The Ministry of Climate and the Environment opened consultations on the draft regulation that will determine the maximum price for energy generated in offshore wind farms (reference price). Investors want the government to raise it. They argue that the assumptions on which the price calculation was based are wrong – writes Bartłomiej Sawicki, editor at BiznesAlert.pl.
The regulation
Last week the Ministry of Climate and Environment prepared a draft regulation that will allow offshore wind farms (OWF) investors that want to build farms with a total installed capacity of up to 5.9 GW to apply for the so-called right to cover the negative balance in the first phase of support for the offshore industry. To determine the maximum price, the regulators had to follow the Act on offshore, which means they had to take into consideration:
• the operating costs and additional investment costs incurred during exploitation, in the period in which the power producer uses their right to have the negative balance covered;
• the investment costs incurred during the preparation of the project and construction of the OWF, together with the required technical infrastructure and the appliances for power evacuation, as well as the costs of complete removal of the OWF and the power evacuation appliances once their exploitation is over;
• the justified return on capital invested in the business with regard to the preparation, construction and exploitation of the offshore wind farm.
The essence of the draft
In order to launch the first phase of support, which will make it possible to develop Poland’s offshore wind farms in line with the schedule, the maximum price needs to be determined. This is because it will allow the investors to determine whether a given investment project can count on participating in the support system, which guarantees that it will be implemented.
Analysts from the International Renewable Energy Agency and from the America’s National Renewable Energy Laboratory have pointed out that the offshore technology is developing so quickly the costs of power production and the price of the technology will continue to drop in the coming decade. The Office of the Government Plenipotentiary for Strategic Energy Infrastructure and Polskie Sieci Elektroenergetyczne (the operator of the Polish power grid) prepared a model, which shows that the reference price for power produced by OWFs should be at about PLN 301.5 per MWh (ca. EUR 70/MwH). This proposition is a form of support and a guarantee for offshore farm owners who must be certain that the investment costs will be covered. Considering the above, the ministry has proposed in the draft regulation that the maximum price for 1 MWh of power generated in an offshore wind farm should be PLN 301.5, i.e. about EUR 70 per MWh. The price is also the basis for the producers to use their right to have the negative balance covered.
On developed markets in Europe the same average support in case of auctions is about EUR 50 on average. However, this mostly pertains to markets where the operator constructs the connections and is responsible for the infrastructure used for power evacuation from the offshore farms. In Poland the situation is different, as the farm owners will build the power evacuation installations, whose costs constitute even 30 percent of the investment. Therefore, the construction of a farm with a capacity of 1 GW may cost between PLN 12 and 14 billion. The size of support offered by the ministry in the draft regulation may cause concern among investors, as it may not cover the costs of investments, which means it’s difficult to determine whether it will be possible to profit from the investments.
The industry wants a raise
The Polish Wind Energy Association (PSEW) argues that it is absolutely crucial that investors receive guaranteed support that will cover the necessary costs of their investments. „The reference price set by the regulation does not ensure this. The price is already only a little different that the energy prices on the spot market. Considering the fact that according to forecasts the energy prices will go up in the coming years due to the growing prices of CO2 allowances, the price offered to the investors could be lower than the market price. This means the investors that want to start their first projects will have it difficult to negotiate with financial institutions,” Janusz Gajowiecki, PSEW CEO, explained. The companies that are directly involved in the process of acquiring support are staying silent until the consultations on the regulation end this week. However, unofficially they believe the price is too low. According to some companies, the price should be at least EUR 10 higher. Last week, Ireneusz Zyska, Deputy Climate and Environment Minister and Government Plenipotentiary for RES, tried to calm the situation down. „The PLN 301.5/MWh price proposed in the draft regulation does not mean this is the final decision,” he said. However, he also added that the maximum price cannot be a matter of anybody’s wishes, because it is calculated on the basis of a mathematical and financial analysis, which was prepared by a designated team at the ministry.
We asked PLN Orlen about their take on this issue. The company owns, together with Northland Power, the Baltic Power firm, which is planning to build a 1.2 GW offshore wind farm. Jarosław Dybowski, Executive Director for Energy at PKN ORLEN, stressed that the offshore wind sector in Poland was just starting to develop. „In Poland we are growing the offshore wind energy sector from scratch. Building wind farms on the sea means we need to construct the entire infrastructure and an efficient supply chain, and this is one of the factors that the reference price should reflect,” he stressed.
According Orlen’s analyses, the maximum price included in the regulation is actually an average price, not a maximum one. Dybowski believes it is significantly too low, and that the way it was calculated needs to be corrected. He also added that before making a decision, the Energy Regulatory Office has to acquire the European Commission’s consent, which is yet another mechanism designed to prevent states from providing too much unjustifiable support. All of the Polish companies already have foreign partners, which is why one could expect that their official and unofficial statements are shared by their foreign counterparts.
Doubts about the assumptions
In order to calculate the maximum price, the following technical parameters and indicators for a referential offshore wind farm were adopted:
• distance from the shore – 45 km;
• depth – 40 m;
• capacity utilisation rate – 45.7 percent;
• average capacity of an offshore wind farm – 1000 MW;
• wind speed (impacts the farm’s productivity) – 9.46 m/s at a height of 100 m;
• go-live of the offshore wind farm – 2026;
• technical lifetime and wear and tear period – 25 years;
• the euro to zloty exchange rate at NBP – an average from past 5 years starting in 2021 (mitigating the COVID-19 impact) – 4.31 EUR per 1 PLN;
• the dollar exchange rate at NBP – an average from past 5 years starting in 2021 (mitigating the COVID-19 impact) – 3.81 USD per 1 PLN; inflation – 2.7 percent year on year CPI – NBP’s inflation target 2022;
• balancing costs – none.
However, the impacted companies believe the assumptions need to change. In their opinion, the Ministry of Climate misjudged the efficiency of offshore wind farms at 45 percent. According to experts on the matter, this assumption does not include geographical factors, or the fact that the farms will be located next to each other, which may impact their efficiency. Moreover, the ministry also assumed that the euro to zloty exchange rate will stay at the same level in the coming years, which creates a risk. The balancing costs are also questioned by the companies, as the ministry decided there were „none”, but did not offer any explanation. However, the majority of the companies stay officially silent about the way the reference price was calculated, expecting the ministry and other entities to make a move during the consultations.
So a question needs to be asked – will the prolonged works on the regulation make it impossible for the involved companies to apply to the Energy Regulatory Office for support by the end of March? It seems the answer is no. The companies started to prepare the necessary documentation already during the work on and then adoption of the Offshore act. However, this week may reveal more on whether and how much Poland’s first offshore wind farms will earn. After the draft was revealed on the 16th of February, the companies had seven days to submit their comments.