Against the backdrop of a climate conference that has always seemed unlikely to result in a deal, US private equity firm First Reserve has made a bold move.
In the past week, the company announced that it will establish a joint venture with Spanish power utility Renovalia, to own and operate wind projects across Europe and Canada.
The business, known as Renovalia Reserve, will start with 559MW of existing Renovalia wind assets in Spain, Hungary, Romania and Canada and $150million of First Reserve’s capital.
For First Reserve, which markets itself as an energy investor as opposed to a firm exclusively focused on renewables, the deal serves as a sensible hedge against the rise and fall of a multitude of international energy sources.
Including debt, Renovalia Reserve will have a value of $1bn. Clearly then, a serious investment.
But given the heritage of First Reserve, why has it overlooked its own US domestic market and instead, sought to commit capital overseas? And what does this mean for Europe?
The answer is as simple as it is complex. And at its heart, it is driven by the beginnings of a fundamental shift in US energy policy – something that the US domestic renewable energy markets, and the conference delegates at COP17 have long feared.
Indeed, with the country set to become a net exporter of natural gas, it’s a fair bet that we’ll see a growing number of US clean energy investors turn their eyes to Europe. A fact that is already a clear frustration for the fledgling US offshore market and that will be yet another blow to those campaigning Congress to extend the renewable energy production tax credit (PTC).
For Europe of course, it spells a significant influx of capital. HgCapital estimates that spending in the sector has already grown from $900m to $2bn in this year alone.
And this additional liquidity – a critical ingredient in ensuring we hit 2020 targets – can only spell further good news in bringing down the cost of construction and the cost of capital.
For the US – a country that along with China and India looks set to hold off on binding COP17 climate change commitments – it’s an altogether different matter. And with large outflows of clean energy capital already heading overseas, Congress needs to act, and fast.
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This year, the team has traipsed round more conference halls than we care to remember. We’ve drunk more coffee and spoken to more industry executives than we thought possible.
The delegate badges, the company phone bill and the bulging inbox are just a small testament to it all. And off the back of all of this, there have been a number of key emerging trends that have started to strike a chord.
First, we’re in an industry in flux. The sharp suits, the drinks receptions, the private parties and the events, not to mention the arms race when it comes to bigger, better stand and brand design, are the clearest indicator yet.
But it is behind this gloss where the true step change really comes to the fore.
For the first time, businesses of all sizes have recognised the power and potential of the market and have begun to invest in their companies, their staff and their service offering, in an effort to stand out from the crowd.
Second, as we grow, we’re an industry with increasingly competing agendas. The competition is kicking in, pricing is becoming more competitive across the board and many of the industry stalwarts – in all sectors – have had to significantly up their game.
And third, we’re an industry that is filled with new participants and by proxy, new potential – now, more than ever before.
For many, it’s this final point that has not been the easiest pill to swallow. In fact, it’s fair to say that when it comes to recognising new potential, some established businesses – both big and small – have had their heads in the sand. And as a result, some companies have been caught napping.
And it’s because of all of this – because of the step change, because of the competing agendas and because of this significant new potential – that my team wants to help identify and showcase some of the best businesses to watch in 2012.
And we want your help.
It’s why we’re asking you to take two minutes to nominate (entirely anonymously) three companies that you think will be going places in 2012.
We’ll add these nominations to our own thinking on the matter and in January, we’ll showcase some of our favourites. Dead easy. So please, do us one small favour – take two minutes and email us your three company nominations – now.
Three hectic days. That seemed to be the general consensus from most conference delegates in Amsterdam this week. It’s perhaps this freneticism, though, that reflects the pace of development of the wider offshore wind industry. It has, after all, come a long way in a short space of time.
The EWEA conference report, ‘Wind In Our Sails’ reiterated this point and highlighted that the European offshore industry now has 141 GW in a variety of stages of development - ranging from the proposal, planning, construction and of course, operation.
So how realistic is this number?
Of that 141GW, roughly 10%, (114,737MW) has yet to be consented. And although offshore consent is generally granted far more quickly and with fewer objections than its onshore counterpart, there are of course far greater technical challenges involved out at sea.
In the UK, a PWC report from last year estimated that offshore wind needs to deliver 12GW of energy alone, in order to ensure the UK hits its 2020 renewable energy targets.
Given many of the issues in pre-construction financing, it’s perhaps worth questioning whether this 114,737MW will be enough to hit not only the UK target, but also a Europe wide industry aim of 40GW by 2020.
Conference delegates, almost to a man, bemoaned a lack of pan-European and national targets beyond 2020. With not enough incentives for the industry to look towards new sites, for financiers to become involved earlier to provide much needed liquidity, and for supply chain businesses to make the necessary investment in staff and technology, there’s clearly a challenge on our hands.
New targets may just be that – targets – but irrespective, they would help encourage and increase the number of MW schemes currently proposed.
