Contracts for difference can ensure that floating offshore wind on Utsira North is realized in a cost-effective way, according to a recent report.
There is broad political agreement to focus on the development of floating offshore wind in Norway. The investment will help to restructure the Norwegian supplier industry, provide new export revenues, and provide Norway with more renewable energy. One challenge, however, is that current technology costs make it difficult to achieve profitability for companies that want to develop floating offshore wind projects.
The Utsira Northarea is open to 1,500 MW of floating offshore wind. By comparison, the floating offshore wind project Hywind Tampen is 88 MW.
To scale up the development of floating offshore wind , public support schemes are needed.
Therefore, Equinor and Vårgrønn have asked Oslo Economics to assess the advantages and disadvantages of two alternative support schemes: investment support and production support (in this case, contracts for differences - CFDs).
Investment support involves a cash payment at the time of investment, while a CFD is a long-term agreement with the state that gives the producer a guaranteed power price that is above the expected market price.
Three assessment criteria form the basis for the analysis carried out by Oslo Economics:
o Ability to trigger the development of full-scale floating offshore wind technology
o Cost efficiency in the scheme
o Feasibility
Based on these criteria, the analysis states that CFDs are a more effective tool than investment support. This is partly due to the fact that future power prices are uncertain, and that there is no effective market for long-term price hedging.
This presupposes that the state can bear the power price risk at a lower cost than the offshore wind developer (investor). In such a case, it would be cheaper for the state to assume the power price risk through CFDs, rather than compensating the offshore wind developer (investor) to bear this risk with an investment subsidy.
Click here to read the analysis and more details (in Norwegian).
