Analysis: How offshore wind impacts the electricity market design

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Paul Giesbertz, Head Advisor Market Policies & Regulatory Affairs at Statkraft, explains why hybrid assets are relevant to the design of the European electricity market.

The huge amounts of offshore wind that are planned to be developed in Europe will have a big impact on market prices. In its offshore strategy, the EU Commission is targeting an increase for offshore wind in the EU to 60GW by 2030 and to 300GW by 2050.

And this is not even including UK and Norway. Offshore hybrid assets can offer opportunities for the energy markets, but also present market design challenges.

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“A hybrid asset is combining the function of connecting offshore wind to the onshore grid with the function of an interconnector between two markets,” says Giesbertz. “Currently connection cables for offshore wind remain underused as the wind turbines are not always producing at maximum capacity.

However, if the connection is also an interconnector, then the cable can be used to exchange electricity. The advantages become more relevant the farther the offshore wind is located out of the coast.”

The first offshore hybrid asset of the German TSO 50Hertz and the Danish TSO Energinet is now being put into operation and connects a German wind park, a Danish wind park and an interconnector with a maximum capacity of 400 MW.

According to Giesbertz, Denmark wants to develop offshore hubs or islands in the North Sea and in the Baltic Sea. And offshore hybrid assets can easily be developed into an offshore grid. A meshed grid; connecting more than just two markets and maybe other types of generation and storage.

Relevance to the design of the European electricity market

There are also some market design challenges. One key question is to which bidding zone the offshore wind should be allocated. Giesbertz: “Let’s take the example of a Dutch offshore wind hub connected to the Dutch and UK bidding zones.

If it would be part of the Dutch zone, the connection from the Dutch coast to the hub would be an internal line. This is called the home market solution. The connection from the hub to the UK would be an interconnector.

The problem of this “home market solution” is that capacity of the interconnector might not be available for cross-border trade at all. This happens if the offshore wind produces at maximum capacity and if the market price in the home market is higher than in the neighbouring country.

So, in our example, assume the Dutch market price is €50 and the UK price is €40. Assume the Dutch offshore wind is producing at maximum capacity and is feeding all output into the Dutch home market. The interconnector between the hub and the UK remains unused despite a €10 price difference. This outcome is not inefficient but seems to be in conflict with the 70% rule, which says that 70% of the secure capacity of each line must be available for cross-zonal trade.”

Giesbertz explains that for this reason, the concept of separate offshore bidding zones has been proposed. In that situation, both connections to the offshore hub are labelled as interconnector, and any flow is labelled as cross-zonal flow.

Another advantage of the offshore bidding zone concept is that deviations after the closure of the day-ahead market can be accommodated without curtailing cross-zonal trades. This would mean, we will have zones, without consumption, with only one generation technology, possibly owned by one company. Don’t these separate bidding zones need competition?

“It could work”, says Giesbertz, “as the offshore bidding zone is coupled with the neighbouring markets that will bring the competition.

As a result, the price in the offshore zone will always converge to the market with the lowest price. A lower price means lower market revenues.

This is a disadvantage of the offshore bidding zone solution for wind developers. It is even proposed to compensate them for these lower market revenues, for example by using part of the congestion revenues that are obtained through cross-zonal trading.

However, that would be a remarkable move. Current EU regulations ensure that congestion revenues are returned to those that carry the costs and risks of the offshore grid. Normally, these are consumers. And this would be extra remarkable if the offshore wind does not pay for connecting to the offshore grid.”

Next steps

“The most important focus should be on the models for real-time prices,” according to Giesbertz, “so this is about the balancing markets and the imbalance price. This brings us to the question of which control area the off shore wind is allocated and how balancing is actually done in practice. This is not yet clarified. The imbalance price is, however, crucial as it is the basis for all price formation also on the day-ahead market. And in particular, it should signal the value of short-term flexible capacity, for example coming from batteries or demand-side solutions. But also the forward markets are important. We are moving in a direction where long-term green PPAs are an important instrument to allow for financing new projects. Long term PPAs benefit from a liquid forward market, so that market risks can be hedged easier resulting lower financing costs.”

Giesbertz is happy with the EU Commission’s European approach: “The topic of offshore grids by definition is impacting several countries. So far, discussions have taken place with policymakers, TSOs and developers of offshore wind. However, the market impacts are large. I call for a discussion with a wider range of topics and broader participation of market participants.”

Watch the entire interview here

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