Lithuanian offshore auction design proposals jeopardise the low-cost delivery of projects

Lithuania is preparing its regulatory framework for the development of offshore wind in its waters. And new proposed auction rules have recently emerged in the Lithuanian Parliament, which will jeopardize the delivery of projects at the lowest cost for society.

The Committees of Economic Affairs and Environment in the Lithuanian Parliament has recommended changes to the auction design, which would support only part of the electricity produced by the winning bidders, instead of to the whole output of the wind farms concerned happens in other countries.

If finally adopted as law, it would result in project developers having to compete in the auction on the lowest price and on the lowest volume of electricity to be supported. This would bring additional risk to the project developers, resulting in higher bidding prices in the auctions. And it would mean that much of the output of the winning wind farm(s) would not be covered by a Contract for Difference, which would increase the financing costs for the rest of the wind farm and result in higher total lifetimes costs. We fully understand the intention of the Parliament to minimize costs to the State and society. Still, we fear the measure would therefore increase the long-term costs to Lithuanian consumers.

Moreover, these changes have emerged very quickly, and there has been little public consultation with market participants. Nor has there been a detailed impact assessment published.

The Energy Minister’s original proposals to the Parliament had a favorable assessment of the two-sided Contracts for Difference (CfD) model as the mechanism the be awarded in the auction. The offshore wind industry agreed with this. The 2-sided CfD, as initially proposed, is the best form of revenue stabilization mechanism to minimize the total societal costs of offshore wind. And the industry has been working on this basis for the last two years, in an open and constructive dialogue with the Lithuanian authorities, which enabled a conducive environment for competition and investment certainty. These sudden changes seem to put all that at risk.

WindEurope urges Lithuania to remove the changes to the auction rules and maintain the Ministry’s proposals of auctioning a double-side CfD based solely on a strike price. Lithuania has come a long way in planning for the development of its first offshore wind farms. It should kick off this technology with a well-established auction mechanism which has demonstrated its benefits in several countries.

CfDs deliver the lowest costs of offshore wind to society because they enable investors to minimize their cost of capital, which has a central role in the financing and costs of projects.

Many Governments across Europe design their auctions for renewables with CfDs because they cost the least in the long run. During high electricity price periods, such as the one Europe is experiencing today, Governments get paid back by wind farm operators the difference between the strike price awarded and the higher electricity price from the market. So CfDs can be ‘fiscal-neutral’ for Finance Ministries.