If key players in offshore are going to successfully persuade policy makers to provide clear incentives for future industry investment, we need to lower costs and reduce the sector’s wider risk profile.
And since the end of a calendar year the mind is inevitably focused on business targets, let’s use this week as a chance to start looking further into the future, to help increase industry certainty.
Wally Lafferty, former Vestas vice-president for technology R&D in the Americas
The offshore wind industry is receiving boosts from the government, in hopes of helping companies bring down the cost of energy. The UK government this month announced two funds totaling £30 million, for innovations in the offshore wind sector. In September, the US Department of Energy announced $43 million for research grants in offshore wind. But are these the kind of boosts that the industry really needs? Here’s what happens when the government offers subsidies for R&D.
First, the government receives intellectual property in exchange for their subsidy. So, companies will provide their less-competitive ideas to the government, and withhold their best ideas to preserve their own intellectual capital. As you can imagine, then, government subsidized projects will typically only make incremental improvements to existing technologies. Truly innovative ideas will need a different source of funding to make it to the market.
Second, the government typically requires matching funds from the company, partnership with a public university or non-profit organization, and often, active sponsorship from strong political resources who want the company to create jobs in their district. These activities dilute the effectiveness of the subsidy by requiring the company to put valuable resources to work on non-competitive projects in the public domain. This makes it less likely that sufficient company resources will remain available to pursue the success of their most innovative ideas. This is not an effective way to push truly innovative solutions into the market.
An alternative way to fund R&D is to rely on private financial institutions. Unfortunately, our industry’s current financial model makes it extremely difficult to bring innovation to the market. Banks, venture capitalists, and financial lenders have all become more risk-averse in the past several years, due to uncertainty in the banking sector. They have become very sophisticated in their tools and methods for assessing financial, legal, operational, and strategic risks. If the combination of the risks is considered high, then funding is denied.
It is said that failure is the mother of invention, so innovation is a very risky business. Many experts agree that a high project success rate indicates that the investor has not taken enough risk to maximize his portfolio performance. The return on investment of a good success story can be staggering; however, our financial model today insists on slow, stable progress with incremental steps based on well-proven technology. This approach will protect investors from risk, but will not bring the technical revolution necessary to make a significant dent in the cost of energy.
So, if true innovation isn’t enabled by government subsidies or by risk-averse bankers, then what is the best model for supporting innovation? First, financial institutions need to be more aggressive in taking “big sensible risks.” They have to stop believing that every project they invest in has to succeed – as long as they know how to make plenty of profit on the ideas that do succeed. The idea is not for lenders to be reckless with their resources – but they can partner with R&D to help companies drive disruptive innovation throughout the entire process.
To be successful, lenders must be committed from the cradle all the way into the market. They must provide investment funds in small steps toward radical improvements, supporting each step to the next milestone. Lenders must partner with R&D to transparently help assess and manage risks. The banker must commit to provide funding all the way to initial production projects that deploy the new innovative technology. Stopping short of this will doom the project to an early demise.
Rather than play it safe with the least-competitive ideas, or incremental improvements, offshore wind innovation can benefit from a funding model that embraces risk, yet mitigates it with a full lifecycle partnership, and small steps toward large-impact innovation.
Written by Wally Lafferty, former Vice President and Managing Director for Vestas Wind Systems, responsible for Technology R&D in North America. He is a member of Offshore Wind Professionals and a contributor to the Wind Power Expert Network. Wally also writes a blog, A Sustainability Minute.
As an aspiring and entrepreneurial industry, when it comes to heading offshore, there’s always room for cheer. [There has to be. Otherwise we’d take the numbers far too seriously. Ed] And since all good news comes in threes, last week was no different.
First, Scotland granted permission for the Moray Firth offshore wind project – a joint venture between Spanish firms EDP renewables and Repsol that will provide 300 offshore turbines producing up to 1,500MW.
Second, the European Investment Bank signed off its loan to Vattenfall, for the 100-turbine Thanet scheme. The bank, supports projects in line with the broader aims of the EU. It’s therefore good to see this given the green light, despite the parlous financial state of the Eurozone.
And third, in the UK, the Government approved two funds totaling £30 million, for innovations in the offshore sector.
So that’s all good.
Except, with COP17 this week, and despite a lot of the favourable rhetoric, there’ll be a reluctance by some western economies to commit to any further binding climate agreements. Most likely this will be lead by the US, which, with recent technological developments, feels a resurgent drive towards fossil fuels – notably shale gas, the tar sands and domestic oil.
And it’s not just the US. The Dutch - our country conference hosts in Amsterdam - have already abandoned their renewable energy 2020 commitments.
And that, in a funny way, leads us full circle to a drum we’ve beaten before.
Cost.
Offshore wind just has to get cheaper. And fast.
