According to the Guardian this week, wind energy firms considering investment in the UK are shelving their plans over concern at the Government’s commitment to windpower.
The paper canvassed opinions from GE, Vestas and Gamesa, amongst others, to ascertain if the current back bench revolt by a number of Tory MPs, which looks to be weakening the resolve of the Conservative coalition partners for onshore wind, would cause them to reduce or remove their UK investments.
The feedback has already turned heads but at what point does the climate shift from being merely uncertain to unfavourable?
Yes, onshore wind is set to lose out from 2013 under the revised ROC banding, and the planning reforms promised are still some way off. However, there is still some way to go before the UK could ever be seen as hostile to the sector.
And given that the Government has a duty to listen to its electorate, many of whom do oppose onshore wind, there should be an awareness that these firms support what is to some an essentially controversial industry.
There is also a perception issue - wind businesses should be wary that they don’t appear to be blackmailing the Government over future employment. With some of these firms suggesting that they would remove their investments, and with them employment hopes for many, because their future portfolio may be reduced, is to akin to the bargaining seen in the arms industry - not a model best followed.
Of course any industry can claim that a certain political climate is making its job harder – and even Germany has had its fair share of problems this week as the impact of changes to the Renewable Energy Act unsteady investors.
However, surely the real impetus should be for the sector to work to overcome adversity through better communication and articulation of its benefits?
In practice this means addressing two key elements. First, it means fighting back against those who argue that it is over subsidised and over reliant on government support. And second, it means making better use of existing data to highlight the future costs of an economy based exclusively on oil, natural gas and indeed nuclear supplies.
Moreover, by not tackling the issues at the root, we’re in danger of moving backwards, not forwards. Something that only reinforces classic industry myths and falsehoods.
By acknowledging that these are tough times, and by hedging risks in mature markets with new prospects, partaking in debate at the highest level and by innovating, to further lower costs, will ultimately turn the tide. In the short term though, it means that we as an industry need to hold firm.
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It was only ever a matter of time before the likes of Lego started getting serious about offshore turbines. Investing in the clean energy generators, brick by brick.
Yes, admittedly they’ve already got a couple of (very speculative!) towers in the water but the announcement early last Thursday morning was the first time that they’ve really got out the cheque book.
And it was a big cheque. In agreeing to acquire a 50% stake in 277MW, 77-turbine Borkum Riffgrund 1, a project due to be developed by DONG Energy between now and the end of 2014, the Danish firm has confirmed an investment of 4.7 billion kroner ($840m). And in doing so, has taken another significant step towards fulfilling its wider fundamental values and objectives.
For DONG Energy of course, the rationale behind the acquisition is irrelevant. Moreover, the key for the €7 billion revenue European energy business was to find a suitable partner willing to help stump up the development and build costs and in doing so, shift the risk off the balance sheet.
But then of course, this isn’t new ground for DONG. The sale of the wind farm, located 55km off the north-western coast of Germany, is the fifth stake sale that the business has handled – with stakes in three previous sites sold to Dutch and Danish pension funds and with a further UK site stake sold to Marubeni Corporation.
Nevertheless, the sale still marks a significant milestone – since this is the first time that the energy sector has been selling direct to corporate customers. And candidly, that, coupled with the fact that construction isn’t due to start until next year – means that DONG's deal was no mean feat.
Whether the deal does in fact mark a new chapter in offshore wind energy finance – as suggested by chief executive, Anders Eldrup – remains to be seen.
However, as the diversity of prospective offshore wind energy investors continues to unfold, this increased level of engagement can only ever help to drive down the cost of capital and underline the wider market opportunity that taking a long term investment in wind energy presents.
On the surface of things, Gamesa’s 2011 sales figures seemed to suggest some good things. Sales from new and emerging markets accounted for 57% of the total with India at 19%, Latin and South America at 15% and China coming in at 23%.
With some of the major European manufacturers struggling to make headway in the current climate, the figures should provide some confidence that there is still a place for European turbine firms in the global markets.
The good news, however, has been tempered by Gamesa’s own forecast for next year, which has revised growth down 4%, blaming uncertainty in the US, grid infrastructure delays in China and volatility in India.
Whilst it’s undoubtedly a safe move for the business to downgrade its forecast for the next year given the global market challenges, it does pose a few questions as to where the business is really headed.
The firm recently announced the acquisition of a partial stake in an electric vehicle technology developer – a market that has suffered far more falls than anything witnessed by the wind energy sector.
And although the business’ facilities in India have enabled access to a new market, there is an emerging tier of new manufacturers that will start to give traditional players a run for their money. Something that our editorial team witnessed first hand, during a visit to an Indian manufacturer earlier in the month.
Evidently then, you don’t need to be an economist to recognise that suddenly, Southern European countries such as Spain need to make their proposed austerity measures count. And for Gamesa, this means that irrespective of the size of its domestic market in the future, it can’t afford to dismiss the wider European economy.
Events have a tendency to disrupt even the strongest of plans. Unfortunately the UK has a dismal record in executing its plans. Despite being blessed with one of the best wind resources in the world Britain notoriously threw away its early lead in the large wind turbine industry. In the early 1980s it was one of the leading players but at the critical moment of transitioning from technology development to large scale manufacturing and project development the government withdrew support, the City did not fill the gap, and the Danes and Germans famously cleaned up.
We were told that lessons have been learnt, and that this time would be different for the UK’s fledgling marine renewables industry. Yet in the last few months Siemens has increased its stake in Marine Current Turbines to 45% and Pelamis has been put up for sale because it needs a mere £10m for the next phase of its development of the articulated sea snake technology. In contrast on the other side of the world Carnegie raised A$6m on the Australian stock exchange for its CETO wave buoy. There is a rather pointed contrast in the ability of Carnegie to raise capital on the Australian stock markets with the willingness of the City to do the same.
In the large scale offshore wind market the overwhelming ownership of the projects is not British. Despite recent moves to bring turbine assembly to the UK the manufacturers themselves are not British, and the assembly plants themselves seem destined to be mere screwdriver plants assembling components which are largely designed and sourced overseas. The evidence to date is that 80-90% of the supply chain value is being won by non-UK companies. This should not be a surprise as supply chains are clusters of evolving ecosystems that are enabled by proximity, ownership, and mutual interests. Despite the oft-touted value of Aberdeen as an offshore oil & gas centre the brutal reality is that it is not proximate to very much, largely owned by transitory non-UK companies, and because of its cripplingly high cost structures understandably not terribly interested in low margin renewables.
The UK’s oil & gas industry combined with post-peak reservoirs littering the North Sea basin could have made it the world leader in carbon capture and storage (CCS). Yet despite the obvious opportunities not a single CCS scheme has been announced and successive governments have not missed an opportunity to miss an opportunity in progressively rolling out the vital pipeline networks connecting the carbon emitters with the key reservoirs. The North Sea is well off plateau, as a result the UK is now a net importer of oil & gas with a rapidly worsening balance of trade, and the reservoir abandonment plans are now so far advanced that it seems unlikely that CCS in the UK will ever reach sufficient scale as to be cost effective because the necessary infrastructure & skills are being lost faster than they will be needed.
