COLUMN-Connection costs overshadow offshore wind: Gerard Wynn

(The author is a Reuters market analyst. The views expressed
are his own.)
    By Gerard Wynn
    LONDON, Oct 2 (Reuters) - Never mind the cash needed to
build wind turbines out at sea, new British data shows that
merely connecting them to the grid costs more per megawatt than
building new gas fired power plants. 
    This raises serious questions about the near-term economic
viability of the low-carbon technology in which Germany and
Britain, among others, are setting such store. 
    Problems have also emerged in Germany over who foots the
bill for grid connection delays, while there are additional
concerns about the cost of the wind turbines themselves, their
installation and servicing. 
    Offshore wind may be entering a critical phase, where
countries can choose either to ramp up ever larger projects
further offshore - to seek better winds and economies of scale -
or else drop the technology as uncompetitive.
    Offshore wind has advantages over onshore; it is a stronger,
steadier resource and avoids planning hurdles. 
    Germany and Britain lead global offshore wind ambitions,
where Germany plans to install 11,000 megawatts (MW) capacity by
2022, after deciding to ditch nuclear power, compared with just
550 MW now.    
    Britain's "Renewable Energy Roadmap" last year envisaged a
medium projection of up to 18,000 MW by 2020, assuming
substantial cuts in installation costs, compared with 1,838 MW
at the end of last year. 
    The European market for annual installations fell last year,
however, according to the European Wind Energy Association
(EWEA), at 866 MW installed compared with 883 MW in 2010. It is
expected to return to growth this year. 
    Germany's progress, in particular, was slowed as a result of
doubts over who is liable for problems with grid connections. 
    In a survey of over 100 participants in the offshore wind
industry in north-west Europe, uncertainty over grid connections
was viewed as the biggest challenge alongside availability of
finance, according to FC Business Intelligence.
    Offshore wind market 2011 (page 9, EWEA):
    Britain's energy watchdog Ofgem last month published the
expected capital cost, not including annual operating and
maintenance, for the grid connection of four projects under
    The estimated valuations and corresponding wind farm size in
megawatts, were as follows: 
 Project                  MW         Estimated Transfer
                                     Value (mln pounds)
 Lincs                    250        282
 London Array             630        428
 Gwynt-y-Mor              576        306
 West of Duddon Sands     389        255
 TOTAL                    1,845      1,271
    The wind farms are all around 20 km or less from the shore,
while future farms will increasingly have to be built further
out, implying even higher connection costs. 
    The four projects work out at 0.689 million pounds ($1.11
million) per MW, implying a grid connection cost for Britain's
anticipated 18,000 MW of more than 12.4 billion pounds before
accounting for the capital and installation cost of the wind
turbines themselves. 
    That extra capital cost of wind farm construction, excluding
offshore grid connection, adds a further 2.7 million pounds per
MW, according to consultants Arup, in a report to Britain's
Department for Energy and Climate Change (DECC) last October. 
    The Ofgem figures imply that just connecting an offshore
wind farm is more expensive than building a gas-fired power
plant, whose overnight capital cost (excluding borrowing costs)
is 0.669 million pounds per MW, according to estimates in a
Parsons Brinckerhoff report last year for DECC, "Electricity
Generation Cost Model - 2011 Update".     
    In addition, offshore wind turbines run at a load factor of
only around 40 percent of their full nameplate capacity,
generating less than half as much electricity as equivalent
gas-fired capacity, which can run at 100 percent. 
    Offshore wind has its own advantages, notably zero fuel
costs and zero carbon emissions.     
    Its far higher relative cost, however, suggests a more
transparent public debate to consider low-carbon alternatives
may be needed. 
    These include interconnectors to cheaper resources overseas,
such as Norwegian hydropower and even Icelandic geothermal
power, as well as domestic nuclear generation and greater
investment in demand response and storage technologies to reduce
and provide for peak demand.
    To make offshore wind work in northwest Europe, policymakers
may have to adopt even more ambitious plans for the technology,
gathering individual projects into hubs further offshore to
capture more wind and pool connection costs, in a potentially
high risk strategy.
    The approach could shave 17 percent off an estimated 83
billion euros to connect 126,000 MW of offshore wind by 2030,
according to a report produced last year by renewable energy
lobby groups, consultancies and university research departments,
"OffshoreGrid: Offshore Electricity Infrastructure in Europe". 
    But it would require even more up-front cash, to plan and
build hub connection infrastructure, for larger and therefore
more expensive wind farms. 
    "This of course also bears the risk of stranded investment
should some of the wind farms never get built," the report said.
    In Britain, companies bid for an open-ended licence to
operate particular offshore transmission networks through a
competitive tender process.
    Transmission operators earn a regulated rate of return on
the costs of building and operating these networks for a period
of 20 years, costs ultimately recovered from generators and
suppliers and passed to consumers. 
    The wind farm owns the transmission project through
construction, handing ownership over on completion. 
    That timeline has avoided the problems that have arisen over
liability in Germany, where the onshore grid operator manages
construction and can be sued by the wind farm for any connection
    German Chancellor Angela Merkel's cabinet approved a draft
law in August to overcome the problem by passing some of the
cost to consumers. 
    The new law imposes an extra charge on consumers - average
households will pay about 10 euros a year, amounting to a total
of about 750 million euros. 
($1 = 0.6192 British pounds)

 (Reporting by Gerard Wynn; Editing by Anthony Barker)