Decarbonisation is high on the agenda of governments globally. In April 2024, eight countries bordering the Baltic Sea – Lithuania, Denmark, Estonia, Finland, Germany, Latvia, Poland and Sweden – agreed the Vilnius Declaration, which pledged closer collaboration on the deployment of important offshore energy infrastructure in the Baltic Sea region. By Norton Rose Fulbright’s global co-head of energy Rob Marsh and partner Tomasz Rogalski, as well as senior associates Christopher Aird and Cezary Zawislak
This followed on from the commitment announced in 2023 by the same countries to expand offshore wind capacity in the Baltic Sea from 3.1GW to 19.6GW by 2030. It is clear that renewable energy, in particular offshore wind, is critical to both energy security and national security in this region of Europe.
Poland has the largest offshore wind market in Central and Eastern Europe, with a successfully deployed offshore wind programme that aims for 5.9GW of installed capacity by 2030 and 18GW by 2040. With an advantageous location in the Baltic Sea, benefiting from shallow waters and strong winds, Poland is arguably paving the way for countries such as Lithuania, Latvia and Estonia.
The Baltic states, which have approximately 18% of the total area of the Baltic Sea, have agreed to commission their first offshore wind farms by 2030. These projects will also benefit from the region's favourable conditions, including sea depths of less than 50 metres and high wind speeds. Although there are currently no operational offshore wind projects along the Polish coast of the Baltic Sea, the projects in the first Polish wave are either in the late stage of development or now entering construction. More than half of these first wave projects are expected to have taken final investment decisions and closed debt finance packages by early 2025.
As developers and investors look to the Baltic Sea as the next frontier of offshore wind, those focusing on the Baltic states are left asking the same question: what lessons can be learnt from the first wave of successful projects in Poland?
Potential for offshore wind in Poland
Poland’s energy mix for electricity production remains dominated by coal and lignite (63% in 2023), followed by renewables (27% in 2023, predominantly from onshore wind, solar PV and biomass), and natural gas (10% in 2023). Poland adopted the Polish Offshore Wind Act in early 2021, which is designed to accelerate decarbonisation targets, boost the Polish economy and help drive the country’s economic recovery following the Covid-19 pandemic.
The Polish Wind Energy Association estimates that Poland’s coastline of the Baltic Sea has the potential to reach 33GW of capacity, and that large-scale offshore wind farms could unlock €29bn of investment. Coastal regions in the north of the country are already active in the offshore wind supply chain, including foundations, cranes and installation as well as service vessels.
Polish ports such as Szczecin, Gdansk, and Gdynia are well positioned to transform into "renewable hubs" for storage, assembly, transportation and maintenance of offshore wind components. Poland’s early success in offshore wind is partly in relation to mature offshore wind markets in Western Europe. For example:
* The Polish Offshore Wind Act adopts a support mechanism based on a contract for difference scheme that covers the negative balance between a fixed price for the electricity produced and the average market price. The scheme supports successful projects for a maximum of 25 years, spanning from the date of first generation of electricity to its subsequent export to the grid.
The 25-year support period distinguishes Poland from other countries where the CfD support scheme provides 15 years of support. From a project financing perspective, it is typical for debt tenors to align with this support period, with some buffer between the final maturity date and the expiry of the subsidy support. With a 25-year support period, there is the potential for longer debt tenors; however this is likely to introduce structuring challenges for certain types of financing.
* The contractors providing goods and services in the first wave of projects will be familiar to both developers and financiers that have previously participated in the offshore wind sector globally. The presence of contractors that have a deep understanding and extensive experience in the offshore environment, with a proven track record of delivering projects on schedule, provides credibility for investors in the sector.
The potential advent of Chinese turbine manufacturers in the European market will introduce some bankability and deliverability risks, particularly in terms of the uncertainty of wind turbine performance, the scope of operations and maintenance services and the sufficiency of the warranties available. These concerns are shared throughout the continent.
* It is likely that multi-contract construction packages will be the norm for developers in the Baltic Sea, as a single contractor will continue to be unwilling to provide a construction wrap. This is an approach that international developers and financiers will be familiar with, to the extent that it provides sufficient contingency and buffer in the construction programme and appropriate mitigants are factored in to manage interface risk.
* All of the sponsors in the first wave of Polish projects have proven expertise in complex project development. Each project has benefited from some international offshore wind development experience, and the commitment of the domestic energy market is clear from the presence of PGE and Orlen (Polish state-controlled energy companies) in many of the first and second wave projects.