In nuclear the UK government managed to exquisitely time the sale of the UK’s nuclear manufacturing knowledge to the Japanese and USA at the bottom of the valuation cycle, and now the other repository of the UK’s operating expertise is rapidly going sub-critical as the nuclear-powered submarine fleet is shrinking below the point of sustainability.
Similarly the manufacturing capabilities for the massive grid renewal programme that the UK requires have largely been shut down over the last forty years. The UK has only one significant manufacturer of hydro turbines, and recently the UK’s largest manufacturer of small wind turbines went spectacularly bust when it was unable to raise capital quickly to overcome a product defect.
Events in Fukushima have coincided with the turmoil in the financial markets to force the largely foreign-owned utilities to prioritise investments in their domestic markets over the UK. As a result there is something of a dilemma for a UK government desperate to attract energy sector investment, yet under domestic political pressure to reduce the subsidies that might entice it.
A European super grid will be able to shunt UK power to continental Europe, and it is noticeable that many of the Eurocentric utilities have prioritised projects that can realistically be exported via a supergrid hub in the central North Sea, thus serving both their short and long term markets – there is a substantial risk that the UK will subsidise offshore wind farms that ultimately export power to the continent.
This is not a pretty picture. In all these industries the technical innovators and business entrepreneurs were (or still are) present. So the real lesson to be learnt from this is that all the necessary conditions must be in place before any large scale manufacturing industry can be rebuilt in the UK and long term value created and harvested, and that crucially in the absence of finance the UK’s entrepreneurs will have to sell out prematurely to foreign industry.
Concerted policy action is needed to improve on many fronts, and it will take decades to reverse half a century of industrial decline. Academia in the UK needs to start working to support existing industry rather than parasiting off them, or worse still in competition with them. As a minimum the education system needs to produce adequate employees rather than the distinctly uncompetitive product on offer. The civil service is proud to be technically illiterate whereas it would be nice to see competent practicing professional engineers in senior government advisory positions. The new breed of professional politicians needs to start understanding that value has to be earned by economies before it can be re-allocated, and that long-term competitive advantage comes from making stuff that is better than the rest of the world.
And the City? The City must remember that it has a role to play in accepting risk and allocating capital into UK industry. At best it is going to be a difficult few decades even if good decisions are taken and stuck to, but the alternatives would be far worse.
Written by the MD of an established turbine manufacturer
US offshore wind isn’t short of detractors and - with the extension to the PTCs still hanging in the balance - the industry has been stuck in a state of inertia.
But the US still needs to solve the problem of meeting the demand for power along the Eastern seaboard – and the conundrum is whether to build out the grid connections from wind projects in the central US, or build offshore and run a number of interconnectors onshore.
But that’s by the by. What caught our eye last week was a study by Carnegie Mellon University in Pittsburgh that highlighted the risks posed by extreme weather events to offshore wind developments on the Atlantic and Gulf coasts. Among the areas studied, the researchers claimed that a site at Galveston would have a 30% chance of having half of its equipment destroyed over a 20-year period.
The concern of the study isn't necessarily the damage caused, but more the cost implications of having to construct turbines capable of withstanding or adapting to the damage. Or, making up the shortfall in the base load while these turbines are out of action.
In the UK, extreme weather events in December damaged a number of onshore wind turbines in Scotland leading to a repair bill that ran into millions. Moving up the cost scale for offshore, extreme weather repairs and replacement will come at an astronomical cost.
But before we hand easy ammunition to those who will always accuse the wind industry of being an expensive folly, let’s not forget that people live their lives in some of the most extreme places on the planet.
Naturally, the wind industry can and will adapt. Whether it’s through new technologies or through careful planning in the location of future offshore sites, the challenge will be overcome. Yes, there will be a price tag attached and yes, there’d be a perversity in refusing to address the problems that extreme weather events present.
However, while the development of wind power is increasingly driven by a need for energy independence – both at a local and national level – it would be be both ironic and foolhardy to dismiss the challenges that climate change presents.
Overlooking a busy Indian highway, on the outskirts of Chennai, stands a solitary turbine, blades spinning in the wind.
For its owners RRB Energy, the unit has, over the years, generated good returns – serving as both billboard and power supply for the work going on far below.
However, while the turbine may be operating in isolation on site, it’s an entirely different story when you take a look at the wider Indian wind energy picture.
At current best estimates, the Asian powerhouse has in excess of 13,000MW of wind power in operation, with a multitude of different turbines located in all corners of the country.
And for the likes of RRB Energy – a wind turbine manufacturer established way back in 1987 - this growing appetite for domestic wind energy helps paint a very rosy picture.
The V27 225 kWh turbine based at RRB Energy's Chennai factory
Naturally the business is quick to dismiss the domestic challenges of grid connection complexities and the ability to lock down power purchase agreements (PPA’s) – both key areas that international market participants all too frequently cite. However, senior RRB executives admit that transportation and movement of the turbines within rural India is now starting to present an increasing headache – particularly as utilities and developers look to capitalise on bigger units, with bigger blades that offer far greater returns.
Evidently then, the switch within India away from 600 kWh, towards the far bigger 1.8MW units is still someway off, although it’s refreshing to see that the appetite is already there.
And that is of course the key.
The appetite for this clean energy technology really is already here. Each new installed unit is recognised not just as a cash generator for the developer but also as an important contributor into the future of the Indian electricity grid.
Naturally, it’s a future that RRB Energy is all too keen to play its part in. And, given its heritage and track record to date, it’s easy to see why.
For RRB Energy isn’t producing any old wind power units. There’s simply no need to do so if you hold the exclusive international rights to manufacture and distribute the V27 and the V47 Vestas turbines.
A curious situation? Yes - and almost certainly unique.
It’s one that came about back in 2006, following the end of a longstanding partnership with Vestas that initially enabled the Danish firm to establish a foothold in the Indian market, before deciding to cash in its chips and move on.
For Vestas, the net result was what has only ever been described as a, “…substantial cash injection…” onto the company balance sheet and the termination of an international partnership that it was either no longer willing or able to continue to participate in.
For RRB Energy of course, the subsequent benefits have been sufficient for it to continually invest in and build out its domestic business – as the construction of its new blade manufacturing facilities in Chennai today, clearly demonstrate.
Construction continues on the new RRB Energy blade factory, due to be completed later in 2012
However, in the longer term, it appears that the international benefits for the business and its impact on the likes of Free Breeze – its ambitious and fast growing international partner – may well be greater still.
For when Vestas sold the technology rights to India, nobody – least of all Vestas – foresaw that the future growth within this critical area of the market.
