Investment support falls short
In the Black Sea the major challenge for offshore wind projects, aside from weak target frameworks, is the lack of direct policy support. Both Romania and Bulgaria have been delaying the introduction of necessary legal frameworks and financial instruments to support offshore wind development, which has stalled any efforts to take advantage of the regions’ substantial wind potential.
Without instruments such as contracts-for-difference, which are commonly used for revenue stabilisation and price risk minimisation, financing renewables projects is much more difficult for investors. This is particularly true in the CEE region, which has always faced higher weighted cost of capital (WACC) due to less developed renewable markets and higher uncertainty with fewer government safeguards and policy commitments. Financing a wind farm in the Baltic States is seven times more expensive than in Germany or France. With many CEE countries experiencing above average inflation, the high cost of capital raises concerns about the bankability of renewable energy projects. In fact, even in a more favourable market environment and lower WACC setting such as the USA, several offshore wind farms in the UShave been cancelled due to, among other factors, unforeseen interest rates.
One option to address this is to make preferential funding available for wind and solar investments. De-risking measures such as contracts-for-difference have been shown to lower the cost of renewable energy projects by some twenty percent. Implementing these measures is therefore necessary to ensure a roadmap of energy investments that will deliver on targets.
Cross border infrastructure could unlock CEE renewables
CEE countries are now exhibiting strong growth in renewables deployment, but much more can and needs to be done to fully exploit the region’s potential. Key interventions could be boosting off-shore wind in the coastal countries and strengthening interconnections, allowing cheap renewable energy to flow to demand centres across borders, reducing electricity curtailment and stabilising power prices. Interconnectors help to balance generation from countries with different renewable generation patterns and smooth out residual demand by aggregating variations over larger zones. To this end, even though building a new cross-border transmission line is a capital intensive and inherently complex undertaking, the project economics are favourable (i.e. they have a relatively short payback period) wherever markets are not well connected.
Interconnectors are expected to play a dominant role in providing pan-European flexibility across all time scales, but especially for longer duration (monthly) balancing requirements, becoming even more significant towards 2050. The more a country is interconnected to its neighbours, the less it needs to invest in other flexibility options like utility scale batteries or gas peaking plants.
Several interconnection projects in the CEE are already in discussion, including the Latvia-Estonia hybrid off-shore interconnector, Lithuania-Poland high voltage direct current (HVDC) line, Poland North-South HVDC bridge, Black Sea Corridor, Central Balkan Corridor, Romania-Hungary HVDC link, and priority corridors from the updated TYNDP 2024such as North-South Electricity Corridor in Eastern Europe and Baltic Energy Market Interconnection Plan. But these aren’t necessarily aligned, nor on the top of the political agenda, which can be problematic for their ultimate realisation.
In addition to the higher WACC and elevated inflation levels, CEE grid operators are struggling to access EU funds, citing associated administrative bottlenecks. This is with the caveat of the 2021-2027 Connecting Europe Facility (CEF)-energy being reduced from the Commission’s initial proposal and kept to this level despite the 2022 TEN-E revision expanding its scope to include several new categories. This means there will be less public money available for upcoming cross-border projects, amplifying the need for private equity.
Aligning infrastructure with shifting regional dynamics
The need for interconnection will only increase in Three Seas Countries. This is especially true in Central and Eastern Europe, where planned interconnection capacity expansion is still minor compared to western Europe. Ember’s modellingindicates that annual cross-border electricity flows between 3SI countries are expected to increase by 53% between 2023 and 2030 as wind and solar projects are rolled out in line with ‘high’ industry forecasts. To meet this demand for interconnection capacity, new cross-border investments will be needed.