Offshore wind farms: Maximum strike price in contracts-for-difference scheme proposed by Minister of Climate and Environment

17.02.2021 energy

On 16 February 2021 the Polish Ministry of Climate and Environment released for public consultations a draft of the regulation on the maximum price for electricity generated at an offshore wind farm and introduction into the grid, in PLN per MWh, which is the basis for calculating the right to coverage of a negative balance. This amount is set at PLN 301.50/MWh (about EUR 67/MWh). This means that this will be the maximum amount of support from the Polish state for wind farms built in the Polish area of the Baltic Sea, which will be allocated within the next four months.

Projects with a combined capacity not exceeding 5.9 GW will be eligible for this round of support, granted in the form of individual decisions by the president of the Energy Regulatory Office (URE). Those starting in the race for this money include the Polish state-owned energy companies PGE (in cooperation with the Danish company Orsted) and Orlen (with the Canadian-owned Northland Power), the private company Polenergia, erecting offshore wind farms with the Norwegian company Equinor, Ocean Wind a joint venture of Engie and EDP Renewables, as well as the German company RWE.

Factors contributing to result of PLN 301.50/MWh

In setting the maximum price, the investment costs of the wind farm were taken into account, along with technical and connection infrastructure, operating costs, additional capex incurred during the operating period, the costs of liquidating the farm, and a reasonable profit on the investment. The factors shaping the levelised cost of energy (LCOE) for offshore wind farms reflected such factors as:

Wind speed, which directly affects the farm’s capacity factor
Distance from the coast, affecting the length of the cable for interconnection to the grid, and the time, and thus the costs of installation, operation and servicing of the farm
Depth of the body of water
Development of offshore wind farm technology
Costs of staff at all stages of erection and operation of the farm.

For the purpose of calculating the maximum price, the following assumptions were adopted for the reference wind farm:

Distance from coast 45 km
Depth 40 m
Capacity factor 45.7%
Average capacity of offshore wind farm 1000 MW
Wind speed (contributing to project productivity) 9.46 m/s at a height of 100 m
Year of startup of offshore wind farm 2026
Technical lifespan and amortisation period 25 years
PLN/EUR, National Bank of Poland average exchange rate of last five years, from 2021 (eliminating the COVID-19 effect): PLN 4.31/EUR
PLN/USD, NBP average exchange rate of last five years, from 2021 (eliminating the COVID-19 effect): PLN 3.81/USD
Inflation: 2.7% increase in CPI y/y—NBP inflation target for 2022
Balancing costs set at zero.

Expected windmill capacity and local content

It was also assumed that the reference farm would be erected on a fixed bottom and would use turbines with a capacity of 12 MW by about 2027 and 15 MW by about 2030. It cannot be ruled out that such large turbines could be installed earlier, as turbines are currently under development with a capacity of 15 MW, and 12 MW turbines have been available for several years.

In drafting the regulation, it was also assumed that there would be a 35% share of Polish labour costs in the labour costs involving connection of the wind farm and maintenance and renovation work. It should be mentioned that because labour costs in Poland are 64% lower than the EU average (EUR 10.70/MWh/h vs. EUR 27.7/MWh/h), increasing the use of local supply chains could have the positive impact of reducing the project costs.

Forecast for further reductions in costs of offshore generation on global markets

The government analysis also assumes declining operating expenses and additional capex, from PLN 0.302/MW/year in 2026 to PLN 0.279/MW/year in 2028. Fees on generation of electricity at wind farms (an element of the concession fee) were also factored in, at the rate of PLN 23,000/MW/year, as were fees for the permit for erection of artificial islands and straight-line amortisation costs. A decline in costs was also assumed with respect to capex (from PLN 11.37m/MW in 2026 to PLN 10.68m/MW in 2028) and costs of liquidation of the farm (from PLN 220,000/MW in 2026 to PLN 204,000/MW in 2028). A weighted average cost of capital (WACC) of 6.03% was assumed, reflecting the existing business risks and factors mitigating those risks, arising among other things from the EU’s climate policy.

Little time for final adoption of regulation

There is very little time left to adopt this regulation. Investors have only until 31 March 2021 to file applications for the right to cover a negative balance. This results from entry into force at the beginning of July 2021 of the obligation to award support in the form of an auction, which will be mandatory across the EU. The next few months will thus undoubtedly be a busy period for the staff at the Energy Regulatory Office, but even busier for investors and their advisers.

Igor Hanas, adwokat, Rafał Pytko, attorney-at-law trainee, Energy practice, Wardyński & Partners