Yes, these early units sit below the limits used by today’s Western utility giants and yes the technology itself has now been substantially enhanced and improved, both in terms of efficiency, operations and maintenance. But to judge its future success on the mechanics alone is to miss the point.
Rather, the ongoing sales success of this technology is precisely because of its relative simplicity and the ease with which the units can be manufactured and assembled, transported, serviced and repaired.
In the world of turbine technology, it’s clear and uncomplicated engineering and for European landowners and the wider agricultural community - where there are already signs of future growth – that really matters.
And that of course, is where the likes of Free Breeze fit in. Established twelve years ago and headquartered in Canada, the business has already made a name for itself within the North American wind and solar communities.
And as the momentum builds, it’s only natural for the business to look towards new markets overseas.
For James Pearce, Business Development Manager, Free Breeze, that means a fresh focus on introducing the Indian manufactured units into the UK.
James need not worry. For initial interest in the units has been strong, with the first deposit received in the final few days of 2011.
"It was 24th December when the order for two V27 turbines landed," said James.
"Both turbines, due to be shipped and erected on the Isle of Luing later this year have been sold to a private developer and mark an important milestone for the business and the UK agricultural and investor community."
And he's right. Since provided UK planning consent can be adequately addressed, the proposition has the potential to become an attractive, cost effective alternative to what’s already on offer to the UK onshore market.
Recently finished blades, stored and ready to ship at the Chennai factory
EU imports
It’s this promising future, combined with some attractive long term financial returns, that has already sparked the interest of White Rock Wind Energy, a medium scale UK and Ireland based developer with a €100m war chest to invest.
Perhaps it’s unsurprising then that Richard Blackburn, Chief Operating Officer, White Rock Wind Energy, already recognises the potential that an Indian manufacturer like RRB Energy presents.
“It’s certainly a market that offers us a great deal of scope,” said Richard. “The challenge of course will be not be in placing the orders and getting the units shipped, but rather, in ensuring that all the necessary paperwork, certification and due diligence is in place.”
For the Indian domestic market, this may be less of a concern but as soon as European developers import goods from outside the EU, then it’s time to take note.
As Richard highlights, everything that is imported into the EU must confirm to EU health and safety standards and the very latest legislation. And it’s the developer’s responsibility to ensure that these strict guidelines are met.
“There’s an element of self regulation involved,” says Richard. “The challenge of course comes when developers look to benefit from the preferential rates associated with Indian manufacturing, import the turbines into the EU and remain unaware of their future obligations.” That, he says, is where it can all go wrong.
The future
Evidently then, for manufacturers, distributors and developers alike, change is already afoot. And what this means for the future of the UK and European market is still far from certain.
However, with the team on the Chennai factory floor quick to emphasise an increasing focus on quality, innovation and the need to secure (and maintain) international approval and certification, the opportunity remains.
To what degree that opportunity is realised of course, it to a greater or lesser extent dependent on the distributor, who increasingly serve as a linchpin between manufacturer and market.
“As a developer,” says Richard, “our ideal situation is for the manufacturer and distributor to be working in sync to provide us with all the necessary legislative and planning documents and requirements up front, in one go.”
And it makes sense. Since by adopting this approach developers maintain a focus on attracting finance, obtaining planning and consent and ensuring adequate compliance at a local, national and European level.
That spells good news for the developer, good news for the ambitious manufacturer and good news for the order books of Free Breeze.
Engineering is usually seen as crucial to ensure offshore wind farm success. But should software not be just as important as hardware in the long term?
By Jason Deign, European Correspondent
Scan any edition of A Word About Wind and it is pretty evident that engineering is at the heart of the wind energy business. Deals are won or lost on the strength of turbine designs. Projects stand or fall on the reliability of their machinery. Yet it is also true that the margin for innovation in engineering is getting smaller. Turbines have grown immensely in size over the last two decades, but have not changed significantly in form.
Even in offshore wind, where there are unprecedented challenges in terms of scale and environmental stress, the preference is for still for traditional horizontal axis designs. Today’s turbine research and development efforts are largely focused on incremental improvements on this basic design. By looking at new materials to handle the stresses in longer blades, for instance, or by experimenting with the concept of magnetic drive. And while these efforts can to some extent assist, increasingly they’re creating something of a problem for the industry.
Dr Pascal Storck, chief operating officer at 3TIER
In short, the incremental improvement approach increases the chances of different engineering teams converging on what is essentially the same design. At the same time, the potential for new breakthroughs is diminishing because large engineering firms now dominate practically all turbine manufacturing, whereas innovation is typically greatest in small, independently minded teams.
This situation will be familiar to anyone who has ever wondered why modern cars all look the same. Corporately sponsored incremental engineering is great for perfecting existing designs, not creating new ones. If that is the case, the European wind industry may need to start looking elsewhere for step changes in operational improvement. And a good place to start would be better estimates of how wind variability will impact production over the life of a project.
It is undoubtedly true that even the best turbine design is worthless without wind to power it. Yet despite advances in turbine technology, the methods many project developers and their investors use to estimate how much power – and thus revenue - their projects will produce have advanced very little in the modern wind energy era. Projects are frequently seen to deliver less than they were designed for, according to Dr Pascal Storck, chief operating officer of 3TIER, a renewable energy risk analysis company.
“We consistently see customers who have built a wind farm expecting, say, a 35% long-term capacity factor, and are getting less than what they hoped for,” he says. There can be two reasons for this, but the root cause of both is simple: lack of accurate information about the wind resource at the site.
According to Storck, much wind farm planning currently follows a “hunt and peck” process: developers find what looks like a promising site, get some basic wind data together and then try to extrapolate it over the life of the project. Then they get building. Such an approach has two risks.
“First, your basic data set may not fully reflect the characteristics of the site,” says Storck. “The air speed you get from ground- or sea-level anemometer might have nothing to do with what you get around a hub 143 metres up or across varied terrain.”
Second, and more importantly since wind farm planners are less likely to take this into account, measurements taken over a year or two may fail miserably to give you a true picture of the long-term wind variability. And trying to correlate that data to data from a remote, long-term reference site can introduce still more uncertainty into the equation.
“Wind farm business plans are typically built around what are deemed to be ‘average’ weather conditions, but in fact there is no such thing as average weather,” Storck says. “The only thing you have is degrees of variability.” Consider, he proposes, that your site survey shows a mean wind speed of eight metres per second. That sounds great. However, “what you may not know is that the region you are looking at has practically no wind for six months of the year, or that weather patterns vary over a three to six year cycle.”
European wind speed variance from average (2011), courtesy of 3TIER
Of course, the beauty of an average is that you should have equal chances of coming in above it as you do below. That is fine if you do not mind taking on the odds; but for most wind farms, overestimating wind potential can have a more profound impact on the business plan than any engineering glitch.
To address the problem of variability, Storck’s company, 3TIER developed a different approach it felt was more firmly grounded in weather science. The company was among the first to use numerical weather prediction models and historical global weather data, combined with on-site observational data, to try to paint a truer picture of the wind regimes at project sites.
