North Seas Grid by E3G (Third Generation Environmentalism)

Securing Options Through Strategic Development of North Seas Grid Infrastructure Simon Skillings and Jonathan Gaventa July 2014

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About E3G E3G is an independent, non-profit European organisation operating in the public interest to accelerate the global transition to sustainable development. E3G builds cross-sectoral coalitions to achieve carefully defined outcomes, chosen for their capacity to leverage change. E3G works closely with like-minded partners in government, politics, business, civil society, science, the media, public interest foundations and elsewhere. More information is available at www.e3g.org

Imperial College London

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www.e3g.org

www3.imperial.ac.uk

About E3G

E3G (Third Generation Environmentalism)

Securing Options Through Strategic Development of North Seas Grid Infrastructure

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Acknowledgments The authors are grateful for the generous support of the Children’s Investment Fund Foundation, the Oak Foundation and the European Climate Foundation. In addition the authors wish to thank Duncan Stone, Markus Steigenberger and Antina Sander who served as external reviewers. We note that the reviewers do not necessarily endorse the report findings and are not responsible for any factual errors or inaccuracies.

This summary and list of recommendations is based on the technical analysis conducted by our partners at Imperial College London and detailed in ‘Strategic Development of North Sea Grid Infrastructure to Facilitate Least-Cost Decarbonisation’. The full technical report can be accessed at: http://www.e3g.org/showcase/North-Seas-Grid

Acknowledgments

The report also benefited greatly from the research efforts of Luca Bergamaschi and Taylor Dimsdale.

Securing Options Through Strategic Development of North Seas Grid Infrastructure

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Summary

The North Seas contain vast and largely untapped renewable energy resources. The extent to which these resources are ultimately exploited remains a matter of great uncertainty. However, important decisions on network infrastructure development in the North Seas will need to be taken before these uncertainties are fully resolved. The current nationally-focused, and largely incremental, approach to planning the offshore electricity network risks foreclosing the option for high levels of offshore wind deployment over the coming decades.

Securing Options Through Strategic Development of North Seas Grid Infrastructure

E3G and Imperial College London have explored the risks and opportunities associated with designing the North Seas electricity grid using leading-edge computer modelling. This analysis has demonstrated the significant advantages of taking a more strategic and co-ordinated approach to network planning in the North Seas region. In particular, new approaches to network design can ensure that the costs associated with creating the option for significant levels of renewables deployment will be far less than the costs of reducing short term investment costs and restricting future options. The modelling suggests: > Judicious use of anticipatory investments can keep offshore wind options open at relatively low cost – with the ‘worst case’ economic regret restricted to around €1 billion even if significant volumes of offshore wind fail to materialise. > Moving to a regional strategic approach to grid planning with full resource sharing could save €25 - €75 billion in the period to 2040, compared to the current incremental member-state approach. A proactive approach that co-optimises offshore wind locations with grid planning could increase these benefits to €30-80 billion. > Even the most basic approach to strategic grid design, involving the clustering of offshore wind parks into offshore hubs, would still save €8 - €40 billion to 2040, depending on levels of offshore wind deployment. This is an opportunity that demands the attention of Energy Ministries of the North Seas countries. The existing fragmented landscape of national policies and regulatory approaches and the current loose level of coordination are not well suited to capturing the full scale of the potential benefits. North Seas countries should, therefore, establish a joint ministerial level body charged with defining political direction, targets and objectives for the exploitation of energy resources in the North Seas. It is also important to establish a new institution with strategic network design oversight. This body would need to establish the future scenarios that will enable TSOs to plan grid development in the North Seas during the 2020s and be charged with giving particular attention to minimising the cost associated with retaining the option of high levels of offshore wind deployment.

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Rationale Energy policy aims to deliver multiple objectives in an uncertain and evolving world and to avoid policy failure whereby one policy objective must be sacrificed in order to deliver the remaining objectives. Policy must therefore be viewed as an exercise in managing unforeseen risks and this requires that optimism bias is avoided and emphasis is placed on securing a range of options.

Rationale

The extent of future deployment of offshore renewable resources in the North Seas is an issue of both great significance and great uncertainty. We have applied leading edge modelling techniques to explore whether the current approach to the design of the offshore grid network represents good policy or whether alternative approaches are more appropriate given the potential importance of offshore resources.

