White paper, guidelines and changes in the regulation of offshore wind

White paper, guidelines and changes in the regulation of offshore wind– Kvale Advokatfirma DA
Lesetid: 12 min

The much anticipated white paper on long-term value creation from Norway's energy resources (Norw: Meld. St. 36 (2020-2021)) was presented on 11 June 2021 with certain recommended legislative alterations, along with guidelines to the offshore wind application process.

The white paper "Putting Energy to Work" outlines Norway's energy sector policy in the important energy transition Norway is facing. The aim of this newsletter is to provide an overview of the key highlights from the white paper and an introduction to the guidelines.

Recommended amendments to laws and regulations

The Ministry of Petroleum and Energy (The "Ministry") has set out several recommendations for amending the Offshore Energy Act and the Offshore Energy Regulation in their consultation paper published in June 2021. The recommended amendments have been summarised below:

  • The licensing process will, as a main rule, start with the Ministry dividing each area opened in accordance with the Offshore Energy Act Section 2-2 into several smaller areas. Each area shall have a maximum allowed installed effect.
  • The Ministry proposes that a fee may be demanded for the allocation of area. As a main rule, there shall be an economic competition where the size of the consideration is decided through an auction system. The Ministry notes that the economics of floating wind makes it less suitable for an auction process and that the key matter for these projects is technology development. For floating wind, the criteria for awarding an area will instead reflect the target of technology development and cost reductions. 
  • The Ministry further recommends a prequalification process to ensure that the participants in the competition fulfil the requirements set out in Section 3-5 first paragraph of the Offshore Energy Act for satisfactory technical competence and financial capacity, and meet relevant requirements for health, environment and safety.
  • The company that wins the competition for award/allocation of a geographically defined area is given an exclusive right to issue a notice and eventually submit a licence application to develop the project. This area is then not available to other actors who want to develop a wind farm project. The exclusive right is time limited, and a failure to meet such limit may lead to revocation of the right to the allocated area.

An auction-based licensing process for bottom-fixed offshore wind

An auction-based licence process as proposed, constitutes a new model for awarding licences in Norway from an energy perspective. The Ministry has chosen a developer-driven approach, with an early award of an area. This indicates that the projects are relatively immature when an area is to be allocated. Consequently, there are limited opportunities to make substantive assessments of the prospective projects in a quantitative competition.

Furthermore, especially for projects where the aim is to have profitable power production and where the technology is matured, such as for bottom-fixed offshore wind at Southern North Sea II, the Ministry considered it challenging to base it on qualitative criteria so early in the process. The aim is, therefore, to have an auction-based licensing process for bottom-fixed offshore wind projects. We find that the proposed prequalification process is a vital tool to ensure that the winner of the auction (single company or joint venture) has the skills needed to conduct safe and prudent operations.

An auction is an objective and market-based allocation model. The price in an auction will reflect the companies' assessment of the expected profitability and indicate which project is the best and thus should be allocated an area. However, a cornerstone for such auction approach is regulatory certainty, as risk and uncertainty will reduce the price in an auction setting.

The Ministry has therefore not developed the detailed content of the auction process, as it considers it to be of vital importance for both Norway and the interested parties that the applicable framework is in place before the auction is carried out. It is assumed that the Norwegian offshore wind farms will deliver power directly to domestic customers and customers on the European continent and in the United Kingdom, which will involve constructing a new cable network and connecting to the electricity grids in different jurisdictions. These type of hybrid projects will have an effect on the power system, on power prices, power flow, and the exchange on other connections. The EU's regulation on this point remains under development, and consequently, the Ministry will carry out the study of the legal framework etc., applicable to bidders participating in such hybrid projects before an auction is held on the Southern North Sea II (see below for more information about hybrid projects). The aim is to announce the auction process for Southern North Sea II in the first quarter of 2022.

Qualitative competition for licensing process for floating wind

For floating wind, the Ministry has considered an auction based licensing process less suitable, as it e.g., is not given that the best technology projects will win in an auction process. The Ministry proposes that the allocation at Utsira North be carried out on the basis of a qualitative competition. The award criteria for Utsira North will reflect the goal of developing projects that contribute to technology development and cost reductions for floating offshore wind. The criteria for awarding a geographical area for the development of an offshore wind project will be described in the announcement from the Ministry.

The Government's aim is for the process to start by the end of 2021, and be based on qualitative criteria, including technical and financial capacity and adequate experience with the development and operations of comparable projects.

Guidelines for award of area, licensing process and application for offshore wind power

On 11 June 2021, the Ministry also released guidelines describing the process related to inter alia award of a geographical area for developing offshore wind power, the licensing process and the preparation of applications related to licence to construct and operate offshore wind power facilities.

The guidelines describe the various steps of the process related to impact assessments, public hearings etc., and include several important deadlines applicable to the project execution.

The guidelines, currently only available in Norwegian, may be read here.

Grid connection

The intention is further that Statnett, the Norwegian Transmission System Operator, will be appointed to operate the system under the Offshore Energy Act for offshore cables and grid. The Government proposes that the grid facilities be planned, built and financed by the companies holding a licence under the Offshore Energy Act and that the grid customers on land shall not cover the costs of a transmission network at sea. The grid at sea differs from the network on land in that there are few users and that the technology required for an interconnected network at sea is immature and expensive.