It does not guarantee what will happen in the future, of course, but it does give developers better insight into what they might expect, and what the level of uncertainty – or risk – really is. The technique is designed to prevent unpleasant surprises.
“Several years ago, our work was perceived by many as some sort of black magic,” Storck admits. “But the results speak for themselves, and increasingly the sceptics are some of our best customers. We’ve simply helped them build more successful projects.”
So as you toil over whether or not to invest in some new turbine technology that promises a 0.5% gain in efficiency, remember that getting back to the basics of really understanding your wind resource may pay much bigger dividends, particularly if you’re still basing your business plan on 20 year old methodologies.
The detailed knowledge and understanding of how the weather works more advanced techniques provide are likely to do much more for your business than incremental engineering alone can achieve. And in the long term it’s something that has the potential to be worth a great deal more than the latest mechanical widget could realistically achieve.
Next month:
In part two of this exclusive editorial series, we will assess how financiers and investors can create greater levels of market certainty and investigate what prospective investors can learn from pioneers of the past.
Samsung’s announcement last week that it intends to invest £100million in Scotland and create 500 jobs through a new offshore wind turbine manufacturing facility was certainly of interest.
Not only will the new facility provide a manufacturing plant for the firm’s latest 7MW prototype turbine, but the firm will also tie up with Clyde Blowers subsidiary, David Brown gear systems, for gearbox technology.
Samsung of course follow, if not a flood, then perhaps a steady trickle of renewable energy business’s that have been lured to the UK. Gamesa has plans for a plant in Leith, Siemens has opted for Hull and Vestas’ application for a factory in Sheerness is in the planning stage.
But in essence the deal is arguably pretty good for UK PLC and as an aside, also very good for an independent Scotland, should that occur.
More widely, it’s not really a surprise given the number of other deals taking place that are seeing a number of Asian businesses investing not only in the UK, but also Europe (see Binani’s acquisition of Belgium’s 3B for details).
So what does this mean for the established European businesses?
It means it is a wake up call. Unless European inward investors want to find themselves at the back of the queue for expertise in their own supply chain, then they need to firm up commercial relationships with the David Brown’s of this world, and fast.
This, combined with the ambitions of South Korean offshore wind, and it’s perhaps not unrealistic to expect Samsung to be followed by the likes of Daewoo and Hyundai – all looking for a suitable environment to develop their technology.
Time then, to start building those local partnerships and to start picking up the phone.
Build anything for the open water and it rusts, corrodes and (without regular service and maintenance,) quickly falls into disrepair. It’s a simple fact. And it’s something that becomes all the more apparent when there are moving parts involved.
For centuries, it has been this often underestimated oceanic weathering that has kept shipbuilders, brokers and financiers in business. From the establishment of the spice trade, right through to the exploitation of marine energy resources that we see today.
Only now there’s a difference. Now, it is not just the boats that need to be kept in good order. It’s the complex mechanical structures that we’re building out at sea that need regular care and attention too.
Perhaps then, that’s why there’s such interest and excitement amongst European mariners, as the opportunity within offshore wind begins to really gain ground.
For the entrepreneurial skipper - armed with the right equipment and the right crew - there’s a real opportunity to secure and win regular business.
Developers, utilities and major manufacturers have already made it clear that they need regular unimpeded access to the turbines. Something that is critical if they are to provide the right level of mechanical care and protection that will ultimately reduce their financial exposure and de-risk their investment.
And here’s the thing. The best skippers and their crews already know it. Combine this with competitive day rates and practically limitless project work and the business case quickly stacks up. And as the numbers build, so do the boats.
A fact that really hit home on Monday, when Iceni Marine Services brought their latest 18 metre South Boat into the City of London.
Moored in St Katherine’s Dock, nestled amongst the super yachts of the city elite, the difference couldn’t have been more striking – despite the similar purchase price.
Only that’s where the similarities end. Since for the canny investor – wind farm transfer vessels are already demonstrating some promising returns. Which, as many will testify to, is more than can be said for the average gin palace.
There’s a new and dynamic secondary market developing around the North Sea turbines - offering good returns and a competitive price point. As ever, there are always risks but if you don the wellingtons and see the stuff for yourself, then you can reduce the chance of getting your feet wet.
Jatin Sharma, Head of Offshore, GCube Insurance
The politicisation of low carbon energy has retained its sex appeal through bull and bear markets by taking many forms: from unilateral agreements to mitigate against global warming, to reducing our addiction to imported fossil fuels, notably oil and gas. The steadily improving cost competitiveness of renewable energy is gaining prominence. Indeed, proponents of the industry have defied the recession and Eurozone crisis by promoting the potential for job creation and local economic benefit.
However, in the UK, the paradigm of a liberalized market economy, most of the evidence points to the contrary. Something that is particularly apparent in offshore wind.
For example, UK projects have typically lost 75 to 80 per cent of the supply chain value (turbines, foundations, cables, substations, installation contracts) to predominantly European neighbours. By contrast, in coordinated market economies, loosely based on Germany, the inverse is true. Government owned development banks invest in domestic supply chain and export credit agencies allow them to compete internationally. This raises two key questions: First, can a liberalized market economy compete against the industrial policy of a coordinated market? Second, is industrial policy likely to undermine offshore wind development in the long term?
Nascent markets have frequently relied on foreign investors and supply chains to stimulate new industry. From demonstration to commercial viability, some industries have frequently adopted import substitution industrialisation (ISI) to limit dependence on foreign intellectual capital, while protecting domestic supply chain development. The nature and timing of this shift to ISI is quite interesting. Ten years since the first wind turbines were installed off the coast of Northumberland and almost £5 billion spent in installed offshore wind assets, the UK has yet to develop its own supply chain. Instead, it has encouraged an environment that focuses on sharing international project development experience, cost reduction and sustaining market signals about the long term viability of Round 3.
Something very different is happening elsewhere. Germany is manufacturing its wind turbines and foundations in Bremerhaven, collecting rotor blades from Stade and placing orders for substations from Erlangen.
Not only has this coordinated market leapfrogged established offshore supply chains in other, arguably more experienced markets, it has maximised positive spillovers in heavy industry and engineering to retain local economic benefit despite limited offshore expertise. But at what cost? An inflated Project CAPEX? A looming serial defect in key equipment? Critical path interdependency on grid connection? Or all of the above? This has led to the latest renewable energy paradox: If offshore wind is about producing local economic benefit in a coordinated market, does the obsession with reducing the installation cost per MW in a liberalized market, such as the UK, really matter at all?
Unfortunately, it does. Whilst politicians cannot support a market that subsidises jobs overseas, offshore wind cannot reach the mainstream until it can significantly reduce its reliance on incentives and subsidies. Job creation may create political good will in the short term, but electricity customers will be less forgiving.
