainty and irreversibility • Dimensions of offshore platforms • HVDC systems that operate at a different voltage • Retrofitting a converter station to make it multi-terminal • Incompatibility of for components coming from different

manufacturers

Type of EU involvement

Soft Strong

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Develop improved transmission planning methods and apply them to elaborate a Twenty or Thirty Year Network Development Plan that considers combined solutions

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Thank you very much for your attention leonardo.meeus@eui.eu

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