Tripartite Contracts for offshore wind

The European Commission wants to accelerate the electrification of Europe’s economy with renewable powering the decarbonisation of industry that’s currently running on fossil fuels. To this end, they’ve proposed a new policy initiative – “Tripartite Contracts” – and they want to apply them specifically in offshore wind. Tripartite Contracts could be a good way to share risk in offshore wind projects and help unlock PPAs with industrial offtakers.

At the recent meeting of EU Energy Ministers in Denmark, Dan Jørgensen, EU Energy Commissioner, announced a new EU policy initiative, “Tripartite Contracts”.

The idea behind tripartite contracts is that Governments engage proactively to share the risks when renewables are helping to power investments in industry decarbonisation. So you have a factory that wants the on switch from running on fossil fuels to run on electricity. You have a wind farm developer that wants to provide the power for that factory. But the necessary investments, both for the wind farm and offtaker, are expensive. So Government take measures as the third party to share their risk and reduce the costs on both aides. And the wind farm and the offtaker them both have a business case which they didn’t previously have.

Wind is already helping to power the electrification of industry. This happens typically through Power Purchase Agreements (PPAs). But often there’s no business case for offshore wind and/or to invest in electrifying a factory. That’s where Tripartite Contract come in.

Here’s how they work:

• Industry electricity consumers would commit to buy a certain amount of renewable electricity at an agreed price;
• Renewable energy developers would commit to building new wind farms to generate that electricity; and
• Governments (or public financial institutions) would provide regulatory certainties and financial incentives to underpin these agreements.

These Government measures could be anything that reduces risks, shares risk and improves the business case for both the energy producer and offtaker. Tripartite contracts could also be linked to additional regulatory measures. Tripartite-badged projects could, for example, benefit from faster permitting or reduced grid costs. Government support given out under a Tripartite Contract should automatically qualify for state aid clearance.

“European industry desperately needs reliable and affordable electricity to remain competitive. And wind energy developers need a stable electricity demand to invest in new wind farms. Sounds like a match made in heaven, right? But often getting a business case to work between the two is hard. That’s where Tripartite Contracts can help. They can establish trust, de-risk wind investments and unlock investments in the electrification of industry“, says Giles Dickson, WindEurope CEO.

How could Tripartite Contracts help?

Tripartite Contracts offer different benefits:

1. Enhanced investment security: They increase investment security. Wind farms face significant market risks. Offshore wind farms take 10 years to plan, permit and build. Then they operate for 25-30 years. Without revenue stabilisation mechanisms like contracts-for-difference, offshore wind developers face significant uncertainty about future electricity prices. Matching wind farm developers with industrial off-takers and encouraging long-term offtake mitigates this risk.
2. Reduced financing costs: Banks like visibility on future revenues. They will lend money at lower rates if they see that a wind energy project has a guaranteed offtake. Thanks to the increased investment security, the risk premia for wind farm developers are likely to be lower under Tripartite Contracts. Especially in CAPEX-heavy offshore wind this will lower the financing costs of new wind farms – and therefore the overall costs of wind energy development in Europe.
3. Lower electricity bills: Wind energy is one of the cheapest forms of electricity generation across Europe. Especially offshore wind farms have the capacity and steady generation patterns to power energy-hungry industrial applications. Procuring renewable electricity directly from offshore wind farms will help Europe’s industrial electricity consumers to slash their electricity bills.
4. Increased competitiveness: Currently, high electricity prices pose a massive challenge to Europe’s industry. Many companies and industries have warned that they will have to move manufacturing out of Europe if prices don’t come down. Tripartite Contracts will make industry more competitive and help ensure that energy-intensive sectors like steel, chemicals, and ICT continue to produce in Europe.

There are not many examples of what such Tripartite Contracts could look like yet. Lithuania has experimented with a specific way to make PPAs happen. They have been looking to subsidise interest rates for factories that want to electrify. With those factories then providing a guaranteed offtake for new wind farms. That’s win-win. It

reduces costs on both sides. And both investments happen – the investment in the wind farms and the investment in electrifying the factory.

Further improving the business case for offshore wind

“Tripartite contracts are no silver bullet. To make them work for offshore wind, Governments must take other structural measures to support the electrification of industry and strengthen the business case for new wind. They need clear electrification targets and strategies. They must expand and optimise electricity grids. And they must continue to simplify permitting, notably by applying the excellent new EU rules”, says Giles Dickson.

Another key measure to improve the business case for offshore wind is the introduction of properly indexed two-sided Contracts for Difference (CfDs). The wind industry is asking for a new deal on offshore wind: Governments commit to auction 10 GW of offshore wind farms every year between 2031 and 2040 under CfDs plus 5 GW a year of projects backed by PPAs. And industry commits to reduce the costs of offshore wind by 30%.

These measures are not a nice to have for offshore wind. They’re essential. Because the project risks today are too high for wind farm developers to bear on their own.