AFRY evaluates offshore wind business case for the Dutch Ministry of Economic Affairs and Climate Policy
The Dutch Ministry of Economic Affairs and Climate Policy has released a report by AFRY Management Consulting entitled: The business case and supporting interventions for Dutch offshore wind. Our study investigates whether systematic changes are required to ensure that the business case for merchant offshore wind is viable in the long term.
At the beginning of the last decade the big question for offshore wind was whether costs could come down sufficiently to make the technology affordable. We now know the answer to this is yes, but, with costs comparable to established technologies, the question for this decade is: can offshore wind make the returns required for an investment fully exposed to electricity market risk?
The answer to this question is of interest to any country developing offshore wind, but for the Netherlands it is particularly important to understand now. The Netherlands has a target of 11GW of offshore wind by 2030 from just over 1GW today and its default offshore wind tender scheme offers no top up to wholesale electricity prices. As a result, the Dutch Ministry of Economic Affairs and Climate Policy wanted to understand if this target could be met under the current scheme and, if not, whether any alternative interventions could enable this.
Two offshore wind projects, Hollandse Kust Zuid I&II and Hollandse Kust Zuid III&IV, have already successfully been auctioned off at zero subsidy, therefore it may appear that meeting the offshore wind targets will be straightforward. However, in our report we explain that there are many factors that could change the viability of the Dutch business case in the future, including the effect of the evolution of electricity prices, the cannibalisation of offshore wind revenues and competition for capital.
We were commissioned by the Dutch Ministry of Economic Affairs and Climate Policy to complete the study, the design of which was led by a Steering Committee which also included Invest NL, PBL (Netherlands Environmental Assessment Agency) and representatives of the Dutch offshore wind industry. We assessed the business case for offshore wind under a range of different market and regulatory uncertainties, considering the impact on the expected return on investment.
We conclude that there is a material risk the Netherlands does not meet its 11GW offshore wind 2030 target at zero-subsidy under the current market environment. So whilst it is conceivable that targets could be met in 2030 without further intervention, the potential for the business case to become unviable as a result of changes in market conditions should be taken seriously.
We also identify a number of interventions that could be made to help make the business case more robust to change. These include ensuring demand growth and offshore wind development are aligned, incentivising time-shifting flexibility and improving the allocation of financing risk.