How Important is Local Content to US Offshore Wind?

The US offshore sector needs to find a balance between lowering the Levelized Cost of Energy (LCOE) and retaining the public and political buy-in needed to help it flourish. Jatin Sharma, President of GCube Insurance and Financing Wind New York speaker, reports

INTERNATIONAL EXPERTISE VERSUS LOCAL SUPPORT

Recently, the US government announced 25% tariffs for Chinese imports including the biopharma, robotics and aviation industries. This is just the latest in a series of protectionist tax reforms imposed by the Trump administration which have garnered attention worldwide – much of which has been negative.

Tariffs on solar panels, intended to protect American panel manufacturers, were widely labelled counter-productive when announced in January – and little wonder. With US solar developers no longer able to benefit from the cheap Chinese panels that have, in the past, contributed to project viability, US development schemes – and the revenue and jobs they create – are feared to be under threat.

Experts have warned of similar effects from recently announced steel tariffs, with Wood Mackenzie Power and Renewables analysts pointing out that ‘Steel and aluminum are important commodities for critical wind, solar and storage components, with few bankable substitute materials available’ (GreenTech Media, 2018). The consensus appears to be that import taxes will damage, rather than bolster, the local economy.

Yet these recent examples of addressing the trade deficit highlight an important issue.

For, while international free trade has undoubtedly been integral to the success of sectors such as the global wind industry, helping to drive down costs and accelerate growth, this has often come at the expense of local economic prosperity, undermining public and political support for local development.

Losing public and political support threatens very real damage to nascent markets such as US offshore wind. The benefits of free trade – most notably, its integral role in driving down the Levelized Cost of Energy (LCOE) – must therefore be weighed against the dangers of alienating local communities and governments.

There is a balance to be struck, here – and doing so will be particularly necessary for the US offshore wind market, as it seeks to become a more mainstream provider of American energy.

THE ROLE OF FREE TRADE IN OFFSHORE WIND

Many have made the case for the role of free trade in allowing US offshore wind to take off. Certainly, the ability to import technology and expertise from more established markets has played a pivotal role in the development of offshore wind elsewhere, both in driving down costs by creating competition and incentivizing innovation, and in allowing for the transfer of knowledge across national boundaries.

With only one project complete off the US coast (Deepwater Wind’s 30MW Block Island), the US offshore wind sector is sorely lacking the expertise and established supply chain required for success. While offshore oil and gas experience – for example, from oil drilling in the Gulf of Mexico – offers some transferrable skills, the US would benefit from importing the sector-specific expertise needed to precipitate growth while maintaining efficiency, thus keeping costs low without compromising on quality.

Mature markets such as Germany and Denmark offer decades of experience, and the reputations of European manufacturing giants such as Vestas and Siemens Gamesa, combined with their long-term service warranties, provide quality assurance. In addition, established conglomerates such as these are more likely to adhere to the high standards laid out by international bodies such as the World Trade Organisation (WTO).

Unsurprisingly, the rewards on offer have led developers to favour low-cost, highly experienced foreign supply chains over domestic offerings. However, the tendency of the industry to outsource manufacturing and services to markets with established legacies in offshore wind – understandable though this may be – can lead to public and media backlash.

OPPOSITION TO THE UK OFFSHORE WIND MARKET

Since its inception, the UK offshore wind market has relied heavily upon imported expertise to drive the market, from its first pilot project, Blyth, through advancements most recently leading to the world’s first utility-scale floating wind farm, Aberdeenshire’s Hywind, which came online in October 2017.

Yet the failure of UK offshore wind projects to demonstrably contribute to the local economy has, in the past, resulted in public and political disquiet.

Take, for example, the case of Thanet Offshore Wind Farm, opened in 2010 off the coast of Kent. The project, the largest offshore wind farm in the world at the time, used Italian submarine power cables, while turbines were installed by the Danish services provider A2SEA and maintained by the turbine supplier, Vestas – also Danish.

The project, owned by Swedish developer Vattenfall, attracted significant negative media attention when it emerged that only 20% of investment in the wind farm was contracted to British firms – among them, the Aberdeen-based company SubOcean, which signed on to lay the subsea cables (The Guardian, 2010).

The London Array offshore wind scheme attracted similar criticism after developer E.ON revealed that less than 10% of its contracts were awarded to UK companies (The Guardian, 2010).

Despite the undeniable truth that Britain simply lacked both the capacity to manufacture turbines and the supply chain experience necessary to lower costs and ensure quality, local industries felt cheated out of the work that they had been promised by renewable energy advocates and politicians alike. Meanwhile, public opinion reacted against the idea of UK taxes, awarded to projects in the form of subsidies, failing to generate any benefit for British citizens.

