Wind Projects May Stall on U.K. Grid-Connection Rules, E.ON, Centrica Say

A U.K. plan to install more than 8,000 offshore wind turbines by 2020 may be delayed by a government plan to contract out work to connect the wind farms to the grid, according to Centrica Plc and E.ON AG.

Regulator Ofgem has said allowing competitive bids would attract investors to the industry and curb the 15 billion-pound ($23 billion) cost of connecting 33,000 megawatts of capacity over the decade. Wind-power producers contend that awarding the work exclusively to other companies, who may lack expertise in offshore wind, could slow projects.

“We don’t want to build a generation asset and then be beholden to a transmission company -- and we don’t know who that’s going to be -- in getting our power to shore,” Sarwjit Sambhi, managing director of power generation at Centrica, said by telephone. The Windsor, England-based utility runs three offshore wind farms, has another slated for construction this year and a permit to erect more turbines in the Irish Sea.

The U.K. aims to get 15 percent of its power from renewable sources by 2020, a sevenfold jump from 2008. The majority of that will come from offshore wind farms, which cost as much as 3 million pounds a megawatt to build, more than double the cost of onshore farms, Citigroup Inc. data show. One megawatt can supply about 650 households, according to industry group RenewableUK.

Regulator’s Review

Ofgem is considering how best to build and manage grid connections, which account for 15 to 20 percent of the cost of an offshore project, while containing expenses for the owners. Tendering for future grid links, which would give winners a regulated income over 20 years, would start later this year.

“Ofgem is opening up this investment opportunity to alternative sources of capital in a bid to create competition and reduce the burden of procurement for sponsors,” said Charlie Hodges, an analyst at Bloomberg New Energy Finance. “Developer margins will improve if less money is spent upfront.”

Centrica and E.ON were among companies that won rights to build wind farms off Britain in the country’s third licensing round in January. Existing transmission arrangements, which are temporary, allow wind-park owners to construct their own point- to-point connections and then auction them off.

‘Layer of Complexity’

“We’d ideally like the flexibility to build our own connection,” Mike Lewis, managing director for Europe at E.ON Climate & Renewables, said in a telephone interview. Bringing in a contractor “adds another layer of complexity. We want the simplest regime that’s going to get as much capacity built as quickly as possible.”

The technology to lay power lines offshore is new and presents engineering challenges. The cables are sunk to depths of as much as 260 feet, equivalent to 18 double-decker buses stacked up, and stretch as far as 200 kilometers (120 miles) across shipping lanes where strong winds can hamper repairs.

An auction of offshore grid connections held earlier this year attracted bidders including National Grid Plc, Denmark’s Dong Energy A/S, U.K. builder Balfour Beatty Plc and Macquarie Capital Group Ltd., an Australian investment bank. Those licenses will be awarded next month.

The sale sparked “strong competition for the first transitional phase for over 1 billion pounds of connections,” Mark Wiltsher, a spokesman for Ofgem, said in an e-mail. “Ofgem has worked to deliver practical solutions that deliver timely and cost-effective connections.”

Wider Network

Any new tendering system should seek to reduce the financial burden on project owners, while encouraging a broader network linking wind farms to each other and to the U.K. grid, National Grid’s head of European Union and U.K. Public Affairs Janine Freeman said.

The offshore network will be an “incredibly complex piece of engineering, and unless companies have the right incentives to coordinate and anticipate development then consumers will pay the cost of inefficient network designs,” Freeman said by phone. “Instead of building point-to-point connections right out into the North Sea, we need a more coordinated regime.”

The opposition Conservative Party echoed National Grid’s view in a March 19 statement. Offshore connections should be managed as a “shared resource rather than through multiple proprietary networks,” the party said. A coordinated approach would strengthen links with European power grids, it said.

European Networks

The U.K. is the first country in Europe to attempt to create a market for offshore transmission links. In Germany and Denmark, the onshore grid operator manages the connections, while in the Netherlands and Belgium they’re controlled by the wind-farm developers.

“European countries are looking at our regime and not understanding it,” Freeman said. “The risk here is that increasingly we will want to see more interconnection, especially as we’re relying on more intermittent renewables.”

Sources of renewable energy such as wind depend on the weather to generate power. Electricity can’t be stored, so utilities need to have backup plants to meet demand when renewable power falls short. Interconnector cables to other markets provide outlets for surplus supply.

“The grid connection is the umbilical link to the generation,” Peter Madigan, head of offshore at RenewableUK, said by telephone.

“Building the transmission network is a critical time constraint to this process,” he said. “By retaining control, the developer is able to keep costs under control as project complexities are worked through.”

To contact the reporter on this story: Kari Lundgren in London at klundgren2@bloomberg.net

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