Securing Options Through Strategic Development of North Seas Grid Infrastructure

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Context North Seas resources There is a huge potential resource of low carbon electricity in the North Seas. Estimates point to a potential overall deployment of offshore wind in Europe of up to 150 GW by 2030 and 460 GW by 20501, with the majority of this potential in the North Seas region. For comparison, the European Commission estimates that total European power generation capacity from all sources will reach 1138 GW in 2030 and 1382 GW by 2050.

Context

However, the extent to which this is ultimately required to help meet Europe’s energy needs is not yet known. Future deployment of offshore wind will depend on how the costs of offshore resources (primarily wind) compare to onshore low carbon resources and the extent to which these two alternatives are amenable to exploitation2.

Securing Options Through Strategic Development of North Seas Grid Infrastructure

A key element of the cost of offshore resources is associated with the network infrastructure required to transport the energy produced to centres of demand. However, decisions on volume and location of offshore wind are unlikely to be made with sufficient lead time to enable an ‘optimal’ grid to be designed. Network planning must therefore be done against a background of uncertainty. There is currently a large project pipeline for both offshore wind and interconnection: 124 ‘far offshore’ wind farms (further than 50km from shore) with 70 GW of capacity are under different stages of development3, and a total of 421 potential project sites representing a maximum of 204 GW of capacity have been identified4. However both the timing and overall eventual level of realisation of these projects remains uncertain, both as a result of significant political and regulatory risks and as a reflection of the early-stage nature of many of the projects.

EWEA (2013) Deep Water: The next step for offshore wind energy

This is complicated by the fact that the cost trajectory is likely to be influenced by levels of deployment. (see Crown

E3G/Baringa (2013) North Seas Grid: Project Pipeline Analysis

Imperial College analysis.

Estate [2013] Offshore Wind Cost Reduction: Pathways Study)

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Figure 1: Projects in the North Seas Grid Pipeline

However, with a few exceptions, interconnection development is considered as an entirely separate exercise from the connection of offshore wind assets. ‘Combined solutions’ (or multi-purpose projects) that incorporate both offshore wind and interconnection remain relatively rare, due to the additional challenges of combining infrastructure types, working across differing regulatory and policy regimes and overcoming potential inconsistencies such as that between priority dispatch for renewables and open access to interconnection capacity. There are currently 3 combined solution projects in the pipeline (up to 19 GW of capacity), and a further two renewables trading projects.

Context

In addition to grid investments for offshore wind connection, a number of point-to-point interconnections are being planned in the North Seas (see Figure 1). A total of 13 bilateral interconnectors are currently under development, representing approximately 10 GW (with 2 projects not yet having declared capacity)5. Countries in the region differ in terms of current levels of interconnection, with interconnection capacity representing less than 5% of installed production capacity in the UK and Ireland, but over 30% of production capacity in Denmark. The likely increase in interconnection in the region is driven by the cost efficiencies enabled by cross-border trading, and by the increasing need for system flexibility resulting from the expected increase in variable wind and solar generation.

7 Securing Options Through Strategic Development of North Seas Grid Infrastructure

Source: Baringa Partners LLP

List of interconnection projects: 1. Skagerrak 4 (DK-NO) 2. ElecLink (FR-GB) 3. Nemo Link (BE-GB) 4. Cobra (DK-NL) 5. Nord Link, NordGer (DE-NO) 6. IFA2 (FR-GB) 7. FABLink (FR-GB) 8. North Sea Network (GB-NO) 9. NorthConnect (GB-NO) 10. DK – GB project 11. FR – IE project 12. NorNed2 (NL-NO) 13. EW1 (GB-IE) 14. Energy Bridge (GB-IE) 15. ISLES (GB-IE) 16. Kriegers Flak (DK-DE)

E3G/Baringa project pipeline analysis

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Regulatory and institutional context Development of offshore resources in the North Seas region remains a primarily national responsibility, with no agreed objectives for the region as a whole, and considerable differences between different national regulatory regimes and support structures. In most countries, moreover, offshore grid investments occur on an incremental rather than strategic basis.

