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German offshore wind electricity needs cash-flow clarity – consultant

17 Oct 2012 17:07:24 | edem

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Germany must consider an electricity capacity-based market model in order to encourage the development of offshore wind parks and reject the idea of a system based on selling into the spot market, a consultant said on Tuesday.

According to Arthur D. Little principal Michael Kruse, Germany needs to consider a model that offers offshore wind generators a long-term, stable revenue stream, such as the looming feed-in tariffs with contracts for difference (FiT CfD) model in development in the UK, despite the fact that generators would no longer be able to profit through trading spot price volatility.

"It's an issue of general electricity prices," Kruse told ICIS on Wednesday. Germany, which with approximately 30GW boasts the highest installed wind capacity in Europe, has often seen negative pricing on its exchange-based spot markets during particularly windy periods.

"This means that offshore wind parks [which require large up-front capital investment] are not really profitable anymore. They still require public subsidies and pricing incentives," Kruse said.

The assessment, however, puts Kruse at odds with some in the UK. When the UK model was being debated, chief executive of utility SSE, Ian Marchant, called for a system known as premium FiTs, which would have retained an element of spot market-based volatility trading.

"The CfD principle will fundamentally undermine the importance and nature of the market, and the UK will live to regret that," he said. "The liberalised market has been a major driver of innovation and investment, and the package of electricity market reform significantly undermines that [see EDEM 2 February 2011]."

Nuclear lessons

Kruse's comments came as he discussed a recent Arthur D. Little report looking at "lessons learned from the nuclear field", and how they could be applied to offshore wind developments.

The findings are most relevant to the German and UK markets, both of which are looking to install comparatively large amounts of offshore wind: Germany plans to install 10GW of offshore wind by 2020, with the UK aiming for a huge 21GW (see EDEM 10 May 2012).

But developing a suitable market structure to attract investment in non-dispatchable, renewable sources of generation has proved problematic, because traditional market designs catered for more reliable or more reactive sources of power production, such as nuclear and fossil-fuel fired facilities.

Offshore wind and nuclear power generation share a number of characteristics, most notably both require large up-front capital investment but have relatively low running costs. As such, Kruse said, the more immature form - offshore wind - can learn lessons from atomic power.

Spreading risk

According to Kruse, the wind sector could learn from the nuclear industry by spreading development costs across a number of parties, "for example, consumers, large industrial companies and institutional investors", although the latter, he said, would no longer invest in nuclear because the political risk is too great.

In Germany, the offshore wind sector has been struck by delays in connecting offshore wind projects to the grid. This was recently addressed by the government which finalised a bill under which owners of offshore wind farms can claim compensation from the country's transmission system operators (TSO) for up to 90% of the feed-in tariff that the farm would have received for generating (see EDEM 29 August 2012).

But according to Kruse, more clarity on what kind of market generators will be selling into is required.

"What we need is more certainty about what the future electricity generation portfolio in Germany will look like because the mix will impact future prices," he said. JS

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