The EU Commission presented a European Wind Power Action Plan to ensure the bloc will be able to reach its ambitious 2030 targets.
Europe strives to generate 42.5 percent of its power with renewable energy by 2030. But while solar power installation seems to be on track, windpower installation is falling behind. To meet the overall target, member states need to install 37 gigawatts (GW) of wind power annually. In 2022, just 16 GW was installed.
“Wind power is a European success story,” Green Deal commissioner Maroš Šefčovič said on Tuesday (24 October) when presenting the plan. “But our industry is now facing serious challenges.”
The issues causing delay ranged from “complex” permitting processes, lack of access to raw materials, skilled workers and supply chain problems to inflation, high-interest rates and foreign competition, especially from China.
Underlying all these issues is a lack of profitability. Over the past years, all major European wind turbine manufacturers reported significant operating losses.
Especially more expensive offshore wind is in deep trouble. Investment in new offshore wind projects fell by 40 percent in 2022, down to the lowest level since 2009. Not a single commercial offshore project was given the final go-ahead in 2022.
No more uncapped bidding?
To help the ailing industry, the commission has proposed an action plan to address all these issues.
A central element aimed at tackling profitability is an improved auction design.
This will “send investment signals across the whole value chain and are central to ensure the sector’s profitability,” the commission announced.
Exact guidance will only be published by the end of March 2024 following discussions with member states and industry, but some elements are already evident.
Currently, the Renewable Energy Directive requires member states to provide long-term auction scheduling plans.
The wind power package now also calls for national ministries to provide “granular” short- and mid-term auction schedules, which, according to commission plans”, will give the industry greater confidence about short- and mid-term business opportunities.
The commission text also warns countries against overusing so-called ‘uncapped negative bidding’ contracts for offshore wind.
Favoured in the Netherlands and Germany, this contract form creates a situation where developers pay the state for the right to operate a wind farm.
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Germany’s Federal Network Agency recently awarded 7 GW of offshore wind capacity for €12.6bn to two oil majors, BP and Total Energies.
Uncapped bidding is attractive for energy ministers because it seems like a good deal for the public. But higher upfront investment increases the cost of power consumers have to pay.
And the commission warns the system increases the financial risk for developers.
Indeed, researchers at the Climate Finance and Policy Group at ETH Zurich have previously shown that higher developer risk also means investors charge higher interest rates. This increases the wholesale cost of power, making it less competitive and attractive to investors.
“This, coupled with cases where there are no sufficient penalties for non-execution of projects, increases the risk for the full and timely delivery of projects,” notes the commission plan.
Small print
Although no specific alternative is mentioned, the commission alludes to bloc’s power market reform. Countries are already debating whether to make so-called two-sided contracts-for-differences (CfDs) favoured in Denmark (and the United Kingdom), the standard across Europe.
This contract allows governments to claw back surplus revenues if prices exceed a specific limit, preventing a repeat of last year’s energy price crisis. It also introduces a price floor which protects power producers if market prices drop below the minimum.
Although this would remove uncertainty for developers and investors (and consumers), a recent failed auction in the UK also revealed the weakness in the plan if auction prices are set too low.
Another problem is inflation. Wind farm developers win an auction at a given price. But if costs become significantly higher when companies come to order their turbines a year later, the project gets cancelled.
To prevent this, the commission suggests that member states should index auction prices to the inflation rate of the contract clauses, an intervention lobbyist Wind Europe has long argued for. “This package is a game-changer,” said WindEurope CEO Giles Dickson.