Indeed, a catastrophic serial defect in key, unproven equipment or lengthy grid connection delays may undermine investor confidence that ripples into liberalized markets in the long term. The project financing frenzy to support independent power producers in Q4 2010 and H1 2011 by major lenders on some high risk investments could undermine the financing appetite of such players in other markets and in arguably, more attractive projects.
Yet the future of offshore wind looks set to follow a coordinated market economy paradigm in new markets such as France, China and South Korea. State leadership in picking winners in the low carbon economy may, however, come at a price and increase costs as well as development, construction and operation risk. How can we follow a learning curve if each nation wants to invent its own wheel? Moreover, such coordinated markets may threaten the comparative advantage of liberalized market economies through export subsidies and trade barriers designed to promote ISI and export led growth without sufficient incentive for a more cooperative industry.
While there are no easy answers to address the deficiencies in the sector, the issue of industrial policy at the expense of better projects, cost competiveness and a cooperative, shared learning curve need to be addresses between liberalized and coordinated market economies. Particularly if the sector is to sustain the confidence it really needs in order to realise the billions in investment required in the years ahead.
When carving up the North Sea, the companies and nations that leave their mark for the next 20 years have already started to make their moves.
By Jatin Sharma, Head of Offshore, GCube Insurance
When Osborne arrived back from his visit to China earlier in the month, he was like the cat that got the cream. Here, he trumpeted, was a new dawn for UK investment – with the Chinese apparently only minutes away from snapping up British assets. Time enough perhaps, for everyone to dust away the cobwebs and hang up the ‘for sale’ sign.
24 hours later, the news broke that a Chinese sovereign wealth fund was to acquire a 9% stake in Thames Water. The deal – as if it wasn’t transparent enough – was then rather amusingly highlighted in some of the UK & European press with a rather tasteful shot of a glass of tap water, complete with City of London backdrop.
All in all, it was the sort of thing that was in danger of Osborne believing his own hype and considering the trip a success – a job well done.
Only it wasn’t. In fact, it was a bit of a damp squib. You see, as investments go, acquiring a stake in a UK utility is never going to set the world alight.
Yes, it’ll provide safe and dependable recurring revenues and yes, for the Chinese it’s a foot in the door into the potentially lucrative London markets. However, you’d be hard pushed to consider it anything more than that. And for Osborne – and indeed the UK government’s wider drive for overseas investment – it can hardly have been the deal of the day. Truth be told, it would barely warrant a delegate trip to China.
No, what Osbourne was really looking for was a much bigger investment. The sort of investment that that would pour fresh capital into expensive (and risky) new UK infrastructure initiatives and energy assets.
The fact that he didn’t, was the deal’s real significance. And for the UK offshore wind energy industry, it was that, that was really worthy of note.
Let’s be clear – it’s not that the capital required for offshore wind energy isn’t out there. Rather, it’s that we simply can’t rely on others – even those in government – to negotiate and attract this level of finance on our behalf. Osborne may well try to do his bit but that alone does not guarantee success. Better to fight our own battles and engage on our own terms. It's too important a task to others.
When a major market protagonist has a rough time it always causes concern, or blown out of proportion panic, from analysts, investors and shareholders.
So the news this week that Siemens - industrial bastion and wind turbine manufacturing giant - is down on first quarter profits following some one-off costs in its offshore wind operations, and a Euro 48million loss in its renewables business, attracted the usual comment.
Setting aside operations of the wider business, where losses are being blamed on a slowdown in short cycle orders from China, it’s worth bearing in mind that Siemens is potentially a victim of its own success. Something that is particularly apparent when looking at the payment of Euro 201million to North German grid operator, TenneT for project delays.
Currently Siemens, is one of only two significant offshore transmission supply chain businesses in the market (ABB being the other). This means that when you compare the number of projects live and in planning, versus the number of firms available to actually do the often-complex work, delays are almost inevitable.
And what this means of course is that until this issue is addressed, the costs will continue to fall on the shoulders of the largest players in the market. Of which Siemens is one.
Better it falls on those who are most able to absorb the costs, some may argue, rather than put the smaller firms out of business. While all the while the burden is confined to the larger businesses, and they continue to experience losses like these - so the nervousness amongst the tripartite of investors, shareholders and analysts continues, threatening the future of a market that is still fairly embryonic.
And whilst for Siemens, being able to supply HVDC offshore converter stations helps spread the risk away from a turbine manufacturer continually under threat from Asian businesses able to operate more ‘efficiently’, one wonders what cost this diversity is truly having on the company balance sheet. We are after all reminded that in these days of austerity there is no business too big to fail.
Floating LiDAR technology: a much needed, promising alternative for more cost effective offshore wind resource assessments
Bruce Douglas, Sales and Marketing Director at international consultancy 3E
Limited offshore wind data is actually available in sufficient detail to fully understand the wind climates of selected sites, accurately estimate potential energy production and mitigate risks accordingly.
The offshore wind measurement campaign is a crucial step in the development and operation of an offshore wind farm. Performed at early development stages, it is the cornerstone of any financial strategy and business planning for a project. In later stages, measurements on site can provide vital information for O&M planning or financial restructuring. Until recently, building fixed measurement masts at sea, equipped with standard anemometers or LiDAR systems, was necessary to capture better measurements offshore. However, the construction of this type of infrastructure requires extensive permitting and can cost 3 - 8 Million Euro, depending on location and site conditions. Many investments offshore are significantly delayed by these costs and permitting constraints and so there is keen interest in the industry for a viable alternative to a fixed, permanent or semi-permanent structure.
Floating LiDAR technology is the most attractive, cost-effective alternative presently being developed. It consists of an offshore-ready LiDAR device mounted on a floating buoy structure. The buoy requires little permitting to deploy, provides maximum flexibility for resource assessments at various locations and depths, whilst costing a fraction of the cost of a fixed met mast platform.
Adapting to the harshness of the offshore environment is still a challenge that needs to be overcome for floating LiDARs
Several floating LiDARs built with different LiDAR systems on different buoy types are currently being developed and tested worldwide. They all face similar challenges:
- a harsh and unstable environment, which affects the survivability and accuracy of systems
- the need for adaptability (to different depths of water, wave heights, types of projects and financing structures…)
- the need for maximum accuracy, to ensure bankability and profitability of projects
Some floating LiDAR have already survived successful trials in real conditions offshore with proving results on accuracy. Nonetheless, reliability remains a key concern for all floating LiDAR developers, especially for the next round of far offshore wind projects. Severity of weather conditions and waves offshore cannot be underestimated as they affect the lifetime of the systems, the quality of the data collected and the whole O&M schemes the devices may require. Floating LiDAR developers are responding to this challenge by building robust devices, strengthened and made watertight specifically for safe use offshore.
In addition, as for all other offshore systems, limited access and irregular maintenance due to limited weather windows and the harshness of the maritime environment are difficult challenges for all types of floating LiDARS. Here again robustness is key, as well as autonomy and redundancies.