UK consumers, despite having the lowest energy bills in the EU, are voicing concerns about the expense of buying from the ‘big six’. Something that will continue to remain on the agenda irrespective of the fact that renewable obligation certificates (ROC’s) aren’t the only thing driving up the prices – that classic perception and reality myth. After all, the oil and gas markets will lobby successfully on that misconception every day of the week.
This, combined with recent respective reports from KPMG and Allianz – both claiming that renewables are prohibitively costly and unreliable – only make things tougher.
So, the industry needs to act fast. It needs to swallow the risk.
Let’s be clear – £30 million for UK innovation is a great start. But it’s only that. A start. The industry needs to step up its research and development and develop a healthier appetite for entrepreneurial investment – only then can we have true cause for cheer.
Driving down costs is possible. Let’s make that a real talking point for the discussions in Amsterdam this week.
“Absolutely useless, completely reliant on subsidies and an absolute disgrace…”
So says the Duke of Edinburgh, when asked recently about his thoughts on the future of European wind.
Evidently, the outspoken royal isn’t our biggest fan.
Perhaps then it would come as a shock to discover that thanks to the foresight of the Crown Estate, he’s actually set to do rather well out of what he’s called a, “…fairy tale…” technology.
From 2013, the Royal Family’s civil list payments are to be replaced with a 15% payment from Crown Estate profits. As such, in the future the duke might be more dependent on wind energy than he’d like to think.
Put in context, the Crown Estate’s land and property portfolio is as significant as it is vast (valued at around £7bn). The portfolio owns almost all of Britain’s 7,700-mile coastline and has already leased and approved vast tracts of the seabed to developers – through Round One, Round Two and Round Three.
For the Duke, this means that the resultant offshore wind energy generation will be doing more for the Royal Family than he’d care to think. While this irony has yet to be fully appreciated by the Duke, it is something that numerous other land rich and cash poor families have already acknowledged.
It is, after all, difficult to ignore an opportunity to convert low-grade agricultural land into a direct source of regular and dependable income.
However, it’s not the paradox of the Duke’s future wealth that really irks. Rather, it’s the closed mindedness that such a high profile individual embodies.
After all, while the Duke stands to benefit from the income, it’s the wider UK economy that really stands to gain.
As the publication of the latest report timed to coincide with this week’s EWEA Offshore makes clear, Europe could have over 150GW of offshore wind capacity by 2030. A prediction that would meet 15% of the continents energy demand, while at the same time providing work for nearly 300,000 people.
It’s a realistic and achievable figure. The Duke makes plain that he doesn’t believe in fairy tales. Perhaps this is the one story for which he needs to make an exception?
See you in Amsterdam.
For a nation that has been blighted by regular power outages and an inconsistent energy supply, cynics would suggest that South Africa’s 3.7GW renewable power tender ensures the rainbow nation continues down a well-trodden path of best intentions, but delayed delivery.
However, the fact remains that South Africa’s traditional energy sources have suffered from substantial under investment over the past five years and now leave the country in a perilous state. Electricity blackouts have become a way of life for many residents – both rural and urban alike – with many citizens taking matters into their own hands.
For the wealthy, this has meant a boom in residential power generation systems, to iron out the power blips, while for those less fortunate it’s become just another part of the daily struggle.
So it’s set within this context – where domestic politics and power supply have fallen short – that there is an urgency to increase the momentum South Africa’s renewable industry. With national utility, Eskom, this week securing a $250million World Bank loan to develop renewable energy sources, there are signs that the country is starting to make some headway.
But as we know, the state can’t always be the sole driver for renewables, so it’s important for the private investment community to be involved, too.
Which is why according to the Department of Energy (DoE), it’s good news that the first round of the bidding process has attracted in excess of fifty qualified bids, totalling over 2,000MW - of which over 50% of projects are wind. What this also means is that there’s almost 1,000MW of wind energy potential, in an emerging market, before the investment has really gotten off the ground.
Naturally, the bidding process is only the first step down the road towards a truly established South African renewables market and the country’s domestic challenges are as complex as they are compelling. Nevertheless, the fact remains that for a nation with an ambitious energy appetite, coupled with a desire to create and encourage fresh corporate investment from overseas, the opportunity is clear.
Indeed, for many European developers and manufacturers – that have started to talk openly about increasing uncertainty within their own domestic markets – perhaps government tenders such as this, will prove to be a bigger olive branch than one would initially think.
Clyde Blowers acquires Moventus. So that's private equity to the rescue? Perhaps.
It certainly shows that there is a real potential for the private equity funds to become actively involved in the renewables industry. Moreover, it demonstrates that the financial sector has got involved in the right part of the industry – the supply chain. But before we go too far, let's take a sensible look at what private equity really brings to the party.
After all, in this midst of this blame-it-on-the-bankers culture and with wider governmental pressures to provide jobs and support national renewables industries with domestic suppliers, any potential investor has got an awful lot of boxes to tick.