Context

For the foreseeable future, development of offshore wind will depend on financial support mechanisms. Currently, individual member states seek to attract developers of offshore projects through offering additional revenue support according to national targets (which are generally derivative of the overarching 2020 EU renewables target), and support mechanisms are generally only open to generation physically located within a country’s geographical boundaries. While the design of the EU 2020 renewables target does allow countries to engage in cross-border renewables trading, progress in negotiating bilateral agreements (e.g. between Ireland and the UK) has been slow. Future prospects for renewables trading within a new EU-level renewables target for 2030 are not yet clear.

Securing Options Through Strategic Development of North Seas Grid Infrastructure

Offshore grid design and development regimes vary considerably between countries. Most existing wind farms are connected directly to shore rather than via offshore hubs, and there are no examples of offshore wind connections currently operating that are combined with interconnection. In most countries, TSOs are responsible for developing offshore transmission, while generators are responsible for financing grid connection6. The UK – where over half of current offshore wind capacity is located – is a notable exception to this. The UK regulator appoints an offshore transmission operator through a competitive tender process, and the offshore transmission assets are typically neither owned nor operated by the TSO. In each of these countries the offshore grid development regime is predominantly national. There are efforts in some jurisdictions to move towards more planned approaches to offshore wind connection. Belgian TSO Elia is in the planning stages of developing an offshore hub to connect future wind farms which will also enable future interconnection links to connect to the offshore hub. In Germany, an offshore grid development plan has been produced to define offshore wind clusters and route corridors for offshore wind transmission and interconnection7. In the UK by contrast the key design decisions are largely within the remit of the individual project developers8. Although the regulator in the UK will assess the economics of the connection assets on the basis of overall system efficiency (including onshore reinforcement and potential for offshore to offshore connections) and this 6

http://www.benelux.int/files/4513/9702/2184/regulatory_and_market_challenges.pdf

http://www.bsh.de/de/Das_BSH/Presse/Pressearchiv/Pressemitteilungen2013/Pressemitteilungen02-2013.jsp

However, the potential for moving to a more strategic design approach has been under consideration for some time, including in the ITPR process.

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does in principle give the opportunity for a more strategic approach, in practice it has operated as an incremental approach with limited potential for separate projects to share connection assets. System operation is managed by TSOs, with balancing happening on a national basis. Countries across North Western Europe have embarked on a market coupling aimed at aligning price formation for day-ahead power markets and establishing a common basis for allocation of interconnector capacity. The implementation of the Internal Energy Market has included moves to increase the co-ordination of network planning by national TSOs through the requirement on ENTSO-E to produce Ten Year Development Plans for the EU transmission network. However, nationally-fragmented policy regimes and differences in asset classification9 means that to date a truly strategic development plan for a North Seas offshore grid has not been produced.

> the North Seas Countries Offshore Grid Initiative (NSCOGI), a 10-country multilateral initiative which has conducted in depth studies on design options and regulatory barriers. NSCOGI brings together governments, regulators and TSOs, but lacks decision-making powers > the North Seas Regional Group, which assesses infrastructure â&#x20AC;&#x2DC;Projects of Common Interestâ&#x20AC;&#x2122; that may be eligible for European financial support > the Pentalateral Forum, set up to promote collaboration on market coupling and cross-border electricity exchange. Despite this range of collaboration initiatives, the regulatory and institutional landscape remains fragmented between countries, with no shared objectives on the volume of offshore resources to be developed and currently no clear means for aligning decision-making on regulatory approaches.

For example, offshore transmission in German territorial waters is included in the TYNDP, while offshore transmission

9 Securing Options Through Strategic Development of North Seas Grid Infrastructure

> the Northern European Energy Dialogue, a ministerial-level political forum discussion of shared energy challenges

Context

A number of collaboration initiatives are underway in the North Seas region aimed at creating greater alignment between national regimes. These include:

in UK waters is not.

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Key findings of analysis The analysis has explored the potential benefits of a more strategic approach to network design along with varying levels of market integration amongst countries surrounding the North Seas. Both of these aspects have been considered in light of significant uncertainty over the extent of the deployment of offshore wind generators in the coming decades. This uncertainty has been represented by the adoption of four scenarios covering a wide range of potential deployment levels (Figure 2).