There are generally two main types of floating LiDARs: on standard marine buoys or on spar buoys. Spar buoy systems are useful in deep waters but cannot be deployed in shallower waters and require extra costs for building and transportation. Standard marine buoy systems move with the waves, but are more robust and can be deployed at any depth, with proper sizing. The latter systems can compensate movement with mechanical stabilisation and software correction. This is the case of the FLiDAR device, developed jointly by 3E, Leosphere and OWA. For this system, test results published in 2011 have shown excellent correlation with fixed offshore LIDAR data. A focus for 2012 will be to validate these measurements in far offshore conditions, reduce costs and to accelerate the full commercial roll-out of the system.
By Bruce Douglas, Sales and Marketing Director at international consultancy 3E.
Bruce is coordinating the development of the FLiDAR, and having previously been Chief Operating Officer at EWEA, now sits on its wind project finance committee.
Everyone likes a success story. Particularly when it comes to European manufacturing.
There’s something inherently tangible about it. For service-based economies in particular, there’s a clear sense of satisfaction attached. And more broadly, there’s the feeling of a job well done.
Perhaps that’s why the work in one particular corner of the market raised smiles all round, last week, following the news that Welsh manufacturer Mabey Bridge has won a multi-million pound turbine tower order, from Nordex.
The deal marks the culmination of what has been quite a journey for the private family-owned business that initially made a name for itself building railway bridges way back in the 1850’s.
As part of the deal, the business will supply 35 wind turbine towers of between 65 and 70 metres high, with work kicking off in February.
The 170 staff working on the project will work a 24 hour-a-day shift pattern, 45 of whom are new hires, with a further 50 people transferred from the group’s bridge building operations.
And while Mabey Bridge has been quick to communicate the benefits of building British, the win reflects a wider company commitment, following the opening of its £38m facility in May of last year.
But there’s something else that the deal highlights... It highlights the sheer size and scale of wind turbine structures in the future - a shift that might just be more noteworthy than you’d think.
For investors and manufacturers, the short-term benefits are already clear – since bigger turbines generate better returns, demand greater levels of investment and facilitate future expansion and growth. However, for governments looking for economic stability and growth, the longer-term market benefits are greater still.
Why? Because put bluntly, when you’re building 120 tonne structures, you don’t want to have to ship the stuff, all that far from the installation site.
That’s something that spells bad news for international trade and good news for the regeneration of local manufacturing markets. It also helps to go someway to explaining why – despite shedding jobs – global heavyweights such as Tata Steel are now also bidding for and winning UK wind energy contracts.
With time, the likes of Mabey Bridge might just prove to be the David, to Tata Steel’s Goliath.
Diversity. Often seen as an inherently good thing. Businesses with diverse portfolios can often hedge against losses and de-risk core operations.
Maybe that’s what was on Gamesa’s mind following its announcement this week to take a 20% stake in an electrical vehicle firm. Sounds good for Gamesa – sounds even better for N2S, the start-up firm in question.
Gamesa explains that the decision was made to naturally complement the charging station equipment it manufacturers as well as enhancing its investments across other green technologies.
In a turbulent time for European turbine manufacturers (see Vestas’ latest financial report for details) under pressure from Chinese competitors, and an as yet uncertain climate in the US, diversifying into products and services away from turbines seems like a sensible option.
And whilst it’s a fair bet that the European turbine makers will live to sell another year, it’s likely that they’ll be selling to a larger, but much more competitive market.
But is it the right investment? Sales of electric vehicles are in a state of decline and a number of debates surround the long-term viability and true cost of the technology.
And whilst Gamesa can claim it’s making reasonable investments into international emerging markets – something epitomised by its commitment to India – where does that leave Spain? A question that is particularly pertinent given the recent changes in Government.
As we discussed in December, Spain still has a number of issues to address in order to safeguard the future of its renewable energy sector and candidly, it hasn't got much money in the pot to do it.
Therefore, while the local markets will no doubt applaud Gamesa’s investment, questions remain about whether, for one of the world’s most ambitious turbine manufacturers, it’s a diversification too far?
What a difference a year makes.
The European energy market was alive and kicking last week following, what had been for many, a protracted seasonal break.
Repower completed its acquisition of PowerBlades, Fuhrlander acquired a majority stake in W2E Wind to Energy and BP climbed into bed with Sempra, to collaboratively develop a major new wind farm initiative in Kansas.
This combined with a whole string of deals nearing completion (at least, if you believe the city rumour mill) suggests that you’d be forgiven for thinking you’d overslept and woken up twelve months late.
Whatever the case, as the market gallops through January, there’s a renewed sense of optimism in the air and a sense that if wind energy is to truly succeed, then there’s some serious work to be done.
Compare this deal flow with the European M&A market and you start to get a sense for what this really means; since activity within the wider private equity industry remains at an all time low - a vicious circle, perpetuated by investors sitting on their hands as well as their cash.
Perhaps then, the renewables market – and European wind energy in particular – offers the investment community a light at the end of the tunnel?
Quite possibly. After all, the market certainly isn’t averse to welcoming fresh investment and - provided the price is right - there’s still plenty of scope for future innovation and growth.
But that’s not the really interesting thing... Since the real interest comes in the contrasts to be drawn between the state of the North American and European marketplace.
Put bluntly, within the North American energy markets, they too have been experiencing a bit of a boom. Only it’s not been in wind energy. Instead, it’s been driven by a long-term bet on shale gas - with transactions up 135% in 2011, when compared to the same period in 2010.
And while you can’t fault North American investors for following the US government and the easy market, it does go some way towards explaining why – when it comes to wind energy – North American clean energy investors, look to Europe
This week has seen EDF, Iberdrola and GDF submit proposals to meet with the France’s plans for 3GW of offshore wind.
Good news for the industry, although it’s important to put this 3GW into perspective alongside other European targets, and ascertain whether this will mark the start of further investment in French offshore.
Compared to the UK, Germany and Denmark, France’s offshore ambitions are relatively small scale. The UK is looking to secure 18GW of offshore wind, with Germany standing at 10GW – although French climate targets will mean that a total of 6GW of offshore wind will have to be deployed by 2020.
Long seen as a ‘nuclear’ country – and let’s be honest if one of France’s reactors ‘lets go’ Germany may as well have had the plant on domestic soil – the gradual move to renewables has as much to do with climate targets as it does about jobs and employment in the economically fragile Eurozone.
Announcements detailing the proposals by both EDF and Iberdrola highlighted the employment opportunities available, with the EDF proposal claiming up to 7500 jobs could be created in total. Both consortia will use French turbine makers – Alstom and Areva, respectively – to support their projects.
That’s not quite the end of the story though, as the German Machine Tool Builders Association has voiced concerns that proposals that favoured domestic manufacturers would be selected. This would of course leave Siemens backed GDF bid outside in the cold.
It’s a bit rich though, isn’t it? Offshore wind energy investments have the joint parentage of renewable targets and economic investment at the domestic level.