So, given the complexities of managing this area of the market, what can private equity bring to the party?
Well, without doing too much of their public relations, private equity firms often bring in specialist management, have a pool of expertise to draw on and of course, aren’t short of investors to tap for extra cash for crucial business processes like research and development and commercial expansion.
Although those, of course, are the ones that are run well.
In the build up to the financial crisis, many PE firms invested in opaque asset classes they didn’t understand, losing their investors money, and having to suddenly re-think their transparency on investments. And in the interests of balance, we can’t brush away accusations that some investors are only ever interested in short term gains, selling out when they believe they’ve made an adequate return, regardless of where this would leave the business and it’s employees.
For Moventus, thought, the Clyde Blowers acquisition is in the main, good news.
The business already owns David Brown gear systems, so should already be well aware of the market in which it operates. And although Moventus CEO Jukka Jäämaa has said there will have to be redundancies, this was almost certainly on the cards, regardless of the take-over.
Some may question whether the deal will give Clyde Blowers to much price setting power in the market, given its existing David Brown portfolio. However, it’s rare for funds to over specialise, since this prevents them from hedging the risk with other businesses in the portfolio.
On balance then, a good move and a smart buy. Given that the industry is crying out for investment, let’s hope we don't wait too long for a repeat performance.
Talk to any potential offshore wind power investor and the story is the same – they want consistency, certainty and a proven track record.
For the investor looking for long term financial return, it makes sound commercial sense. However, for an ambitious emerging market, none of these three core elements are ever easy to find.
It is for this reason alone, that the offshore European wind energy market must stand proud.
Through the development of some strong strategic partnerships and often through management’s sheer dogged determination and tenacity, the first phase of tackling these challenges is already being overcome.
Operational consistency is improving, project management capability is being continually refined and there’s a sense of optimism in the air and on the water, even if politicians in the European sub-continent aren’t exactly sharing it.
So what’s been the key to this shift in confidence and how can we nurture and safeguard this in the future?
It sounds like a tough question but I’m not so sure it’s as tricky as it sounds. Rather, it’s a case of recognising what works.
One such area that warrants further thought is the ongoing challenge of building sound commercial partnerships with firms working in offshore oil and gas.
To date, there has already been some positive interchange between these established energy markets. However, the lessons learnt are by no means complete and while the markets do have their differences, we still share more in common with traditional marine energy players than we’d like to think.
As such – and given that these partnerships provide that extra element of assurance for future financiers and investors – we need to keep capitalising on our contacts book.
Interested in finding out who to influence and how to build and commercialise these relationships? The first of our new series of no-nonsense mini reports will help. There are 200 licensed copies available for purchase from 1st December – competitively priced and available on a first come, first served basis. Click here to reserve your copy.
Long term growth for wind not so rosy? So it would seem, according to MAKE Consulting.
The Q4 Market Outlook Update, as it’s pithily titled, maintains its prediction for 316GW of installed capacity in the period 2011 – 2016. But in its long term prognosis, the report suggests a contraction in the onshore market as support structures are realigned and ‘bearish’ [just a bit… Ed.] market conditions continue to afflict Southern Europe.
Offshore wind is given a more positive outlook, with above average growth rates and a steady project pipeline leading to a compound annual growth rate of 32% from 2010 -2016.
We’d largely agree with the analysis, although there may be some who suggest that offshore is at risk given changes to the ROC banding review from 2013, and the continuous allegations that the industry will never represent value for money in the UK. Given the commitments made to Round 3, however, and the potential for the industry in Korea, China and the US, the trend is probably largely on the up.
Which leaves us to ponder the short term. MAKE reckon that we’ll see short-term growth in certain markets as developers look to get projects on the ground before financial support alters, or industry runs up against further opposition.
Well, probably. The trouble with these reports is that there’s an awful lot of dwelling on generic forecasts, rather than nailing down the specifics in particular countries or regions. Europe may be suffering a slow down, but indicators from South and Latin America, which saw Acciona invest in Costa Rica last week, the realization in South Africa that coal fired plants are not sustainable in the long term, and renewed momentum in Australia, suggest that there could be fairly large exceptions to the rule.
So do we ever really know? To an extent, yes, but let’s remember wind energy is still driven by capital flows, and these flows can appear from nowhere over night, so perhaps we need to be a bit more guarded before we start to talk ourselves up or down too much.
Solar is a lot like wind. No, really. In fact, solar and wind are more alike than you’d think.
It’s precisely why, if you work in either energy sector, you have to keep an eye on what’s happening on the other side of the fence. Take last week as an example.
In short, the past seven days in the solar sector have seen an awful lot of tantrums being thrown. And as ever, there’s an interesting back-story, played out behind the scenes.
The UK solar industry – that has experienced dramatic growth off the back of generous government subsidies and a pretty nifty Feed in tariff (FiT) – was told that the public sector sponsored party was over and that it was time for a change.