Key findings of analysis

Figure 2: Scenario tree capturing possible paths of future offshore wind deployment in the North Seas.

Securing Options Through Strategic Development of North Seas Grid Infrastructure

Strategic approaches The context section above illustrates that power networks are currently designed in response to largely known future requirements from network users on both the supply and demand side of the market. It is possible to replace what is essentially a reactive and incremental approach with varying levels of proactivity - anticipating, or even prescribing, the needs of future network users. At a basic level, this could involve the development of connection corridors to offshore hub locations providing the potential for many offshore projects to effectively share connection assets (see Figure 3). This involves predictions of the potential number and capacity of wind-farms that will be built in any particular vicinity and has the potential to avoid significant duplication of costs. However, this approach risks over-investment and stranded network assets if sufficient offshore projects do not materialise.

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Key findings of analysis

Figure 3: Schematic of grid design options

Source: North Seas Countries Offshore Grid Initiative

Central to these strategic approaches to grid design is the requirement for some form of central network planning function that is capable of identifying future scenarios, the policy choices available and the cost of retaining flexibility in future policy positions. Indeed, it is possible for such a planning authority to go beyond simply planning the network and to ‘co-optimise’ the location of generation resources along with grid development. Our results show that even the most basic approach to strategic grid design, involving the creation of connection hubs, has the potential to save €8bn in the period out to 2040 and this may extend to several €10bns in high deployment scenarios (see Figure 4).

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11 Securing Options Through Strategic Development of North Seas Grid Infrastructure

The risk of over-investment can be managed by designing the grid by exploring a range of potential future scenarios. For example, it is possible to optimise the network design such that the level of system redundancy in the worst case scenario is minimised. This so-called ‘minimising the maximum regret’ or ‘min-max’ approach effectively retains the option of pursuing a wide range of future offshore wind deployment scenarios at least additional cost to consumers. It may result in the development of assets that would not be required under any single scenario optimisation but which create the option to pursue a range of alternatives at least cost.

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Key findings of analysis

Figure 4: Savings in operation and network investment costs of a hub network when compared to the optimal ‘Radial’ solution (with and without the adoption of significant demand side management).

Securing Options Through Strategic Development of North Seas Grid Infrastructure

*In Figure 4, “S1” = Scenario 1, “S2” = Scenario 2, etc. Scenario 1 is the highest wind future, Scenario 4 is the lowest wind future.

We have also explored the extent of system redundancy in the circumstances that the outturn level of offshore wind deployment differs from expectation. This analysis suggests that the economic ‘regret’ associated with ‘over-building’ the grid in expectation of high levels of deployment is much lower than the ‘regret’ associated with ‘under-building’ the grid on the basis of overly conservative deployment expectations. Also, we have demonstrated how network assets that would not be built under any single scenario optimisation are required in the situation where the network is designed to minimise the worst case economic regret (see Figure 5).

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Figure 5: Optimal network design under high wind deployment scenario (top left) and low wind deployment scenario (top right) compared with ‘min-max’ network (bottom). Additional connections that do not appear in either of the optimal designs are shown in red.

NO1

UK3

4 32

14 IR

30 4250

UK2 1600

450

NL 70

5 14

7100

2480

UK2

940

23 28

4000

3000 5710

700

1700

DK221 370 5

600

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8940

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2850

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320

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15 480

UK1

2000

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DK1 90 2400

1400

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DE3 1630

3000

IR DE1

1500

6000

3040

3980

450 600

DE2

DK221

1950

1 1000

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4230 16

4090

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600

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2210

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380 2400

1400

5300 450

DK1

1700

620

NO2

890

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1400

Key findings of analysis

1500 1610

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DE4

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560

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3770 450

620

1180

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1400

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DE4

Finally, we have demonstrated that additional savings of approximately €5bn (depending on the scenario) might be achievable in the circumstances in which the central planning function can also prescribe the location of new offshore wind-farms. However, such savings are likely to be greatest in the circumstances in which the optimisation covers a wide geographical area leading to material differences in offshore wind resource potential (see Figure 6 below).