Indeed, in the UK it has been touted as one of the key aims, with colleges teaching new courses, new jobs in economically deprived areas and new factories for supply chain firms. The only argument you could make is that in the UK is hasn’t been done that well, with up to 80% of project spend going to overseas businesses – dare we whisper, predominantly German ones?
In all likelihood, the French will flick a cheerful Gallic 'v' sign at any protestations made that they may be favouring domestic manufacturers. Which, as long as the wind industry doesn’t descend into a closed oligopoly for the big players, seems fair enough. If it takes a bit of local sourcing to help rebuild the Eurozone economies and hit green energy targets, then so be it.
Vestas hasn't escaped the January blues. Shares of the Danish wind turbine manufacturer fell 19% on Wednesday following the company’s second profit warning in three months. The business is now expecting to break even in 2011, rather than the €250 million profit originally anticipated. A fact that might come as a surprise to analysts over at Bryan, Garnier & Co. following their 'buy' reccomendation, at the start of the week.
You could say that the firm has been hit by a perfect storm – strong winds delayed European installations in December, Chinese demand was overestimated (and the competition underestimated), questions remained regarding the extension of North American PTCs and then development costs of the new V112 – 3.0MW turbine over ran to the tune of €125million.
While the rationale for all of this is thoroughly plausible, it won’t stop a number of voices in the City questioning whether the current Chief Executive Officer, Ditlev Engel is the right person to pilot the business through this difficult period in the market.
Mr Engel will of course always feel the heat when times are tough – partly because he has a very public image and also because, at nearly seven years service, he has been at the top for what is considered a fair amount of time.
And, as is often the way, the market is littered with examples of pioneering businesses that have dominated the sector, only later to fall short. A condition usually brought about through over confidence, an expectation that the status quo will continue and an underestimation of the competition – see Research in Motion or GM for more details.
Dwelling on the specifics though is largely academic – the litmus test for Vestas is in what happens next. Whether that results in having to fight off the acquisitive advances of a competitor (stranger tings have happened – particularly given that US PE fund Blackrock has a five per cent stake, and by Vestas’s own admission 57% of its shareholders are based outside Denmark) – or a strategic overhaul to slash costs - the markets need to see some quick results.
The current global economic climate and relative political uncertainty surrounding renewables was always going to make 2012 a tough year, for Vestas, it remains to be seen just how tough...
“2011: The year when a lot happened”. That’s how the BBC news website recently summed up global events over the past twelve months. How apt.
It certainly was a busy one. And for the European wind energy market in particular, it summed up the state of play admirably.
With a focus on 2020 targets, major manufacturers, developers and investors worked hard to win new contracts, while a whole host of new market entrants poured into the sector to help solve policy, procurement and project management problems and capitalise on the boom.
The result? Twelve months on the industry continues to make considerable ground, despite the best intentions of the naysayers and the peddlers of gloom.
And that’s all just marvellous. However, it’s a fight that’s not getting any easier just yet and as ever, if the industry is to truly succeed, it needs all the support it can get.
Put bluntly, that support comes through sheer weight of numbers.
For too long the wind industry has played up the argument that when it comes to international energy, it’s still small fry. And yes, compared to our fossil fuel cousins, that may well still hold true.
However, do not underestimate the power of public opinion. And the sentiment on the street is already starting to shift.
Even in these austere times the consumer has a conscious. An ideology that has become increasingly clear through the consumer’s attitude towards the cost of energy.
For the industry, it’s easy to dismiss this subtle shift and to look beyond what is often seen as a fickle consumer. But take a second look.
In 2011, the crowd was at the very heart of some of the most memorable international events – riots, demonstrations and toppling of governments.
Perhaps then, when acting together with a common goal, people really do have power and hold sway?
And if they are a proven revolutionary force – might that not be of benefit to help secure the long-term future of wind?
With governments both within North America and within Europe having shown consistent inconsistency, might it not be time for the industry to try something new – and take the debate direct to the people?
2012. A year of people power. Now that’d give the BBC a headline and a half.
Spain’s rampant rollout of renewable energy initiatives – and in particular wind power – has quickly propelled the country to the top of the heap.
And for some individuals and businesses, it’s a period that’s resulted in some serious growth. Iberdrola and Gamesa are of course, two of the most high profile winners, although others haven’t exactly faired too badly either.
This, combined with the knock on investment impacts that have in turn kick started a whole swathe of support services businesses, means that the past few years have been quite the fiesta.
However, following the first policy unveiling of the new right-wing government on Monday, all this looks set to change.
So far, there’s been no official word on renewable energy – or indeed energy in general.
However, with the major utilities having stepped up the pressure on the incoming government to tackle a deficit of over 20 billion euros – something that they’ve accumulated on their balance sheets since they were obliged to cover the short term cost of state-backed subsidies before increased consumer pricing was supposed to pick up the tab (but never did…) – change is coming.
And while the outgoing socialist government reached a deal last year to begin to tackle this tariff deficit – paying back the debt to the utilities through the sale of state-backed government bonds – the fact remains that any future investment in wind energy will be perceived as a costly initiative.
And that, in short, is a shame.
While for the likes of Gamesa and Iberdrola, they’ve largely protected themselves against the shortcomings of their domestic market through expansion overseas, it’s a development that will do little for Spain’s economic and energy security woes.
Indeed, with the new government having previously expressed an interest in developing further grid connections with France, in developing existing gas pipeline agreements with North Africa and with introducing further tax changes to nuclear activity, it would appear that renewable energy will be shut out in the cold.
For a country that was for so long bought into a clean energy future, the policy changes and politics demonstrate how quickly such sentiments can change.
Last week, three unconnected incidents took place that, in an instant, illustrate the differing challenges facing the North American, European and Asian wind energy markets. Something that is pertinent, as 2011 draws to a close.
Consider the following:
1.) In China, a Chinese trawler captain stabbed two Korean coastguards, killing one and injuring the other, over escalating battles between fishing grounds and offshore energy rights.
2.) In the US, following storms earlier in the year, Bonneville Power Administration acknowledged that it had discriminated against wind and hydro plants, when it unplugged the generators as the power surged.
3.) And in Europe [or given the current political climate, perhaps just, the UK? Ed.] developers switched on and plugged in a 76-metre turbine, despite a declined council application. The council had refused consent on the basis that, “…it would have an impact on the users of the [local] crematorium.” – but that’s another story.
Three very different industry challenges, within three very different corners of the world.
For the Chinese, the conflict with the Koreans demonstrates the rapid rise of renewables in the region and provides a timely glimpse into future political tensions that may slow or even stagnate future financial growth.
To date, China has invested heavily in onshore wind energy initiatives and if this level of ambition moves offshore and into open water, then a new level of international wind energy politics will quickly come to the fore.
For the US and more specifically, for federal agencies such as Bonneville, the repercussions of the generator switch off remind us all of the investor’s dependence on future power generating returns and revenues.