The Polish Offshore Wind Act provides support for up to 12GW of offshore wind projects. The auctions are expected to take place every two years – 4GW of capacity in 2025 and 2027 respectively, and 2GW of capacity in 2029 and 2031 respectively. In the event that the volume in any auction is not utilised in full, the remaining capacity will be included in the following auction. If the 2031 auction is not fully allocated there may be one additional auction in 2032 for the remaining capacity. The CfD price for these auction rounds have not yet been established (see Challenges in Polish Offshore Wind below). The support system in Poland is divided into two key waves:
* In the first wave, investors could only apply for support until June 30 2021 and the aid has been granted by way of individual administrative decisions issued by the president of Energy Regulatory Office for seven offshore wind farms with a total capacity of up to 5.9GW. The CfD price is Z319.60 per MWh subject to indexation.
* In the second wave, investors bid for the right to negative balance settlements in a competitive auction system.
The Polish Offshore Wind Act has adopted this dual approach of individual administrative decisions and competitive auctions to strike a balance between the advantages of market competition and the need for early sector stability. Early-stage projects benefit from the controlled environment created by individual administrative decisions, which also lower investment risks and guarantee consistency with national energy goals. Conversely, competitive auctions encourage more efficiency and cost-effectiveness for ensuing projects in Poland.
Table 1 sets out the projects being developed in the first and second waves in Poland:
Challenges in the Polish offshore wind
Poland is not immune from the challenges that the offshore wind sector has been facing globally, including high component prices, rising labour costs, shortage of specialised technicians, and limited availability of installation vessels. Beyond these issues, which are common across the industry, there are some notable obstacles specific to Poland, and which may present some “lessons learned” for markets such as Estonia, Latvia and Lithuania.
* Subsidy regime – Poland’s CfD support regime was originally faced with a currency challenge: the development, construction and operation contracts are typically denominated in euro, and any international debt financing is likely to also be raised in euro, while the negative balance payments were denominated in zloty.
This raised some concerns within the industry, so in response the Polish government amended the Polish Offshore Wind Act, allowing the generator to elect to denominate any payment in part, or in full, in euro with any remainder in zloty. This change enhanced bankability and the attractiveness of Poland’s offshore wind market, reducing currency risk and attracting more investors internationally.
Consequently, each project will need to craft an appropriate plan to manage currency exposure when balancing the split of euro/zloty payments under the CfD regime. This challenge is unlikely to pose an issue for the Baltic States, each of which use euro as the main currency. To date, Lithuania has developed a CfD regime, which received state aid approval from the European Commission in 2023. Estonia is in the process of planning the establishment of a support scheme of its burgeoning offshore wind sector. Latvia is yet to establish a subsidy support scheme analogous to that in Poland and other developed markets, with auction design being a key next step for the country.
* Pricing – The maximum strike price for Poland’s CfD auctions for the second wave remains to be determined. The first auction for the second wave is expected to take place in late 2025, and although the maximum CfD strike price for this auction is yet to be determined, the Polish Ministry of Climate & Environment proposed in September 2024 a price of Z471.83 (circa Z109.20) per MWh.
Participants in the sector expressed concerns that such prices may result in a complete lack of submissions. One need only look to the UK’s 5th CfD auction round, which saw no offshore wind projects submit a bid to understand the risks of setting the auction clearing price too low. As a result, the Polish Ministry of Climate & Environment has revised its proposal and is considering a price of Z512.32 (circa €118.59) per MWh.
As details emerge on the pricing criteria for support regimes in the Baltic States, it will be important to understand whether a CfD auction will be chosen as in the UK and Poland, or a negative bidding system akin to those adopted recently in German and Dutch markets. Negative bidding has been criticised for placing unnecessary additional pressure on developers, negatively impacting both the wider wind energy supply chain and electricity consumers.
* Grid – To ensure the reliable and timely connection of offshore wind farms to the national grid, Poland is under pressure to improve grid reliability. The electricity system is currently constrained by the rapid expansion of onshore wind and solar PV sectors in the country, causing bottlenecks and curtailment issues. In 2023, grid curtailments in Poland for solar PV and onshore wind reached 74.4GWh, and more than 194GWh in the first four months of 2024.
The Polish government is working with neighbouring countries to strengthen cross-border interconnections and is funding upgrade works to the gird. Cross-border cooperation will play an important role for the deployment of successful offshore wind projects in Poland, and the Baltic States more widely.
The joint Latvian-Estonian project ELWIND is a prime example of such collaboration. However, national grid operators will need to work together to develop offshore infrastructure and coordinate the planning of offshore power systems. This not only benefits offshore wind projects but also enhances national security.
The Baltic states’ national grid operators are currently undergoing a process of synchronising with the Central European Network. This requires an increased reliance on existing interconnection systems such as those between Lithuania and Poland. The design of this system, and the development of further interconnectors, will be key to driving a more holistic grid across the Baltic states.
