the global offshore wind market

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Douglas-Westwood Limited

The Global Offshore Wind Market

Policies and Investment Trends

Irene AllcroftDirector – Advisory Services

EWEC 2009, Marseille

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Policies and subsidies overview

The European landscape

Implementation and impact

Market forecasts

Case Studies

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• Europe has been at the forefront of offshore wind development since the 1990s

• Changing national policies has seen certain markets grow • Which policies/support mechanisms have had most

influence?

European Offshore Wind market

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Feed-in tariff – based schemes(also known as)

• FIT, ARTs, REFITs, Fixed Price Offers (FPOs), Standard offer contracts

• Objective is to provide long-term fixed price payment for renewable generators

Quota-based schemes(also known as)

• TGCs (Tradeable green certificates, ROCs (Renewable Obligation Certificates), RPS (Renewable Portfolio Standard)

• Objective to create price competition between renewable energy generators to meet defined targets at least cost

• Typically have a defined maximum cost through a price cap instrument (Country variations)

Support mechanisms: terminology

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Investment tax incentives

• Provide for income tax deductions or credits on some proportion of the capital investment

• Reduces taxable income or offsets taxes due

• Investment tax incentives encourage capital expenditure

Production tax incentives

• Provide for a set rate of income tax deduction or credits for each kWh of electricity produced by an offshore wind farm

• Production tax incentives encourage more efficient long-term production

Tax incentives

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• Capital grants• Subsidised loans• Grid connection• R&D

Other investment incentives

Picture courtesy of Vestas A/S

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The European landscape (1)

Country Developer support mechanisms

Tax incentive type Grid connection End user electricity supply incentive (market driver)

Belgium – regional level

TGC. Minimum green certificate value set at 10.7 ct/kWh

Investment tax incentive – taxable income deduction (13% of eligible investment)

unclear Quota system in operation for supply of electricity from renewables (varies across regions from 2.5%-8%)

Denmark GC mechanism based on market price + premium

FIT system

General carbon tax providing generators with 13cts/kWh produced

unclear Utilities required to buy all power from renewable sources at rates varying between 70—80% of the consumer retail price of electricity

France FIT – 13.0 ct/kWh for first 10 years, then varies over next 10 years depending on output (3.0ct/kWh – 13.0ct/kWh)

None currently for offshore wind

Wind farm developers responsibility

No specific drivers aimed at utilities. Govt target of 20% renewables by 2020

Germany Initial FIT – 13.0 ct/kWh payable for minimum of 12 years if farm operational by 2011 , plus an additional 2ct/kWh if construction on new farms starts before end of 2015

n/a German grid companies required to bear the costs of connection until 2011. (Introduced in 2006)

No specific drivers aimed at utilities. Govt target of 27% by 2020, 45% by 2030

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The European landscape (2)

Country Developer support mechanisms

Tax incentive type Grid connection End user electricity supply incentive (market driver)

Netherlands FIT from fixed fund(Available for total of 6000MW, of which 450MW allocated to offshore wind)

Previous tax incentive phased out in 2004-05. Unclear if they are being re-introduced


No specific drivers aimed at utilities. Govt target of 20% renewables by 2020

Spain FIT – Market price plus 8.6 ct/kWh to a maximum of 16.4ct/kWh guarantee

Investment tax incentive - reduction in taxable income equal to 10% of the eligible investment


Obligation to purchase all electricity produced placed on utilities.Govt target of 12.1% renewables by 2010

Sweden TGCs Production tax incentive – reduction in taxable income of approx. 1.94ct/kWh of energy produced.


Compulsory quota of electricity to be purchased from renewables each year (17% by 2010)

UK ROCs Levy exemption certificates (only applicable if ROCs and electricity produced are traded together)


Increasing quota of electricity to come from renewable sources (10.4% by 2010)

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• Differences in support /tariffs payable to developers supplying offshore wind energy into the grid systems across Europe (Revenue line impacts)

• Need to better understand available tariffs, support mechanisms and revenue stream structures to make informed investment decisions on future portfolio development across Europe (Balance of risk)

• FITs most widely spread in Europe, and perceived success has driven adoption in other countries

• Ongoing debate between quota-based schemes and FIT schemes in Europe.

• EU market entered competitive stage to attract developers – what impact will future EU concord have?

• Moves towards one European electricity market – timing and impact on revenue streams

The developer’s investment dilemma

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• Appears a heavily subsidised sector

• Support mechanisms open to change – leads to uncertainty

• Capital costs of offshore wind need to be reduced to give visibility of sustainable future without subsidies

• Balance sheet financing been dominant to date

• Little debt financing taken place to date – although cases being put forward

• Equipment/services sector of the industry may be more attractive than the offshore wind farms themselves

The Financial investor’s view: Offshore wind

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‘Many lenders have stopped providing credit for installations anchored to the ocean floor....offshore simply has a different

cost structure and this has influence on profitability’– Thiess Harder-Heun, Director, DeutscheKreditbank AG (Feb’09)

‘Still an extremely strong economic case for continued long-term investment in windfarm projects’

– Eddie O’Conner, Chief Executive, Mainstream Renewable Power’ (Feb’09)

‘...planning to invest in 1500MW of offshore wind capacity, but it is very expensive, both in capital cost and in maintenance’

– Sam Laidlaw, Chief Executive, Centrica (Jan’09)

‘ The economics of this project need revisited....we are workingwith our partners to study the feasibility of the project’

– Ziad Tassabehji, Head of Innovation & Investments, Masdar (Jan’09)

Lack of clarity affecting investment

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Market Forecasts (Global) 2009-2013

• 334 MW brought online in 2008• 5.5 GW expected online between

2009-2013• UK 2.3 GW• Germany 1.4 GW• Denmark 0.9 GW• Belgium 0.5 GW• 0.4 GW others

