Per Lund, CEO of Odfjell Oceanwind and Jon Barratt Nysæther, Project Development Manager at Odfjell Oceanwind:
Norway is currently refining its policy framework on offshore wind, a topic where Odfjell Oceanwind has strong opinions. The below text is a translated version of a debate post recently published in the main business newspaper for the electricity sector in the Nordic countries, Europower, as a comment to the ongoing discussions.
NVE (Norwegian Water Resources and Energy Directorate) has analysed the power market up to 2050 and concludes that the cost of producing power from offshore wind will remain higher than the price that this power can capture in the power market. In an interview with Teknisk Ukeblad (TU) on October 11, NVE Director Kjetil Lund stated that the competitive situation for Norwegian offshore wind will be challenging.
We agree that this will be challenging. The situation that Norway faces, with increasing energy demand and the challenge to establish new power supply from any technology, is demanding. The development of onshore wind and solar power faces massive opposition. More hydropower would require interventions in protected waterways. There is still significant uncertainty around the maturity and costs of nuclear power. Therefore, dismissing offshore wind in Norway at this stage would be a mistake. This claim should be challenged, and the picture should be nuanced.
Has NVE Accounted for Expected Cost Reductions in Floating Offshore Wind?
NVE's analysis uses cost estimates for floating offshore wind calculated for Utsira Nord in 2030, thereby omitting the large cost reductions expected when the market for floating offshore wind matures and industrializes. Utsira Nord will be among the first large floating wind farms to be built; the supply chain will still be immature, there will be a lack of specialised suppliers and technologies, and the industry's experience in building large wind farms will be limited.
For fixed-bottom wind, there was a rapid decline in costs in the latter half of the 2010s, driven by larger project sizes, increased competition among experienced developers, and the development of a competitive and specialised supply chain. It is expected that the same could happen for floating wind if enough projects are developed, which is supported by analyses from, among others, Menon.
Should Investments in New Power Be Justified by Market Prices Alone?
Today’s power market is based on a system where various producers bid their power at what is called the marginal cost, i.e., the short-term cost of producing power in a given hour. For fossil power, the cost is determined by fuel prices and CO2 costs; for hydropower, it’s the value of stored water; while wind power has a marginal cost of zero. Once a wind farm is built, it costs nothing extra to produce power.
In hours where wind power covers almost the entire demand, the market price for electricity therefore becomes very low. With increased wind power development, there has been a growing occurrence of so-called “zero prices.” This system works very well to balance supply and demand on an hourly basis but is not well suited as a basis for investing in new power plants, even though these investments are highly necessary to ensure future power supply.
Countries around the North Sea are ambitious about developing offshore wind as the backbone of a renewable energy supply. But these investments will not happen by themselves within today’s market-based system. There is simply no willingness to invest in new power plants that could risk prices dropping to zero every time the wind picks up and all producers generate at the same time. To address this challenge, several countries have introduced a system of difference contracts, where wind farms are paid an agreed price regardless of the market price. This system, also established for offshore wind in Norway, has reduced the risk for investors and made offshore wind projects investable. The result has been a large European industry where offshore wind has gone from being heavily subsidized to being competitive with other energy sources.
In simple terms, one could say that the daily operation of existing wind farms is managed by the market, but the development of the future power system requires political prioritisation and, in many cases, support systems. This also applies to technologies other than offshore wind. One example is the capacity market introduced in the UK around 2018, aimed at gas turbines and other flexible generators.
Where Will New Norwegian Power Come From?
Norway is also in a situation where we need to develop more power to electrify society and maintain a positive power balance. In the coming years, we will need to decide what our future power system should look like. Although opinions differ on how much new power is needed, offshore wind stands out as an important technology.
It’s important to recognize that new power is more expensive than existing power, which mainly reflects the cost of keeping current power plants running. According to NVE, only hydropower and onshore wind will have an energy cost below the expected electricity price. Both of these technologies, as previously mentioned, face scalability and public acceptance challenges. It is, therefore, highly unclear which power sources will be able to provide new “commercial” power in the future.
It's also worth pointing out that the low electricity price that NVE forecasts largely arises from high wind power production in our neighbouring countries. NVE claims that this will increase the need for subsidies for Norwegian offshore wind, which is technically speaking correct. However, even though this wind power has zero marginal cost, most of it will already be supported by difference contracts in neighbouring countries. The power is thus not cost-free, even though it may seem free to import. In such a scenario neighbouring countries’ difference contracts will in practice subsidise Norwegian electricity prices.
Norwegian Floating Offshore Wind Can Add Great Value to the Norwegian and European Energy Mix
One of the advantages of floating offshore wind in Norway is that it can be spread geographically along the Norwegian coast. When the wind isn’t blowing in the North Sea, it may be blowing strongly further north. This power will then have relatively higher market value, which will in turn reduce support payments through difference contracts.
NVE's conclusion that Norwegian floating offshore wind will be too expensive in the long term must therefore be challenged, both because costs will come down, because new power is more expensive than old, and because Norway has geographical advantages that increase the value of our power. Even if the cost of building floating wind may be above the market price for electricity, it can still be profitable for Norway to develop offshore wind.