A new approach to coordinating offshore electricity grids

Introduction

Sustained increases in UK and EU offshore wind power generation mean that making changes to regulation and infrastructure has become a priority.

Attention is turning to offshore energy infrastructure in the North and Celtic Seas following announcements by the UK and EU of significant offshore renewable energy ambitions and because of growing pressure on the oil and gas sector to decarbonise.

The implementation of UK and EU policy will require radical changes to the existing offshore energy sector and its infrastructure. These changes are needed to accommodate significant increases in renewable energy, alongside deployment of new technologies such as hydrogen and carbon capture, utilisation and storage (CCUS). This article considers the changes needed to offshore electricity networks to enable this offshore energy transition.

Policy background

Three prominent recent policy announcements highlight the opportunities and challenges offshore presented by the energy transition: the EU Offshore Renewable Energy Strategy (ORES), published by the European Commission; the UK Energy White Paper, issued by the UK’s Department of Business, Energy and Industrial Strategy (BEIS); and the signature of the UK’s North Sea Transition Deal.

From a renewable energy perspective, offshore wind will play an important role in both the UK and the EU’s decarbonisation strategies to 2050. The UK Energy White Paper reiterates the ambition of deploying 40GW of offshore wind by 2030, including 1GW of floating offshore wind, a fourfold increase on today’s capacity. The ORES estimates that the EU will require an increase in offshore wind capacity from 12GW installed capacity to at least 60GW by 2030, as well as at least 1GW of ocean energy. Significant increases in capacity are forecast to 2050, rising to 300GW and 75GW for offshore wind in the EU and UK respectively.

For the UK oil and gas industry, the signature of the North Sea Transition Deal sets the industry on a pathway to net zero by 2050. The deal establishes emission reduction targets for oil and gas production of 10pc by 2025, 25pc by 2027, and 50pc by 2030, against a 2018 baseline, to meet the sector’s aim of creating a net-zero basin by 2050. As well as support for CCUS and hydrogen at scale, the deal also includes commitments from industry and government in relation to the electrification of platforms.

New approach needed

Most existing offshore windfarms are connected directly to the onshore grid by individual point-to-point, or radial, links. In many EU member states, the offshore electricity network development is undertaken by the incumbent transmission system owner.

By contrast, in the UK, the offshore transmission owner (OFTO) regime has formed the basis for the buildout of offshore grid connections. Despite the regime including the option for the OFTO to build the connection asset, in practice generators have preferred to maintain control over the construction timetable, undertaking all design and construction works.

After completion, a competitive tender process is run by the UK regulator, Ofgem, to appoint an OFTO as offshore transmission licence holder to adopt the transmission assets from the generator. The “economic and efficient costs of construction”, as determined by Ofgem, are paid to the generator by the OFTO at the point of asset transfer. The successful bidder for the OFTO assets receives a tender revenue stream (TRS) for a period set out under its licence. Designed to attract lower cost of capital investments by infrastructure funds, there is little incentive for an OFTO to actively develop the asset or coordinate with other OFTOs.

Coastal communities and other marine stakeholders are beginning to raise concerns regarding the scale of offshore wind development forecast in the next 30 years. The need for a change in approach has been highlighted by the recent judicial review of the development consent order (DCO) for the Norfolk Vanguard offshore windfarm. The DCO was overturned on the grounds that the cumulative impact of the onshore grid connection works of another offshore windfarm had not been adequately considered.

Issues to address

It is clear a change in approach will be needed to deliver decarbonisation targets. The ORES proposes a more coordinated approach to offshore grid infrastructure and the development of meshed grids, deployed beyond national borders. It envisages that hybrid projects, where the offshore grid infrastructure fulfils multiple purposes, are a stepping stone in the development of meshed grids.

An example is an offshore windfarm, connected directly to an electricity interconnector between two or more member states. In this case, the grid would serve both as an interconnector and as the grid connection for the project. WindEurope estimates that up to 7GW of offshore hybrid projects are already in the pipeline.

The UK Energy White Paper, while highlighting the issue, provided little detail on the proposed alternatives, apart from a reference to “hybrid, multipurpose interconnectors” which would directly feed into the electricity export infrastructure, and a commitment to developing at least 18GW of interconnector capacity by 2030.

Some of the issues relating to implementing shared offshore transmission solutions have been considered previously by both Ofgem and the UK transmission system operator but little occurred in practice.

However, that may be changing. In August 2020, BEIS and Ofgem launched the Offshore Transmission Networks Review. They recently published an open letter highlighting some of the issues to resolve in developing hybrid projects. These include possible changes to the OFTO regime to encourage infrastructure co-ordination and anticipatory investment, consideration of the interface between the OFTO regime, contracts for difference support regime for offshore wind, and a ‘cap and floor’ regime for electricity interconnectors, as well as determining the appropriate licensing regime for hybrid projects.

An important question will be whether hybrid projects result in any value erosion for offshore windfarm operators as compared to the current radial connections. For example, will the offshore windfarm have priority access to the interconnector capacity, or will forward allocation of interconnector capacity mean a greater risk of curtailment for the windfarm if actual production is higher than forecast?

Post-Brexit challenge

Cooperation between the UK and the EU will be needed. The UK is no longer a member of the North Seas Energy Cooperation, established to promote the development of the offshore grids and renewable energy in the region. The Brexit Trade and Cooperation Agreement expressly envisages cooperation in relation to offshore grid development and the large renewable energy potential of the North Seas region, covering issues such as hybrid and joint projects, support frameworks and finance, and maritime spatial planning.

However, development of electricity infrastructure in the North and Celtic Seas will now inevitably be susceptible to changing relationships and political priorities between the UK and the EU.

With the level of offshore electricity generation planned, a clear and supportive framework for coordinated offshore electricity infrastructure is needed. A key challenge for both UK and EU policymakers will be to minimise the impact of uncertainty caused by regulatory reform and to maintain the build-out rate of offshore wind to 2030 and beyond.