These low levels of ‘local content’ – work awarded to domestic firms – threw doubt on the conviction, shared by industry and politicians alike, that renewable energy would be a growth sector, providing jobs and kick-starting manufacturing following the 2008 financial crash.

UK SUPPORT FOR LOCAL CONTENT

In this period of uncertainty, various solutions to the challenge of retaining public and political support for the industry were floated, including a minimum local content requirement for projects.

While this has not yet seen implementation – perhaps due to concerns about contravening world trade rules – the then-Energy Minister Michael Fallon asserted in 2013 that future projects would have to produce ‘supply chain plans’ in an effort to encourage projects to support the local economy (Business Green, 2013).

The British government subsequently agreed a 50% local content goal with trade body RenewableUK, and a later study commissioned on behalf of the Offshore Wind Programme Board found that UK offshore wind farms invested an average of 48% in the domestic economy through local content (RenewableUK, 2017).

The UK economy has benefitted correspondingly, with the offshore wind sector creating local jobs, supporting factories and industries, and increasing the local tax base. These benefits can be further reinforced by the option to export these goods and services. Meanwhile, any cost savings attributable to the locality of the supply chain and the independence from exchange rate fluctuations can be passed down to ensure lower cost electricity for the end user.

APPLYING LESSONS LEARNT

Returning to the US, the longstanding Jones Act – which requires vessels operating in US ports to be American-made and -owned – ensures that all US offshore wind farms will necessarily create some jobs and opportunities for American maritime companies.

However, securing further benefits for the domestic economy will be key to achieving, and retaining, public and political support for the nascent American offshore wind sector – and this will, in turn, be important for the success of the market as a whole.

For, just as political support in the form of subsidies was integral to the initial viability of offshore wind in markets such as the UK, the global sector remains subject to political decisions in the form of Contracts for Difference (CfD) auctions and planning permission grants. Meanwhile, dissenting public opinion can create problems ranging from lawsuits to lobbying groups such as Mothers Against Wind Turbines.

WHAT DOES ‘LOCAL CONTENT’ ACTUALLY MEAN?

In addition, confusion around the exact meaning of ‘local content’ can lead to difficulties in quantifying it.

In its broadest form, ‘local content’ could encompass the development, construction and operational phases of a wind farm, including physical products created – such as turbine blades – as well as the logistical work required to construct the farm. Associated service industries such as risk management and insurance, as well as the maintenance of turbines throughout the wind farm’s operational life, could also be included.

Yet definitions vary; a survey of leading project managers in 2012 showed significant divergence in the definitions ascribed to ‘local content’ by different companies (Jatin Sharma, Master’s thesis, 2012).

And the decision of what to include in – and exclude from – this definition is a wide-reaching one; for example, the decision to include operations and maintenance services (often supplied on a long-term basis by domestic companies) is likely to significantly push up the calculated percentage of local content.

To ensure clarity and transparency, the US offshore wind sector should agree on a unified definition of ‘local content’, just as the UK has done in its ‘UK Content Methodology’ (RenewableUK).

STRIKING A BALANCE

Free trade has certainly been integral to the success of offshore wind markets in Europe, and particularly the UK, which – at least in its early years – imported a large majority of content from long-standing, reliable and experienced supply chains in Europe.

However, as the case of Thanet Offshore Wind Farm – among others – showed, the failure to provide tangible benefits to the local economy can result in significant backlash to projects. This in turn can affect political decisions pertaining to auctions and subsidies, as well as planning permission grants.

Inversely, if managed correctly, local content has immense power to achieve public and political buy-in. This is nowhere more apparent than in the softening of President Trump’s stance on wind energy, prompted by the hundreds of thousands of American jobs created by onshore wind (Renewable Energy World, 2017).

It is therefore clear that local content, with its potential to secure domestic support for projects, will be integral to the success of the US offshore wind sector.

Supporting domestic supply chains while keeping costs, and risks, low will be challenging, and the case of the US solar panel taxes – intended to protect American manufacturing jobs, but in reality likely to jeopardise jobs in project development – highlights the complexity of negotiating local content policies.

Get it wrong, and you risk either alienating both the public and government – endangering the viability of a sector that relies on the support of both – or stifling development by imposing too-stringent sanctions on imported expertise and low-cost, high-quality products.

For US offshore wind, a nascent sector at the mercy of a renewables-sceptic government, getting the balance right has never been more important.