A cut in the subsidies is on the cards and a period of consultation is already underway. It makes sense. The government just can’t keep on spending at its current rate and this, combined with an ongoing drop in panel prices means that the commercials can – and will – stack up.
For the casual observer, it also makes sense.
However, within the solar sector, there’s uproar and plenty of stamping of feet. You’re killing our market, they say, just when we need your help the most. And where, they say, are the certainties now, as you pull the rug from under our feet?
But you see, this issue of certainty strikes right at the heart of the problem. To date, the vast majority of renewable energy industries continue to associate certainty with direct government support. And yes, to a certain extent I’m sure government can and will help. But as an emerging energy market, we simply can’t rely on them.
Rather, we need to be looking to create some certainty on our own. This means having the confidence to commit to bigger orders, to hire new recruits, to invest in our businesses and expand. It also means having the confidence to speak clearly and articulately about everything that we do.
Creating certainty isn’t a something that should be governed exclusively by Whitehall – it’s simply too important for that. It’s time to create some certainty of our own.
An interesting report from Citigroup this week – apparently the bank is advising its clients to exercise caution when considering investing in Scottish renewables because of uncertainty over Scotland’s constitutional future.
The report suggests that Scotland does not have the ‘consumer base’ to be able to support the estimated annual subsidy of £4billlion for its renewable energy targets, and therefore, this will have to be additionally contributed to by customers in England and Wales. With the ceding of Scotland to full independence, the argument goes, this additional funding would come under threat, thereby reducing or removing the return to investors in Scottish energy projects.
Alex Salmond gives a sensible counter argument to the BBC, here, but the reality is, it’s an issue that needs putting to bed as the renewables community, and wind energy in particular, needs the support of the City – not just in Scotland, but across the board.
And whatever the constitutional state of Scotland in the future, the eventual hope is surely that we’ll all be moving towards pan-European schemes, such as a super grid, which will start to negate domestic energy wrangling.
Additionally, given the interest from Asian sovereign wealth funds in German offshore wind and Japanese corporate investments, such as Marubeni, it seems that the international investment community doesn’t, as yet, share the same risk aversion.
If this is to continue however, it’ll probably take more than a firm rebuttal from Mr Salmond to shore up investor confidence easily spooked by the musings of an analyst.
There’s a difference between developing, designing and building a great product or service and actually selling it.
During those euphoric early days, it’s often all too easy for aspiring developers, manufacturers and businesses to start refining and fine tuning a particular concept before the first order hits the factory floor.
As this quest for perfection grows, the customer, the client service and the cash flow quickly find themselves forgotten. All just a necessary evil, as they plot a supposed path to perfection.
More worrying still, it’s a problem that is no longer limited to the manufacturing and engineering community – oh no. It’s a similar story within the service sector, where some of the smartest specialists have developed some cracking answers to questions that may never be asked.
Now naturally, in a free market economy the forces of capitalism will almost always dictate who eventually wins and loses in this battle to move the industry forwards. However, within the wider renewable energy markets, it’s not always quite that simple.
In fact, it’s wholly possible that there are businesses out there that have the potential to really succeed – if only they were to better understand and recognise the value of what they can deliver. All too often that means addressing the questions that customers are asking and providing answers, not just features and benefits.
The challenge then, is to start picking, and backing, these winners.
For the finance and investment community this means getting under the skin of the sector – working out how it really ticks and offering businesses the right mix of financial investment and independent management consultancy and advice.
And for those businesses battling with this challenge on the ground, it requires something far simpler – recognition that outside assistance is required.
Despite the dire state of the European economy, there are still plenty of financial backers and cash rich energy businesses and utilities with money to spend. However, to do so, they need some further guidance on how and with whom they should spend it.
Tell a good tale, nail that narrative and encourage them to open their wallets.
If there was a common theme amongst the keynote speakers up in Manchester this week, it was the need for a narrative.
And it was the good man Tony Juniper, recently appointed Chairman of Action for Renewables, who led the charge.
In an impassioned fifteen-minute speech he spoke of the need to tell the story of the green boom; showcasing new contract wins, celebrating job creation and confounding the critics.
For too long – he said – the sector had shied away from talking up the benefits of the UK renewable energy market and for too long, the industry had let other people set the agenda. This, combined with a sceptical UK Treasury and governmental departments that are keen to help but that freely admit don’t always have the answers, has created a bit of a pickle.
In short, without clear action and without a clear and consistent set of communications - he argued - the UK market was in danger of losing its way.
We couldn’t agree more. While the UK – for the moment at least – leads the world in the development and roll out of offshore wind, we all have to learn to tell better stories and to find our voice.
That means starting to talk confidently and consistently about the opportunities that exist within all areas of the wind energy market. However, it does also require something else.
It requires the ability for each and every one of us to contextualise what we do and why we do it.
Forget the sales and marketing speak – why does what we do really matter? And how does it help the industry to develop, innovate and grow?
