Hybrid offshore wind projects. Social desirability vs. incentives to invest

To unlock the full potential of offshore wind requires investment in a more integrated offshore grid infrastructure combining generation and interconnection between countries in so-called hybrid projects. Taking the perspective of a social planner, these projects may result in more efficient allocation of scarce resources. Alas, the distribution of this welfare gain may result in disagreement on what grid design is the most attractive, what markets should be connected and whether and when to invest. To examine these dilemmas, we apply real options theory to investments projects with different grid design and market characteristics. We compare the incentives to invest in a) only the wind farm and b) both the wind farm and the grid infrastructure, assuming the project value of the last alternative can serve as a proxy for social welfare. Solutions are derived using a simulation approach called least squares Monte Carlo method. We find: 1) Non-stationary stochastic prices and/or decreasing costs may make it socially optimal as well as commercially beneficial to postpone even profitable investments. 2) Connecting markets is socially desirable but may reduce the offshore wind investor's project value. 3) Connecting markets with different characteristics is socially desirable but reduce the offshore wind investors' project value. • Considering uncertainty, profitable offshore wind investments might be postponed. • Differing private and public incentives may cause suboptimal investment. • Connecting markets is socially desirable but reduces value for a private investor. • Redistributing gains from offshore wind projects can align stakeholders' incentives.