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Market integration

Key findings of analysis

The EU has been pursuing an agenda of market integration for many years and has agreed three legislative packages in pursuit of this objective. Despite this effort, member state markets operate as largely independent and loosely coupled systems with relatively little sharing of resources. The European Commission has recently published data10 to show that Member States surrounding the North Seas do not rely on electricity produced elsewhere to meet a significant proportion of domestic demand (net annual energy transfers typically lie in the range of 5-15%). This includes the production of renewable electricity where Member States prefer to deliver targets purely through domestically produced renewable energy. This reality is often termed ‘energy neutrality’.

Securing Options Through Strategic Development of North Seas Grid Infrastructure

Numerous studies have shown that full market integration and sharing of resources amongst Member States can deliver significant cost savings11. Our study has explored the benefit of pursuing strategic grid design on a collective regional basis around the North Seas (see Figure 3 for schematic representation). This analysis shows that at least €8bn of additional costs can be saved purely by planning the network on a regional level – particularly by connecting offshore assets between jurisdictions to replace separate bespoke interconnection and to avoid onshore grid reinforcement. Indeed, public acceptance obstacles to building the onshore grid reinforcements necessary to accommodate offshore wind generation may be a significant constraining factor on offshore wind deployment and minimising this requirement is therefore extremely important. The overall cost savings associated with regional strategic approaches to grid planning and full sharing of resources can be extremely significant. Our analysis shows that between €25bn and €75bn can be saved in the period out to 2040 compared to the current incremental Member State approach depending on the level of offshore wind deployment. The majority of the savings arise through the ability to operate conventional assets more efficiently, thereby avoiding significant operational costs. Figure 6 shows the level of savings achievable using regional strategic approaches to grid planning and full sharing of resources.

10 European Commission (2014) Commission Staff Working Document: In-depth study of European Energy Security. 11

See Booz & Company et al (2013) Benefits of an Integrated Energy Market; and European Climate Foundation et al (2011) Power Perspectives 2030

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Key findings of analysis

Figure 6: Savings in operation and network investment costs of different grid design options when compared to the optimal ‘Radial’ solution.

15 INT (FI) = Fully Integrated. INT (FI) PRO = Fully Integrated Proactive. See the Annex for detailed descriptions.

The strategic and integrated planning and operation of the grid network around the North Seas not only delivers significant savings but allows the option to deploy significant volumes of offshore wind generation to be retained at relatively low cost. Figure 7 shows the cost of system redundancy for networks optimally designed to deliver each scenario but where either the highest deployment scenario (scenario 1), or the lowest deployment scenario (scenario 4), actually arise. This is compared with a network optimised to minimise the worst case cost of system redundancy. This analysis shows that a suitably designed network can limit the worst case cost of retaining the option to deploy significant volumes of offshore wind to around €1bn during the period 2020-2025 even in the circumstances that significant volumes of offshore wind ultimately fail to materialise. It also demonstrates that the highest regret is experienced in scenario 4, where the network is designed with an expectation of low levels of wind, but significant volumes of wind materialise. In practise, network planners would be expected to repeat this analysis periodically on the basis of scenarios that include updated assumptions for key future uncertainties.

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Securing Options Through Strategic Development of North Seas Grid Infrastructure

*In Figure 6 the categories on the x-axis represent the various policy choices. INT (EN) = Integrated Energy Neutral.

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Key findings of analysis

Figure 7: ‘Min-max’ Regret Analysis – ‘Fully Integrated’ grid design option

Securing Options Through Strategic Development of North Seas Grid Infrastructure

However, the integration of regional planning and operations requires major changes in system governance and a shared responsibility amongst Member States to deliver energy policy objectives. For example, it involves full trading of renewable energy – and this would be easiest to achieve if accompanied by joint targets for delivery of renewables and a sharing of the support costs across all consumers. Similarly, there would be a need for highly co-ordinated grid planning and a common position on future scenarios and the policy choices available. This might ultimately require the creation of an organisation similar to the regional independent system operators seen in other jurisdictions.