From the Government's perspective cost-sharing that distinguishes between onshore and offshore networks means that offshore network customers face the real costs of building and operating offshore networks to the greatest extent possible. Cost-sharing is an incentive for the players to ensure that the total grid rent is not higher than necessary and that the distribution is perceived as reasonable and fair. The rules for investment contribution under the Energy Act apply if the connection of wind turbines to the onshore power grid requires grid reinforcement of the domestic grid.

Hybrid projects with interconnectors

The Government is currently carrying out studies on the legal framework regarding so-called hybrid projects, meaning projects with connectors to the Norwegian market and interconnectors to other energy markets.

Southern North Sea II is relatively close to the continent and the United Kingdom, up to the Danish continental shelf. The industry wants to develop Southern North Sea II projects where the power is exported to countries with higher power prices than Norway. Some have pointed to solutions with hybrid projects where the power is taken ashore both in Norway and abroad, while at the same time allowing for ordinary power exchange between the countries.

Hybrid projects will have effects on the power system and on power prices. EU regulations in this area are also under development. Therefore, it is necessary to study the effects and legal aspects, of hybrid projects before such projects can be opened up for. The Government will seek to clarify the effects that hybrid projects will have on power prices and power flow, clarify regulatory and legal issues and see this in connection with developments in the North Sea. The Government aims to clarify whether, and possibly on what terms, it will be possible to apply for a licence for hybrid projects before allocating an area on the Southern North Sea II.

Opening of new areas for offshore wind

Further to the opening of Southern North Sea II and Utsira North, the Government has also stated that it will start a new process of identifying other projects for offshore wind development and thus conduct new impact assessments of identified areas.

The Government will establish a working group to identify new areas and carry out a new impact assessment. The assignment will consist of two steps. The first step is to identify areas for a new impact assessment. This means assessing the 13 areas remaining from the impact assessment performed by the Norwegian Water Resources and Energy Directorate in 2012. The second step is to identify new areas that may be more relevant today than in 2012, due to the development of technology and increased experience.

Important goals will be to facilitate good coexistence and cooperation with, among others, the fishing industry and the oil and gas industry and to identify areas with prospects for profitable development.

Taxation

Offshore wind follows the general rules in the Norwegian Tax Act, meaning that income from wind power will be taxable for companies considered domiciled in Norway for tax purposes. Persons and companies tax-resident abroad, on the other hand, will not be subject to Norwegian taxation for the activity taking place outside the Norwegian territorial waters.

In the white paper, it is noted that the Government is currently working on an amendment to the Norwegian Tax Act to secure a taxation on income from offshore wind from the Norwegian continental shelf. It should also be noted that the Government states that with the current outlook for costs and power prices for offshore wind, resource rent taxation is not expected for some time and not considered relevant to introduce at this point.

Financial security in the offshore wind licence

The Offshore Energy Act  or other applicable legislation does not provide any legal basis for obtaining financial security in a licence or the installation itself. Financial security in connection with the financing of offshore wind was not assessed in the preparatory works. The Petroleum Act provides a right for the licensee to mortgage the production licence, and security is obtained when the mortgage is registered in the Petroleum Register, which the Norwegian Petroleum Directorate administrates. To ensure that not only major industrial actors may participate in the Norwegian offshore wind adventure, a similar system for mortgage of offshore wind licences should be considered introduced in the Offshore Energy Act.

Regulatory framework

The regulations for offshore wind are new and still under development, but the content is primarily based on petroleum laws and the Energy Act. The Offshore Energy Act and the Offshore Energy Regulation constitute the main legal framework for the process from the award of an offshore wind licence, development phase including the environmental impact assessments, installation of offshore wind installations (windmills) operation of the wind farm until the final decommissioning of the facilities.

On 17 August 2020, the responsibility for the safety of renewable energy generation on the Norwegian continental shelf ("NCS") was delegated to the Petroleum Safety Authority Norway ("PSA"). Consequently, the PSA will be in charge of developing regulations for and supervising the development and operation of offshore wind turbines.

The PSA has stated that the rules will be based on functional requirements and a risk-based approach equivalent to what currently applies to the petroleum sector, implying the use of recommended industry standards to demonstrate compliance with the applicable functional requirements. It is expected that the legal framework will include various HSE-regulations governing all safety aspects related to the life cycle of an offshore wind project. The existing HSE-regulations for petroleum activities will serve as inspiration, but due to the scale of the activities and the difference in risks involved, the final framework will for most certainly differ in many aspects. It is worth noting that the white paper did not address this part of the offshore wind regulation.

The draft regulations are expected to be sent on public hearing during the second half of 2021 or the first half of 2022.

Our comments

  • The choice of an auction process has several benefits and is aligned with the model applied in Europe in general for offshore wind in countries that have a more mature market. We follow the developments closely and look forward to clarity on the further details of the process.
  • A prequalification process is an adequate manner of securing the quality, financial strength, and HSE aspects  essential  for the industry to create trust and robust resource management.
  • We see it as very positive that the Government is working on clarifying the future taxation regime for offshore wind, as well as looking into the issue of financial security. The latter will in particular be important to secure project financing going forward.
  • While much remains unknown and subject to further clarification, the white paper, guidelines to the application process etc., and the consultation paper are all important contributions to a more structured and predictable overview of the framework applicable to upcoming offshore wind developments. It is expected that Norway in the near future will experience increasing interest from companies wishing to be a part of developing our prospective offshore wind resources.

Kvale has a strong team on offshore wind consisting of lawyers with vast experience in the renewable energy sector, oil and gas as well as the shipping industry. We are currently involved in two floating offshore projects and act as advisor to a wide range of companies in the growing offshore wind industry. Read more here.