The offshore wind industry is fast becoming a major player in the global energy sector. By the end of 2016, 13GW of offshore wind turbines operated across Europe – enough to power 14M households. Although this compares to just 1.5GW in the rest of the world, global capacity is set to reach 36GW by 2020. The UK, Germany, the Netherlands and Denmark are the major established European markets, with key emerging markets including France, China, the USA, Japan and Taiwan.
Our recent report for the International Energy Agency: Renewable Energy Technology Deployment – co-authored with the Carbon Trust and renewable energy financial advisors Green Giraffe – shows that in established markets, the industry is entering its maturation phase, evidenced by:
• Strong and supportive regulatory regimes
• A steep cost reduction in many European countries
• Several European markets becoming commoditised, with financial investors, commonwealth funds and pension funds now investing in operating assets, allowing utilities to recycle capital to new projects
• A reduction in perceived risks from the investor and finance community due to a growing confidence in the ability of developers and the supply chain
• Decreasing project margins over the last five years due to increased confidence in the industry and a perceived reduction of residual risk levels
• A consolidation of industry developers, particularly in the UK where significant exits have left fewer players in the market
The risk profile for developers is in flux
While overall risk levels for offshore wind are decreasing, policy trends influence the risk profile for developers. The transition from feed-in tariffs to competitive auctions in established markets has led to an increase in allocation and price risk, particularly in markets such as the UK where developers must take on the risk and cost of site development. The move to centralised development models, where governments choose sites rather than developers, is an effort to combat this, but allocation risk remains high and means there are fewer opportunities to develop a portfolio of projects. Greater government control can also create inefficiency risks for some developers who prefer greater control of site development and grid asset construction and operation. Nevertheless, government site de-risking activities are generally considered desirable in competitive auction systems.
The growing maturity of the industry is seeing reductions in other areas. A greater track record of large wind turbines, growing experience with increasing cumulative capacity and a strengthened industry structure is reducing technical risks, during both construction and operational phases. This in turn results in greater trust within the investment community, attracting a more diverse range of funders including traditionally risk-averse investment banks and pension funds. However, more challenging site conditions, larger equipment requirements and bigger projects, combined with increasing cost pressures, present future challenges. Supportive government policies and strengthened industry collaboration are needed to mitigate these risks to continue delivering cost reduction across both established and emerging markets.
Given the changing risk profiles for the industry, our recommendations for industry stakeholders are:
Collaborate to manage risk
The transition to competitive auction regimes in Europe means greater allocation risk for developers. Furthermore, project capacities are growing and with it so does the capital required – and the potential impact of failure on a developer’s overall business. Developers have approached these trends through collaboration, regularly forming consortia with stakeholders from the supply chain. This approach shares potential risks equally, increases the chance of winning bids and maintains a reasonably-sized project pipeline.
Build a strong team and have fall-back plans in place
An experienced project management team is pivotal to the success of any project, as well as robust planning and fall-back plans. Developers should involve independent advisors early in the planning phase, when the procurement and execution strategy can be optimised with the potential for large savings later in the project lifecycle.
Foster strong relationships with regulators, executing authorities and third parties
In markets with little experience of offshore wind projects, the industry must engage early with regulators, interfacing authorities and third parties. Industry players should participate in stakeholder consultations held by regulators to mitigate unrealistic expectations or unintended risks being introduced to developers and their funders.
Continue to innovate
European offshore wind tenders awarded in 2016 confirm that developers need to achieve significant cost reductions compared to what has been seen in the industry to date. This means collaborating with universities, supply chains, or regulator-supported pilot schemes and participating in industry research initiatives to support innovation.
Improve the public perception of the industry
Many people think offshore wind is less reliable and more expensive than other forms of electricity generation. The industry should work to improve its public standing by promoting the importance of offshore wind in maintaining grid stability, cost savings in recent projects and the benefits to local and regional economies.
With most countries keen to diversity their energy models, and the Paris Agreement on climate change giving renewed impetus to the need for renewable energy sources, the potential for offshore wind power is vast. Working to tackle and mitigate industry risks will help developers reap the benefits of this largely untapped resource.