• Outside of Europe, China is poised to construct its first large project

• US development activity growing but few strong projects yet

• Canada to begin construction of first major project in 2013

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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Belgium

Denmark

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UK

Others

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10-year view Offshore wind development

Case study 1 : Denmark

Impact of policy/support mechanisms• 1996 Danish Govt action plan (Energy 21) setting target of 4000MW of offshore

installed capacity by 2030• 1997 Danish Govt orders utilities to build 5 demonstration offshore wind parks by

2007 (proposed 750MW capacity)• 1999 Electricity Reform Agreement - opens up applications for offshore wind farms

next to demonstration sites. Preliminary approvals received for 4 of the 5 wind parks• 1999 sees liberalisation of electricity market• 2001 – Danish Govt reduces 5 to 2 (Horns Rev & R0dsand - total 318MW)• Prior to 2004 Denmark had circa 400MW of capacity online

Online, 426 MW

Construction, 222 MW

Development, 663 MW

Denmark - Present Situation

'Development' refers to projects expected online by 20130

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Denmark

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• Danish market stalled between 2001-2005, resulting in no projects built offshore between 2004-2008

• Following liberalisation of electricity market (2000-2004) the generating companies received a guaranteed price of 8cts/kWh

• (1999) proposed change from FIT to quota-based system enters political agenda with proposal to be fully operational by 2003

• (Nov 2001) Following national election, negotiations on transitional rulings stall introduction until 2005. Complex transitional period follows:

• Post-2004 no feed-in tariff made available for turbines that were connected to the grid prior to January 2000.

• Newer wind turbines connected after Jan 2005 receive feed-in tariff , to be phased out within first 20 years of operation

2009• Current output generated from offshore wind farms sold under Green certificate mechanism

that attracts market price + premium, FIT also in operation

• General carbon tax which provides the offshore wind generators with 13 cts/kWh produced

Denmark : Impact of policy/support mechanisms

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10-year view Offshore wind development

Case study 2 : Germany

Impact of policy/support mechanisms• 2000 Renewable Energy Sources Act (EEG) allowed utility companies to benefit

from special feed-in rates for their own renewable generation facilities• 2004 Amendment – important changes for offshore wind power• Offshore turbines located in certain protected areas are no longer eligible for

tariff• FIT rate for offshore set at 9.1cts/kWh for eligible farms• 2008 Amendment – increases rate from 9.1 to 13 cts/kWh

Online, 12 MW

Construction, 60 MW

Development, 1, 391 MW

Germany- Present Situation


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• 2006 – new development law makes TSO responsible for bearing cost of grid connection of offshore wind farms. This applies currently to developments installed and ready to be put into service before 31 December 2011

• 2008 Further Amendment to EEG – increases FIT rate from 9.1 to 13.0cts/kWh and introduction of longer term reduced tariff arrangement. (Premium rate and reduced rate)

2009• As of Jan 2009 FIT increased to 13 cts/kWh (premium rate), with an additional incentive

of 2cts/kWh (reduced rate) bonus where construction of turbines starts offshore before end of January 2015

• Current premium rate to be maintained for at least first 12 years of operation of offshore wind farm

• Thereafter the reduced rate applies until end of 20th year of operation

• Post 2015, both the premium and reduced rates will decline at a rate of 5% per annum

• Total of 21 wind farms of varying size have now been approved for construction in both the North and Baltic seas

Germany : Impact of policy/support mechanisms

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10-year view Offshore wind development- present situation

Case study 3: United Kingdom

Impact of policy/support mechanisms• Three bid rounds (2001), (2003), (2008),• Round 1 resulted in 18 offshore wind farms receiving permission to proceed ( 7 are

operational, 3 are under construction, 1 more in development )• Round 2 resulted in 15 offshore wind farm sites receiving permission to proceed (None

are operational, 2 are under construction, remainder in development)• Official Round 3 results due shortly. Larger scale projects being developed by

consortiums looking to share risk and cost

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UK Online, 598 MW

Construction, 443 MW

Development, 1,557 MW

UK - Present Situation


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• Quota-based ROC system in operation

• 1 ROC/MWh produced been available historically for offshore wind

• 2008 – Govt decision made to maintain ROC scheme rather than move to FIT scheme to avoid loss of momentum

• Renewable obligation (RO) on utilities to source certain percentage from renewable sources in place for 25 years to secure long-term market

• Round three projects may move forward faster than some Round 2 projects

• Some Round 2 projects may not get built

2009• As of 1st April 2009, 1.5 ROCs/MWh produced available for offshore wind

• Support for planning phase costs introduced for Round 3 projects. Crown Estate will support up to 50% of the planning costs up to planning approval being granted

• Developer still responsible for grid connection costs

UK : Impact of policy/support mechanisms

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Conclusions

• Uncertainty on future policy slows down investment from the developers perspective

• Short-term incentives not enough to keep up investment

• Better clarity on different stakeholders responsibilities

• Due to scale of costs, debt financing may become more common, even for larger utilities

• Investment incentives not enough to stimulate industry development – developers/financiers driven more by longer-term production incentives

• Capital costs of offshore wind need to be reduced over next 5-year cycle to give visibility of sustainable future without subsidies

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Contact details

United Kingdom

Aberdeen 47 Albert Street AberdeenAB25 1XTUnited Kingdomt: +44 (0) 1224 264970Email: [email protected]

London St Andrews HouseStation Road EastCanterbury CT1 2WDUnited Kingdomt: +44 (0) 1227 780999Email: [email protected]

United States of America

New York 40 Wall Street28th FloorNew York, NY 10005USAt: +1 (212) 400 7195Email: [email protected]

mailto:[email protected]



the global offshore wind market

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