* Curtailment – Offshore wind projects in Poland benefit from a specific curtailment regime and enjoy priority in the dispatch of electricity. If a project is unable to export electricity, the generator receives financial compensation or payment of the negative balance, thereby providing some stability to offtake and revenue streams. However, this regime does not fully resolve curtailment concerns, as any renewable electricity from offshore wind farms that cannot be exported to the grid is therefore not contributing to Poland’s decarbonisation efforts. Moreover, this protection against curtailment risk is only guaranteed from the date falling seven years after the grid operator is informed of an offshore wind project’s CfD award – ie, the decision for first wave projects or winning the auction for second wave projects.
Therefore, if an offshore wind farm becomes operational before the seven-year period lapses, then there may be a period where the project is exposed to curtailment risk. Management of curtailment risk is crucial to the bankability of large-scale projects and should be a focal point for system and subsidy design in developing markets.
* Change in law – Historically, renewable generation, notably onshore wind, has been subject to changes in law in Poland. This has been due to a perception that these are costly technologies when compared with other means of generation, such as coal-fired power plants. This experience, coupled with Poland’s new CfD regime, exacerbates potential financiers’ risk perception on matters such as change in law risk, which is less pronounced in more mature markets where subsidy regimes are well established.
Some domestic financing institutions might not be familiar with funding offshore wind developments, and the structures and risk allocations that have developed as the global market has evolved. While it is perhaps to be expected that financiers would view “first of kind” or “first in jurisdiction” projects through a more conservative lens, it is expected that the financing trends seen in more mature European markets will gradually be adopted in the Polish market.
* Designated funding – Polish development bank Bank Gospodarstwa Krajowego announced a €5bn financing package for offshore wind schemes, unlocked from the European Union’s recovery fund for Poland. This is available only for the funding of offshore wind farm assets and cannot be used to fund construction of onshore works. While the Baltic states haven't rolled out specific financing packages for offshore wind projects yet, their respective recovery funds are poised to initiate similar programmes to those in Poland.
* Domestic developers and financiers – Developers may face challenges in obtaining location licences. In the second wave of projects in Poland, all 10 licences were awarded to domestic investors, namely PGE and Orlen, despite the participation of numerous experienced overseas developers. This was due to bidding criteria favouring the decarbonisation efforts of sponsors and their capital groups, and this assessment was more acute for the domestic bidders.
These types of non-price criteria are becoming more common in competitive allocation processes. For example, the UK government recently consulted on its plans to introduce non-price factors as part of CfD assessment criteria. This mechanism, looking beyond a “price-alone” assessment, is designed to ensure that other factors such as capacity, sustainability, innovation and system flexibility, are given weighting in the award process.
The hope was that these changes could assist future projects to deal with some of the disruptive trends impacting offshore wind projects globally and avoid a race to the bottom on price. This imbalance in favour of domestic developers is a factor that the Baltic States should be conscious of, as Lithuania has faced some challenges in its auction rounds.
After a successful first wave, Lithuania’s National Energy Regulatory Council launched the country’s second offshore wind tender, but it was forced to discontinue the process after just one (domestic) developer submitted a bid for the 700MW site. The tender was recently relaunched, and the list of qualified bidders is expected to be published in Q2 2025. More generally, the identity of project sponsors is likely to be subject to greater scrutiny in emerging offshore wind markets.
Due to the more nascent nature of the sector, investors may place more weight on a sponsor's experience in the sector and/or specific jurisdiction, alongside typical considerations such as creditworthiness and reputation. For those projects looking to raise debt finance, this is likely to result in extended equity lock-in periods or minimum holds.
Summary
Poland is at the vanguard of Eastern European offshore wind in the Baltic Sea. There is increasing interest in the Polish offshore wind programme among international players, in part due to favourable site conditions and the Polish government’s commitment to the sector. The need to decarbonise and ensure energy security is not unique to Poland, and Estonia, Latvia and Lithuania are similarly poised to capitalise on offshore wind’s potential.
The planned projects in the Baltic Sea do, however, face some uncertainties. Despite approving Vattenfall’s Poseidon project on Sweden’s west coast, the Swedish government recently rejected applications for the development of 13 offshore wind projects in the Baltic Sea due to defence concerns.
Nonetheless, renewable generation remains crucial to the Baltic region’s energy security, and offshore wind is a key component of many national strategies. The development of grid infrastructure, support regimes and port capabilities, as well as the availability of assembly and installation vessels, will be crucial in enabling the deployment of offshore wind in the region. In order to achieve the ambitious targets that have been set for offshore wind development in the Baltic Sea over the next two decades, it is imperative that the experience of building and financing projects in Poland is carried forward into the Baltic states.
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