Breaking new ground offshore

Offshore wind sees its biggest development yet, but there's much more to come. Elsewhere, EU carbon gets a boost and the UK announces renewable energy strike prices.

The UK joined 'The Little Mermaid' in celebrating the merits of being under – or, more accurately, in – the sea, with the official opening on July 4 of the world's largest offshore wind farm. With a price tag of $A3 billion, the first 630MW phase of the London Array began operations in April and is jointly owned by DONG Energy, E.ON and Masdar.

The government is considering an application for phase two, which could bring capacity up to 870MW – enough to power 250,000 homes for the next 20-25 years.

Later that day and at the other end of the country, a joint venture between Spain's Repsol and EDP Renewables submitted plans to the Scottish government for a 1GW wind farm off the Angus coastline.

Inch Cape Offshore joins a growing number of proposals to build wind capacity off the coast of Scotland. If approved, the 213 wind turbines would cover 150 square kilometres. This is also the same team behind the proposal to build what could replace the London Array as the world's largest offshore wind farm. Comprising 1.5GW of capacity and 339 turbines, the £4.5 billion ($A7.3 billion) project was supported by Highland councillors in March and now needs approval from the Scottish government.

The country has the ambitious goal to generate renewable power equivalent to 100 per cent of its consumption by 2020 and lawmakers estimate that by then there will be 10GW of wind turbines in Scottish waters.

The UK is already number one for offshore wind capacity, with 3.3GW of installations – double the rest of the world combined. The government aims to cement this lead by offering offshore wind developers triple the market price for power they generate, it announced on June 27. Offshore wind power plants may earn a 'strike price' of £155/MWh ($A251/MWh) from next year. This compares with £100 for onshore wind, £105 for biomass and £125 for large solar projects. The front-month power price in the UK has averaged £47.80/MWh over the last year. Eligible generators may choose between this option and the current Renewables Obligation scheme until March 2017.

The government estimates that this subsidy program will spur the construction of 8-16GW of offshore wind capacity. This technology – together with nuclear – is at the heart of its plan to replace aging power plants and to cut emissions. However, one stumbling block for developers may be that the new contracts will last only 15 years for most technologies, including offshore wind, rather than the 20 years of the current scheme.

The UK aims to obtain 30 per cent of its electricity from renewable sources by 2020, compared with the current 12 per cent.

Elsewhere in the world, Statoil announced on July 3 it was delaying an offshore wind project in Maine because legislation supported by Governor Paul LePage has created uncertainty. The Norwegian energy company said that it may abandon the $US120 million pilot project after lawmakers approved a legislative amendment that would allow the University of Maine to submit a proposal for the project by September 1. Democrats have questioned LePage's motives, given his opposition to wind power. Currently the US has no operational offshore wind capacity.

One state further south, the long-delayed Cape Wind project off the coast of Massachusetts is edging towards construction, its developer announcing on July 1 that it had signed a $US15 million contract with local firm Lawrence-Lynch for the project's terrestrial cable work, starting next year.

In June, PensionDanmark said it would provide a $US200 million mezzanine loan for the $US2.6 billion project. The Bank of Tokyo-Mitsubishi, as lead bank, is expected to coordinate up to $US2 billion in debt and Siemens has said it will supply the turbines and may provide $US100 million in equity for the project. Having met considerable opposition from affluent local residents and a Native American tribe, Cape Wind is working to secure funding before the Investment Tax Credit expires at the end of the year. PensionDanmark has said that its investment is conditional on a final decision this year to construct the wind farm.

Globally, there will be 15.4GW of offshore wind capacity by 2015, according to Bloomberg New Energy Finance.

Europe will maintain its grip on the technology, with 76 per cent of the global total, together with the Middle East and Africa. This lead is due to favourable policies, technology and experience – all of the leading offshore wind equipment suppliers and engineering, procurement and construction contractors are European. Behind Europe in offshore wind technology and experience, Asia and Oceania is forecast to have installed a more modest 3.6GW by 2015, despite some supportive policies, with China, South Korea and Japan the main markets.

In the carbon markets last week, there was no need to see if it had to be third time lucky for backloading as the European Parliament on July 3 adopted an unexpectedly strong version of the proposal by 344 votes to 311. This was its second foray into the plenary after parliamentarians rejected the plan in April.

Supporters of auction curbs to prop up the ailing European emission trading system will have breathed a sigh of relief. But there are several more turns in the road before backloading reaches its destination: first, the Commission, Parliament and member states must iron out their differences but these trialogue negotiations are unlikely to begin until October – namely until Germany has gone to the polls on September 22, formed a government and announced its position on auction curbs.

What bodes well is that the Parliament rejected last week several compromise concessions that could have irked national governments – such as a move to earmark auction revenue for an industrial innovation fund.

If all goes to plan, the Commission could initiate auction curbs in just under a year. But this will depend on events in Berlin and how long it takes for the Commission itself to draft a new auctioning regulation. In the meantime, European carbon prices should be driven more by auction supply, energy fundamentals and equities. Over the next few months, however, summer holidays will reduce auction supply and traded volumes, making the illiquid market more sensitive to any demand increases thanks to hedging.

EU carbon

European Union carbon jumped last week after the bloc’s parliament passed a measure to delay temporarily the sale of some permits. European Union allowances (EUAs) for December 2013 gained 1.9 per cent over the week to close at €4.29/tonne on Friday, compared with €4.21/t at the end of the previous week.

EUAs dipped to as low as €3.25/t on Wednesday morning as traders nervously awaited the European Parliament’s vote on the carbon-market rescue proposal. A record 13.7Mt of front-year EUAs changed hands in the hour through noon London time. Prices surged above €4.60/t immediately after a majority of parliament voted in favour of the plan, known as backloading. They hit a weekly high of €4.88/t as the market opened on Thursday.

UN Certified Emission Reduction credits (CERs) for December 2013 gained 8 per cent last week to close at €0.54/t.

This article was originally published by Bloomberg New Energy Finance.

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