Tony talked about telling tales and we’ve simply got to start telling them. After all, it’s only by doing this that we can truly win over the hearts and minds of the great British public. The future success of each and every one of the businesses working in the renewable energy industry depends on it.
The utopian policy view of the UK power market is that in the future there could be potentially thousands of generators connected to the distribution networks at scales varying from domestic solar panels to large wind farms. Energy demand could also evolve and increase through the electrification of the transport and heating sectors.
The cost of building this new power infrastructure in the UK could be over £110bn by 2020. Of this, about £70-75bn is likely to be invested in new generation capacity and the remainder in the electricity networks. Moreover, energy utilities could also face additional financing requirements associated with the roll out of smart meters, gas transmission and renewable heat policies. Overall the investment challenge could amount to over £200bn.
However, the UK is not the only country with investment needs of this scale. Driven by the same EU Energy policies and the recent decision to rescind nuclear, by 2020 Germany wants to have cut greenhouse gas emissions by 40%, doubled renewable generation to supply 35% of electricity and cut primary energy consumption by 20%. Research from the KfW Bankegruppe, put the total investment required for this at €239-262 billion (£208-228 billion).
The UK Government understands that the current electricity market cannot attract either new entrants or their vital development capital without major changes. On the 16th of December 2010 the Department of Energy & Climate Change (DECC), supported by the UK Treasury, announced their Electricity Market Reform (EMR) Proposals with the aim on decarbonising the GB’s electricity system. This document outlined the most radical changes to the power industry in 25 years.
The latest capacity market EMR consultation produced in July notes that the current energy companies do not have the financial resources to make anywhere near this level of investment, as do key players such as Scottish & Southern in their spring White paper. Furthermore, the future financial regulatory proposals also means that banks will have less capital to invest across Europe as competing countries look for investment capital but against an increasing level of risk.
So how do we prevent investment failure, failing firms and end customers? We use our leadership skills, humble ourselves, consider the bigger investment picture. We set our investment budget to within our balance-sheet constraints, prioritise our investment, work hard at getting the costs of technology down and supporting the supply chain. We need to keep power affordable to end customers. It’s housekeeping and common sense, or is that not fashionable enough for the utopian view?
Written by Aily Armour-Biggs, Global Energy Advisory CEO
Another week, another conference. [We are busy attending them so you don’t have too… Ed]
This time, RenewableUK plays host and the circus moves to Manchester. There’ll be 300 plus exhibitors, 5,000 delegates and enough speakers, panellists and moderators to keep the sales and marketing departments happy.
They’ll also be the usual arms race between the manufacturers, as they compete for the conference headlines and no doubt introduce an array of lighter, leaner, bigger and better kit, to ensure the developers continue to dig deep.
Despite the economic gloom, the mood will be broadly one of optimism, although as the Asian appetite for wind energy increases, one can’t help but think that there will be some businesses looking in the rear view mirror. If after all, the onshore market truly becomes a volumes game, then Asia wins, every time.
For offshore however, the European manufacturers need not worry. Given the increasing European North Sea push and with the likes of Siemens entering the final stages of testing for its 6MW machine, manufacturing facilities will be staying close to the markets they serve. The sheer logistics associated with manufacture and construction dictates it.
Perhaps then, it’s the Chinese that need to worry? After all, while they’ve secured significant dominance in onshore capacity, they may soon find themselves leapfrogged by the Koreans, who have announced their own plans for a 2GW offshore tender.
In light of this, the real manufacturers to watch up in Manchester this week then aren’t the European’s at all.
Rather, it’s the likes of Samsung and Hyundai, who will doubtless have their eye on future Asia Pacific offshore tenders and will be looking to Europe for the lessons learned.
The Korean manufacturers might offer less theatrics than their European counterparts but as the international market heads offshore, don’t count them out.
Keen to put a damper on RenewableUK next week, somebody in Whitehall thought it best to announce the reduction in financial support for onshore and offshore wind.
We jest. But good news for wave and tidal, and let’s be honest, a reduction in the level of tradable certificates isn’t going to kill the sector overnight. So in that case, is it really just more of a price correction to where government subsidies should originally have been set?
RenewableUK has, of course, asked the Government to maintain the existing reward system, claiming that any reductions may result in certain projects not being able to go ahead.
But that begs a couple of questions. First, should the government always be the underwriter of last resort? Second, should support always be financial?
After all, if there is a national commitment to climate change regulation after 2020, or planning for renewables for the next 50 years, private industry is more likely to invest in developing new technologies, constructing new manufacturing facilities and improving knowledge transfer.
Naturally then, measures that encourage the industry to look at its costs with a focus on improving efficiency, such as those announced by Charles Hendry last week, should be encouraged.
