The power market design column – Offshore Hybrid Assets

The discussions on the Clean Energy Package have been finalised, so now it is time to carefully study the new Regulation and Directive for the electricity market. Those who have read my earlier columns might guess that I will focus on Article 14 of the Regulation with the 70% target for cross-border transmission capacity between the different bidding zones. I might do so in the near future, but there is much more to look at. Like offshore hybrid assets.

Offshore hybrid assets combine wind connection with interconnection

The new EU Regulation on the internal market for electricity (recast of Regulation No 714/2009) starts with fifty-five recitals. Recital number 44 introduces a new term: offshore hybrid asset. “Offshore electricity infrastructure with dual functionality (so-called ‘offshore hybrid assets’) combining transport of offshore wind energy to shore and interconnectors, should also be eligible for exemption such as under the rules applicable to new direct current interconnectors. Where necessary, the regulatory framework should duly consider the specific situation of these assets to overcome barriers to the realisation of societally cost-efficient offshore hybrid assets.”

Offshore hybrid assets are definitely interesting. Interconnectors play an important role in an efficient transition, especially in balancing the variable output of wind and solar generation in the different market zones. And offshore wind parks will have to contribute a lot to the growing share of renewable generation. Offshore wind parks were originally located relatively close to the coast. However, new parks will be located farther away and then the long and costly connection would remain unused if there is no wind. The idea to combine such offshore wind connection with an interconnector is obvious. If the offshore wind park is also connected to another market, the cables can remain fully used to exchange electricity between the two markets. So far, this solution has not yet been implemented. The Kriegers Flak project claims that it will be the first in the world. It connects a German and a Danish offshore wind park to Germany and to Denmark, while at the same time interconnecting these two markets. This is a project of the two TSOs (Energinet.dk in Denmark and 50Hertz in Germany) and commissioning is planned in the 3rd quarter of this year.

At the same time, the emergence of these offshore hybrid assets raises some questions on the regulatory and market arrangements. In which bidding zone is the wind park participating? Will the wind park get preferential access and is the remaining capacity deemed to be the interconnection capacity? How are the RES support schemes (if any) be dealt with? All of these questions were studied already several years ago within the North Seas Counties’ Offshore Grid Initiative (NSCOGI). One Working Group was created to tackle the market and regulatory issues and issued a discussion paper in July 2014.

Arrangements for hybrid assets remain unclear, but Kriegers Flak is kicking off

The question is to what extent the work of the NSCOGI has landed in the Clean Energy Package. The answer is short. Apart from recital number 44 there is nothing. Neither in the Regulation nor in the Directive. The text of the Clean Energy Package as proposed in November 2016 did not contain the sentences on offshore hybrid assets in recital 44, so probably they were added on the request of some of the North Sea member states.  But these sentences do not say so much. It says that if the normal rules create barriers for offshore hybrid assets, one should use common sense to overcome such barriers. Apparently the NSCOGI could not solve the issues and could not deliver concrete proposals. And actually the problem has become more complex in the meantime. Offshore assets should become offshore grids and not only the connection of offshore wind but also the connection of offshore gas fired power plants (in combination with CCS) is discussed.

The conclusion therefore is that the Clean Energy Package does not provide any clarity on the regulatory and market arrangements for offshore hybrid assets. This means that the rules and market arrangements for such assets will be developed in fits and starts and different solutions will probably be chosen for each individual case. In that respect it is interesting to see which arrangements will apply for the Kriegers Flak project. And actually this project is mentioned in the recent decision of the regulators of the Hansa region (which is the region that covers the borders between Germany and Denmark and between Sweden and Poland). In this decision the regulators did approve the Capacity Calculation Methodology (CCM) as proposed by the TSOs. This methodology entails that the interconnection capacity that can be allocated to the market will depend on the expected generation of the wind parks. The generation from the wind parks has prioritised access to the transmission capacity towards its home market which directly reduces the capacity available for the markets. It seems to be rather basic and obvious approach. Still this rule may be regarded as a milestone as it is the first specific regulation for offshore hybrid assets. It is therefore remarkable that this rule was introduced and approved without much public debate. The original proposed CCM for the Hansa region was consulted by the TSOs in summer 2017. However in that version, Kriegers Flak was not mentioned. After that, the TSOs submitted a slightly amended version to the regulators of the Hansa region, which was then consulted by some of the regulators. Also in that version, Kriegers Flak was not mentioned. Only in July 2018, the regulators submitted a request for amendment to the Hansa TSOs including a request to add a solution for Kriegers Flak.

Conclusion

Offshore hybrid assets, combining the connection of offshore wind parks with an interconnector, offer clear benefits and are likely to become an important element for a decarbonised power system. Such, hybrid assets can further develop into meshed, offshore grids and also connect offshore gas fired power plants. Still, the regulatory and market arrangements for such offshore assets and grids remain unclear. The Clean Energy Package does not contain specific rules. Instead, ad-hoc solutions will be developed. And that is what has happened with the capacity calculation methodology for the interconnection capacity of the Kriegers Flak project that is planned to become operational later this year.

This is my 19th column on power market design issues. The earlier columns covered the following topics intraday capacity hoarding and pricing, interconnectors, international comparison of market designs,  cross-border capacity calculation,  flexibility, cross-border capacity, electric time and unintended exchanges, EU Network Codes, price formation and zero marginal cost generation, simplicity in the Clean Energy Package,  smart grids, storage, auto-generation, balancing, VoLL, demand side response, interconnectors and the Economist on market design.

Disclaimer: The views as expressed in this column do not necessarily reflect the views of Statkraft

Paul Giesbertz

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