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Recommendations

The potential benefits of both strategic investment and of resource sharing will not be realised under current arrangements. The North Seas countries should, therefore, establish a joint ministerial level body charged with defining political direction, targets and objectives for the exploitation of energy resources in the North Seas. This could be a new regional institution or a development of the existing NSCOGI forum with an enhanced mandate. Importantly, it should have a specific requirement to set out a North Seas development strategy, including both offshore grid and interconnection aspects. This should include targets and objectives for the exploitation of resources in the North Seas that are clearly linked to the EU level 2030 climate and energy process and associated governance mechanisms. It will also need to include a process for driving the necessary convergence in policy and regulatory design. For example, it will be necessary to develop common approaches for accessing offshore renewables support schemes and mechanisms for allocating the associated costs. An important early task for the strategic ministerial level body would be to establish a new institution with strategic network design oversight. This body would need to establish the future scenarios that will enable TSOs to plan grid development in the North Seas during the 2020s with particular attention to minimising the cost associated with retaining the option of high levels of offshore wind deployment. This strategic network design function could be undertaken by a new co-operative of regional regulatory authorities or be part of an expanded role for ACER, but it should be independent of transmission and generation ownership interests. It would, in any case, be necessary to create a new regional regulatory function to evaluate and approve investment plans developed by TSOs.

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New approaches for strategic grid planning can be developed within Member State jurisdictions. However, if the introduction of such approaches is not co-ordinated then it is possible that this could delay, or even prevent, delivery of the larger benefits associated with integrated planning and market operation. It is, therefore, vital that Member States ensure that sufficient consistency exists between the various approaches adopted such that the move towards fully co-ordinated regional network planning is not delayed.

Recommendations

The strategic and integrated planning and operation of the North Seas grid region presents the opportunity to robustly deliver policy objectives at a vastly reduced cost compared to the current incremental and Member State centric approaches. The extent of these potential savings is too large to be ignored and it must be a high priority for energy ministries around the North Seas to consider how these benefits can be realised.

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This reform agenda builds largely on the existing institutional structure (see Figure 8). However, there are already several aspects of electricity system design that are subject to centralised planning decisions, including measures to deliver a particular energy mix and overall resource adequacy. It appears sensible to co-locate the delivery of these system objectives and the strategic network design responsibility within a single organisation. Moreover, the efficient operation of fully integrated markets suggests extremely close working between the system operator functions of the national TSOs and it would seem logical to create a single regional system operator (ISO) independent of transmission ownership and asset management (see Figure 8). The formation of a regional ISO creates a natural home for the strategic planning functions associated with the power system and the joint ministerial level body should consider the merits of such an approach.

Recommendations

Figure 8: High level schematic of current and potential future institutional design

Securing Options Through Strategic Development of North Seas Grid Infrastructure

Current high level Institutional structure

Potential future high level Institutional structure

MS Governments individually set targets for RES and resource adequacy

North Seas MS Governments collectively set targets for RES, resource adequacy and future policy scenarios for offshore resource deployment

MS regulators individually set framework for network regulation and approve TSO plans

TSOs develop network plans (and may have other policy delivery responsibilities)

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North Seas MS regulators collectively approve TO plans

North Seas ISO delivers policy including strategic grid design

TOs develop network plans in response to strategic grid design

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Way forward

Approach

Key Characteristics

Radial

> Incremental connection of offshore wind projects to shore. > Offshore-to-offshore connections not considered. > Member states are net energy neutral and self secure.

Hub

> Strategic connection of offshore wind clusters to shore. > Offshore-to-offshore connections not considered. > Member states are net energy neutral and self secure.

Integrated Energy Neutral

> Offshore-to-offshore connections considered. > Member states are net energy neutral and self secure.

Fully Integrated

> Offshore-to-offshore connections considered. > Unconstrained cross-border electricity trade. > EU wide security.

Fully Integrated Proactive

> > > >

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Offshore-to-offshore connections considered. Co-optimization of network and generation investment. Unconstrained cross-border electricity trade. EU wide security.

19 Securing Options Through Strategic Development of North Seas Grid Infrastructure

Annex: Description of Policy Choices

Way forward and Annex

It is important that Member State governments with a direct interest in the exploitation of North Seas renewable energy resources review and refresh their approach to developing this resource in line with emerging agreements relating to the EU climate and energy package for 2030. This report sets out the evidence on the importance of the issue and the need for a more co-ordinated and strategic approach. The changes required are significant and will not happen immediately. It is, therefore, essential that Member State governments begin to consider the issues and options as a matter of urgency.

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