A recent report by Aegir Insights, a technology-driven intelligence company serving the offshore wind sector, sheds light on the significant offshore wind potential in the Baltic Sea region, but also underscores a series of challenges that could slow its development. While Estonia, Latvia, and Lithuania possess some of Europe’s most favorable conditions for fixed-bottom offshore wind turbines, the realisation of this potential is hindered by limited demand, modest ambitions, and slow market progress.
Aegir Insights, a company known for using data science and industry expertise to help renewable energy players make smarter decisions, highlights the Baltic’s lack of sufficient demand which results in a limited future built-out/pipeline as key barriers. Historically, power prices in the region have been higher than in many other European markets, due to the relatively modest integration of renewable energy sources into the electricity mix and limited interconnectedness to other EU-countries. Despise favorable power prices, the limited domestic as well as possibility to export to other regions has created a market environment where the scale of offshore wind development is constrained, despite the region’s attractive natural resources.
“Looking purely at the fundamentals the Baltics have favorable offshore wind conditions with relatively low water depths, good wind speeds and thus good capacity-factors. The challenge is that the Baltic nations have limited power demand which coupled with the successful offshore wind auctions might have led to a market saturation.” – said Alba Teodoro Pujol, Market Analyst at Aegir Insights
Market Conditions and Limited Demand
According to Aegir Insights, the Baltic states face a dual challenge: the offshore wind potential is there, but it is difficult to realize without a significant increase in demand for renewable energy. The modest penetration of renewable energy sources into the local grid, coupled with a limited domestic market, creates a scenario where offshore wind projects are less financially viable without clear external demand for the energy produced.
The report highlights the recent failed offshore wind auctions in both Estonia and Lithuania as evidence of the challenges faced by the region. In both cases, the auctions failed to attract sufficient bids, underscoring the uncertain investment climate and market reluctance to take on the long-term financial risks associated with offshore wind projects in the region.
The ELWIND Project: A Potential Game-Changer
One bright spot in the Baltic’s offshore wind landscape is the ELWIND project, as this can act as a stepping-stone to realizing the aim to establish the region as an exporting energy hub . Even though project´s primary focus is on energy- security and integration of the participating countries Estonia and Latvia, the principles for the technical setup and market design mimics that of an energy hub/hybrid and thus could serve as a model for future energy export developments. However, significant hurdles remain, including technical challenges, lengthy supply lead times, and unresolved market design issues.
Aegir Insights notes that recent delays in the project’s timeline may be seen as sensible, given solutions for technical-, supply-chain and market design issues are not readily available.
Lithuania’s New Offshore Wind Auction
In a move to stimulate development in the sector, Lithuania has re-launched its second offshore wind auction, with results expected in 2025. The auction will allocate 700 MW of capacity with a total budget of €193 million, through a 2-sided Contract for Difference (CfD) with a 15-year duration. Notably, the auction will still be considered successful if only one bid is received, which reflects the region’s cautious approach to offshore wind.
The auction conditions stipulate that the developer will be responsible for the cost of connecting the offshore wind farm to the grid, adding a significant financial responsibility to any potential project developer. Aegir Insights highlights that developers may need to accept a relatively low internal rate of return (IRR) of ≤8.3% after-tax nominal, a factor driven by the relatively low subsidy budget.
Interestingly, the report notes that a higher strike price may actually result in a better return for developers by depleting the subsidy budget quickly, as opposed to a lower strike price that would spread the subsidy budget across the 15-year period. This insight reveals that a limited support budget coupled with relatively high electricity prices, net present value makes an impact on the project economics .
“Despite the gap between LCoE and the public available forecasted power prices are lower than many other countries, the rather limited support budget result in modest returns and will require more than 15% power price increase if a 10% IRR is to be achieved – Time will tell if this is enough to attract more bidders than in the original auction.” added Alba Teodoro Pujol
While the Baltic’s offshore wind potential is significant, the region’s development will require substantial efforts from both the private and public sectors. Aegir Insights points out that without an increase in demand and a clearer path to becoming a regional energy exporter, the realisation of offshore wind potential in Estonia, Latvia, and Lithuania remains uncertain.