Directions paper puts wind in the sails of Victorian offshore renewables

The Paper outlines the Government’s commitment to supporting the development of one or more offshore wind farms by the early 2030s, with the aim for first power by 2028.

For those of us who work in renewables, the Directions Paper is an exciting step towards establishing the policy conditions necessary to bring projects to life, and facilitating greater certainty for offshore wind developers and investors.

The Government says more details on implementation will be released later in 2022, but the Paper does provide some interesting clues as to how the offshore wind sector will be developed in Victoria. Here are my top three predictions.

Contracts for Difference a likely mechanism

The Victorian Offshore Wind Policy Directions Paper commits the Government to ‘procure an initial offshore wind tranche of at least 2GW with the aim for first power by 2028…to establish the offshore wind sector in the State’.

This provides a strong indication that Victoria is considering state government support for developers to kickstart the industry. In other jurisdictions, such as the booming UK industry, the preferred mechanism in this situation has been a ‘Contract for Difference’ type process to support the economic viability of offshore wind early movers.

A Contract for Difference (CfD) is a financial instrument designed to provide an electricity generator with an agreed price for its power output, well before any turbines are built or connections made to the grid.

In the same way that fixing your home loan offers protection to homeowners should interest rates rise, a CfD ‘strike price’ provides a level of protection to generators against electricity price fluctuations. It is important to note, however, that the generator still needs to enter into a contract for the sale of the actual power it produces (known as a Power Purchase Agreement or ‘PPA’) in the normal way, and will be paid for energy in accordance with that agreement.

If once the asset is built, the ‘reference price’ (the market price that a generator can obtain for its output) is lower than the strike price, the generator receives a top-up payment to make up the difference. If the reference price is higher, then the generator pays back the difference for each MWh it sells. 

For an emerging sector like offshore wind, CfDs can help developers attract project funding at a lower cost and provide additional security to the first movers who are investing large amounts of money to investigate, commercialise, and deliver new infrastructure. 

The Policy Directions Paper isn’t explicit about the financial mechanism that the state will use, saying that 'further work will be undertaken to determine the precise form of government support, including funding pathways'.

The competitive nature of CfD schemes has been hugely successful in driving the deployment of renewable energy in the UK market while rapidly reducing costs. In fact, it has led the price per unit of offshore wind to fall by around 65 per cent between the first allocation round in 2015, and the third in 2019.

In my mind, this presents a tried and tested approach for the Victorian Government to replicate.

Gippsland and Portland the first areas to be declared

Under the recently introduced Commonwealth Offshore Electricity Infrastructure Act 2021, a proponent who wishes to operate an offshore renewable energy project under a commercial licence must first obtain a feasibility licence.

This gives them exclusive rights to assess the viability of developing offshore wind assets in a prescribed investigation area, including long-term studies to measure wind energy potential (strength and direction), complete baseline environmental surveys, and undertake detailed impact assessments that will inform Environmental Management Plans.

Before a proponent can apply for a feasibility licence, the Commonwealth Energy Minister needs to make a declaration that a particular zone of the coastline is suitable for development in accordance with Division 2 of Part 2 of the Act (declaring areas for offshore renewable energy infrastructure). This zone is known as a ‘declared area’.

The Victorian Policy Directions Paper identifies two zones that represent the ‘location of high-quality offshore wind resource in…Gippsland and Portland West.’ It describes these zones as representing ‘at least a 13GW opportunity in initial tranches’.

Such language is a strong signal that consultation between the Victorian State Government and the Commonwealth Department of Industry, Science, Energy and Resources will result in Gippsland and Portland being identified in the first round of area declarations by the Commonwealth. This is a positive sign for the first movers who are already investigating in these zones.

Supply chain development key to industry success

The Policy Directions Paper explains that ‘[Victoria’s] local workforce and industry have developed extensive capability in onshore renewables and have transferable skills from the resources sector.’ It goes on to say that the Government is: ‘committed to activating and supporting local supply chains that can participate in the offshore wind sector and generate direct and indirect jobs.’

It’s both a vision statement, and an acknowledgment that investment is required not just in offshore wind projects, but in local capability and capacity to deliver them.

This is indeed one of the greatest challenges facing the fledgling offshore wind industry in Australia. As wind turbine generator (WTG) sizes continue to increase, the construction, assembly, and installation of these massive structures becomes more specialised. With no offshore wind projects in the delivery phase to date, there are few suppliers in-market able to meet developers’ needs as projects enter the construction phase.

Creating the conditions for offshore wind success - and meeting the targets that have now been set - requires significant work in building local capacity, and bringing delivery costs down in turn. 

It will be interesting to see which mechanisms and approaches the Victorian Government will use to stimulate supply chain growth.

There are some clues as to where the state’s supply chain focus will be, with the Paper stating that the Government will release an Offshore Wind Implementation Statement later in 2022 that includes further details on its approach to ‘developing the transmission network to provide offshore wind farms with access to the grid’, and ‘facilitat(ing) port upgrades to support wind farm construction and operation’.

So, where to next for offshore wind in Victoria?

RPS has been working with a range of clients to investigate offshore wind potential, viability, and sustainability off the coast of Victoria for a number of years.

The Victorian Offshore Wind Policy Directions Paper shows that the State Government is not just supportive of the work that is already going on in offshore wind, but will proactively assist our industry to grow, and take projects beyond investigation, to detailed design, delivery, and operation.

There are clues as to how that might happen, and for those of us involved in offshore wind, it’s exciting to know that the Victorian Government is along for the journey.