So the big issue once again, is in fact the consumer. None of this deals with the increasing – and very public – problem of rising consumer energy bills. And by proxy, any further discussion of subsidies and government support for nascent energy sectors will fail to win over the general public. We might not like to hear it but if we really want to win with wind, we need to widen the debate and in doing so, capture those hearts and minds.
An interesting announcement from DECC last week. A ‘task force’ has been created to reduce the costs of offshore wind to £100 MWh by 2020.
Sensible? In a word, yes. Government, for fairly obvious economic reasons, can’t go on subsidising the offshore wind industry indefinitely, and there’s a point at which the UK voting public will baulk at electricity costs from their utilities.
But can it be done? That probably depends on how effective the task force can actually be. There are certainly some industry heavyweights on board, who will bring a huge amount of knowledge and experience to the table, from a wide variety of backgrounds. Whether they can collectively tackle some of the broader macro problems, though, is perhaps debatable, and there are certainly some conflicting forces at play.
The Government is keen to develop a UK supply chain to create jobs and security, and prevent subsidies going to overseas businesses for UK projects. Witness an estimated 80% of Government financial support for London Array going to foreign-owned firms, for example. Yet by the same token, whilst the UK can boast a number of offshore oil and gas businesses, they aren’t quite exactly transferrable skills for offshore wind. And whilst there may not be any issues with an oil and gas firm getting on board for offshore wind, the banks are still skeptical as to whether this truly constitutes an industry track record when looking at offshore wind projects. Why is this important? Because without a track record, risk increases and project lending costs remain high, leading to higher MW/h costs.
It will, then, be a delicate balancing act for this ‘task force’, but ultimately, it’s probably better to ask the industry to try and find a way of addressing its costs, whilst maintaining a financial support structure, rather than cutting everybody off at the knees….
It will be interesting to hear the first recommendations.
All energy is political. It’s unavoidable. It’s a subject that gets industry eyes rolling in Europe, the US and Asia and yet it simply can’t be ignored.
Politics impacts on consent and permitting, future policy and regulation and of course on subsidies, tax credits, financing and funding. More broadly, it’s the primary driver for getting a nascent energy market off the ground.
So why then, is there such hesitance for both public and private institutions to work together?
As the wind energy market battles with the fall out of an embattled global economy, it’s the private sector that once again feels that it’s doing the leg work, as politicians across the board press industry executives to win contracts, hire staff and expand.
And for the wind energy market of course, it’s something that, given the right backing and support, they are only too willing to achieve.
Out in Baltimore this week, it’s interesting to register a very real sense of frustration in the air, as the political debate continues to delay the much-anticipated US offshore market.
To date, the US has yet to set a turbine spinning in the Atlantic. This, when combined with European projects competing for ever cheaper capital, it’s no surprise that even the American financial markets are looking to Europe – and not to their domestic market – when it comes to experimenting with offshore project finance.
As the UK and German markets know only too well – it’s only through the development and implementation of a stable public policy that the offshore wind market can truly thrive.
In this regard, Europe still has many lessons to learn. However, if we share our experiences with our North American cousins – particularly during this most frustrating of times – then we all stand to gain. Indeed some argue that the success of the US offshore market depends on it. Particularly if we are to achieve wider cost efficiencies, an established support services industry that can scale.
In Baltimore this week, the American Wind Energy Association will play host to the Offshore Windpower Conference and Exhibition.
According to the pre-conference pitch, the organisers expect over 2,000 attendees and over 120 exhibitors, as the annual gathering continues to grow. There will be the usual mix of meetings and workshops, as well as some carefully stage-managed project signings, partnerships and deal wins.
If only everyone in the international offshore sector could be quite so positive.
The reality for many of course – particularly as the European winter sets in – is that diving into the offshore wind energy market is not for the faint hearted.
Despite huge steps forward having been made in the last twelve months, the ongoing battle over costs and delays at the Greater Gabbard site serves as a timely reminder of what operators, developers and investors stand to lose.
What’s more, the unpalatable truth is that this legal battle won’t be the last – particularly when the United States enters the fray. This, combined with the challenges of attracting cheap capital and the ongoing issues associated with safeguarding the supply chain, make this an area of the market that is not always as cheer-filled as some might have you believe.
However, now is no time to lose heart. As interest and experience within the market grows and as new participants walk through the conference doors, now more than ever is the time to look forwards, not back. For the Greater Gabbard consortium, that might prove painfully expensive in the short term but nevertheless it remains an important lesson to learn. To Baltimore - see you there?
Good news for North West England this week: the former Cammel Laird shipyards in Birkenhead and the port of Mostyn on the Dee estuary both benefited from investment worth £50million and £5million, respectively. The funds come from providing supporting port facilities to the Gwynt y Mor offshore wind development off the Noth Wales coast.
Gwynt y Mor is currently being developed by RWE npower, and will provide 576MW of wind energy upon completion.