And within Western Europe, the spat played out between a local authority and an independent developer, reiterate the complexity of the planning and consent challenge – a struggle perpetuated throughout Western Europe.
All three incidents of course, set in chain a whole series of events that have ramifications on the local market and create wider market issues that must be overcome – be it financial, federal, territorial or political.
And that’s the thing. While the wind energy market may well be global, its international success can only ever be driven at a local level - a lesson that the major manufacturers and developers have already had to learn.
With many smaller but equally ambitious businesses set to make their first international steps in 2012, how quickly will learn from those that have come before?
The conclusions of the report from the Adam Smith Institute released this week, were not a surprise.
The free-market think tank argues that renewable energy is neither cost competitive, nor able to provide any form of energy security. It also argues that renewables would be entirely uneconomic if the traditional forms of energy that have to support base loads are included in project costs.
Naturally the report was rebuffed by many, with counter arguments from DECC claiming that the drive to renewables was to promote a realistic energy mix, rather than relying on fossil fuels that are 'expensive to import’.
And unless we’re mis-representing the facts, the institute’s argument seems to be on the grounds of costs, rather than say, broader debates on climate change. So is there a common ground?
In short, if renewable energy is to answer the critics, are we doing enough to lower costs?
The answer is yes – probably. Onshore wind is unlikely to get any cheaper unless the planning process is significantly overhauled. Turbines are susceptible to changes in steel price, and the cost of foundations depends on concrete supply – that’s without factoring in legal costs from planning disputes.
Offshore wind, we know, is very expensive. But it has a plenty of merits. There are a large number of firms that can get involved in the supply chain, thereby increasing jobs, and it removes many of the ‘nimby’ debates that afflict those operating onshore.
Yes, solar energy has been generously supported, but it was unlikely to see an established market were it not for the FIT. And despite the warnings from a number of solar businesses, there is some evidence to suggest that the continuing fall in solar equipment will drive the sector's growth in the long term.
So, supposing for example that we do suspend investment in renewables, what are the alternatives? Well, we still mine 18 million tonnes of coal a year for our ageing power stations. However, the market price of coal is starting to reach a level where its UK extraction will have to be subsidised in order for us not to exclusively rely on overseas imports.
If we continue to burn coal, our low carbon climate agreements will force us to invest in carbon capture storage – which really isn’t cheap – and we still haven’t solved the energy security debate.
Then there’s nuclear. No one can deny the benefits. Despite the notable incidents, it still has a relatively low accident rate, and is a clean burning fuel. It can, however, take up to ten years to commission a new plant. We’d still be looking at an energy gap.
And then there’s oil and gas. Fuels that currently supply an estimated 60% of UK energy needs. In the UK, ‘local’ North Sea reserves are dwindling, leading to gas exploration through the as yet environmentally unproven hydraulic fracturing. And oil, according to most commentators, will increasingly have to be imported.
When it comes down to it then, the argument is a political one. Energy is expensive. We are moving into an era where we will pay more to power our homes and businesses than ever before.
And if we do find the high costs of renewables unpalatable, then Government can do more than act as a taxpayer-funded cash point. For many, that means ensuring Whitehall provides commitments beyond 2020. These would assist the renewables industry in working harder to lower costs.
If we’re to really address the issue though, there needs to be demand side actions - through legislation - that ensure that the consumer thinks more carefully about the way in which they consume energy in the future.
Either way, there are some very hard decisions to be made.
A long term, secure and green investment represents an attractive opportunity for investors in the current turbulent financial climate. A wide range of investors including pension funds, private equity, infrastructure funds and major corporates are bidding to invest in the transmission links which carry electricity from offshore wind farms to the shore.
Charles Yates, Energy, Environment and Sustainability Director at Grant Thornton
The investors are bidding to buy existing assets with a regulated licence issued by the independent electricity regulator (Ofgem) to be an offshore transmission operator (OFTO) transmitting electricity to the onshore grid. These are attractive assets for long term investors, as they are secure even in the current troubled times for the following reasons:
• A robust 20 year revenue stream with limited risk of regulatory intervention
• The OFTO is protected from wind farm operating risk (the OFTO is paid as long as the transmission assets are operational, independently of whether the wind farm is generating electricity)
• There is no construction risk as operational assets are currently being tendered
• The OFTO is appointed following a transparent competitive process run by Ofgem
• There is a significant, sustained pipeline of OFTO investment opportunities worth £15-20bn extending over several years – thus bidders can gear up for a number of opportunities
• There is strong political and regulatory support for UK offshore wind – DECC estimate there will be 10 - 26 GW of offshore wind by 2020 which constitutes the mainstay of additional renewable generation to be built by 2020
Long term investors may wish to assess the next round of tenders which start in 2012 for OFTOs for the Humber Gateway, Race Bank and West of Duddon Sands wind farms with combined generating capacity of 1.3 GW and a total estimated value of circa £1bn.
By Charles Yates, Energy, Environment and Sustainability Director at Grant Thornton
Charles leads the Grant Thornton team which is advising Ofgem on the £2bn OFTO Transitional Round 2
For those of you based anywhere north of Brussels, it won’t have escaped your notice that winter has arrived. That means a drop in temperatures, an increase in cloud, rain and snow and perhaps most important - plenty of wind.
Good news for the wind energy community then?
Certainly. Only, for some wind investors, developers and operators these conditions can create a bit of a glut. Something best exemplified in a high profile mechanical failure on Thursday (something the Daily Telegraph is getting far too excited about).
And that’s the catch. Because while a surplus of almost anything in life is a cause for celebration, right now in the electricity markets it presents a bit of a headache.
In simple terms, it is because electricity production and consumption must be matched precisely at all times – since surplus’ cause just as many blackouts as a shortage, so engineers say.
This, combined with this spat of publicity that last week’s turbine shut downs created, means that the pressure is on to tackle the root cause of future surplus and supply problems.
It’s why there’s such a focus on the rise and rise of the so-called European super grid - with initiatives such as Friends of the Supergrid already doing a cracking job of influencing EU public policy and rallying wider consumer support.
And that of course is the key.
The ability to unite the industry and the public under one banner and behind a single unifying cause is critical if Europe is to successfully tackle the energy transmission, surplus and supply challenge.
From an industry perspective, that means working together to address seven necessary steps associated with building a European super grid. Namely –
- Investing in the ports
- Tackling logistics
- Committing to construction
- Generating more power
- Increasing transmission capacity
- Getting better at governance
- And fostering future finance
As Andris PieBalgs, former European Commisioner for Energy has acknowledged, calculating these costs and putting a credible framework in place that can help facilitate this isn’t easy.
However, if Europe is to successfully transition, not just to sustainability, but towards long-term energy security and an independent Europe, then we’ve got to work together on this.
As the competition heats up and as the winter wind speeds rise, the evolution of the European clean energy markets are as much about transition as they are about transmission.