Mostyn is set to provide port facilities for the operations and maintenance of Gwynt y Mor, whilst Cammel Laird, has been given a smaller sum to provide additional supporting port facilities in the loading of monopile foundations. Crucially, this contract should give Cammel Laird a platform to pitch for construction work for offshore sub stations for future developments off the West coast.
As a base for O&M for the offshore wind industry, Mostyn makes much sense, as it had already provided a construction base for the 90MW Rhyl Flats and 60Mw North Hoyle projects. It additionally provides loading facilities for A380 ‘super jumbo’ wings from the nearby Airbus factory to be placed on ships bound for Toulouse.
In an area of the UK that has suffered since the decline of traditional manufacturing and mining industries over the last 40 years, the development can only be good news. With ever more severe economic figures, particularly for construction and a Tory conference where the PM could give no hint of an improving situation, this is perhaps a small reason to be hopeful.
Firstly it proves that the UK can start to make use of some transferrable skills and rejuvenate a decrepit infrastructure that can support Round 3 and beyond.
Secondly, it adds an impetus to ensure that Government spend in renewables increasingly goes to UK businesses, not those that are based overseas.
At the RenewableUK offshore conference in June, Cammel Laird was touting its potential as an ideal future manufacturing and servicing facility for UK Offshore. Let us hope that this is the first in many future agreements.
There’s something interesting that’s fallen out of the (very) public spat played out between AMSC and Sinovel over the ‘cash for code affair’, in September.
To recap on what happened, AMSC sued a former employee over selling secrets to the Chinese – something that’s never going to exactly win you favours with the boss.
The deal the chap struck with Sinovel was supposed to secure him a five-year $1m contract, in return for an encrypted license code that kept the turbines turning. However, the plot soon fell apart following a routine site inspection to Sinovel turbines that were, of course, still spinning. The result was a jail sentence for the (now) ex employee and an ongoing legal battle between AMSC and Sinovel to try to claw the code, and the missing license revenue, back.
However, to my mind, the really interesting element is not the specifics of this deal at all but rather, what it all means for a) the degree to which intellectual patents will be respected and honoured and b) the increasing role that technology is set to play within this large-scale engineering environment.
Indeed, with the likes of IBM and others already starting to tout their wares and enter the fray, I’d hazard a guess that when it comes to the ownership and use of software, technological coding and intellectual IP in wind energy, the AMSC/Sinovel spat is just the start.
Last week’s discovery of an estimated 200 trillion cubic feet of natural gas in the Northwest of the UK presents both an opportunity and a threat for European wind.
First though, let’s cover off the facts. According to Cuadrilla Resources, the Lichfield-based energy exploration firm responsible for the find, approximately 10-30% of the gas is recoverable, with the first fuel being brought to the market in 2013.
Now a 10-30% recovery rate is seriously impressive stuff and, with the UK currently consuming approximately 3.3 trillion cubic feet of gas every year (about half of which is currently imported) it offers the very real potential of combating some of the recent energy company price hikes.
Naturally then, pressure is already being placed on the UK government to push through the plans and to capitalise on what is already being viewed by some prominent industry commentators as, “…an abundant, cheap, domestic source of energy…”
However, in the risk to satiate a desire for cheaper consumer energy bills, let’s not lose sight of the longer-term UK energy vision.
Sure, extracting the gas provides us with a viable energy export and there’s a strong argument to suggest that hydraulic fracturing or “fracking” need not be as environmentally destructive as some activists would have us believe. However, to focus exclusively on a short-term reduction in energy bills and the complexities of extraction is to miss the point.
Put simply, the available gas reserves are finite and present a danger of distraction. The UK government and the wider energy industry must recognise this for what it is, particularly at this critical stage of renewable energy investment.
The concept of a European supergrid was rubber stamped by MPs this week, albeit with a number of caveats based on the enormous costs involved in the project.
Whilst it isn’t a new idea, and indeed there are in existence already cables that cross the channel to provide nuclear energy produce in France to UK consumers, as limitations in the UK grid become more apparent, it’s clear an overhaul is needed.
The benefits of a pan-European grid are manifest – surplus energy, currently wasted, could be sold to areas in defecit. Excess production from offshore wind could be funneled south in winter, where solar energy sees diminishing production, whilst vice versa in summer months.
A supergrid could also solve the complaints of Scottish renewable energy producers who claim they are penalised under a system of connection charges that favours energy production closer to population centres. Under a revised system renewables produced off the Scottish coast could connect to a wider pan-European grid at a lesser cost, and could be sold to a wider customer base during excess production.
All in all, it’s certainly a compelling proposition, but initial costings make the expenses surrounding the development of offshore wind look like loose change.
That said, the ambition for wider European cooperation on energy in the face of the continent’s large amounts of imported power, makes a lot of sense.
Realistically, it’s probably a matter of time, and, indeed, the Desertec scheme unveiled in recent years, is an example of a concept, which, once published will continue to slowly gather momentum.