Identifying challenges facing the UK offshore wind industry

Building on existing research, in particular the recent Offshore Wind Cost Reduction Pathway Project, The Crown Estate commissioned Redpoint Energy Ltd in association with GL Garrad Hassan to undertake a study with the objectives of reviewing the existing UK offshore wind programme, assessing its future role and identifying key challenges that may constrain deployment in the short medium and long term. Twenty-nine stakeholders including existing and new entrant developers, government stakeholders, supply chain players, finance providers and advisors were consulted, focusing on consultees’ views on the current and future state of the industry and key barriers to future deployments.

It is important to remember that the report does in part, set out to identify challenges and this review summarises the findings related to those challenges, it is not intended to be a definitive assessment of an industry that is currently progressing steadily along a challenging and exciting road with huge potential for growth. The challenges will no doubt be seen as far from insurmountable by the industry in general.

The principle finding was that highest among stakeholders’ concerns were the policy and regulatory framework along with the availability of construction phase finance. Echoing concerns expressed recently by developers and manufacturers, the stability of the investment environment was a consistent topic for discussion, consultees expressing concerns about the government’s long-term commitment to offshore wind along with political uncertainty created by impending reform of the electricity market. An interesting perceived paradox is where future political commitment is contingent on cost reduction which cannot be delivered without significant political support to enable long term investments in the sector that can drive down costs.

FINANCE AVAILABILITY

The report found concern among consultees of an anticipated funding shortfall, a consequence of constrained utility balance sheets. There was also scepticism about the availability of new sources of capital to bridge this gap. The asymmetry between construction risk and the number of players who can manage these risks effectively, along with limited knowledge sharing and cooperation between key players were seen as factors with the difficulties of attracting new capital. Credit rating agencies’ treatments of joint venture structures (a particular feature of Round 3 projects) was also identified as a factor here. Consultees felt that potentially negative issues with supply chain and skills, grid connections, technology risk and consulting could be mitigated if appropriate actions were taken to address the policy, regulatory and finance issues.

Six scenarios were mapped to explore further the potential evolution of the market using the drivers of gas prices and cost reduction in low carbon technologies. The scenarios ranged from 11GW to 20GW operational in 2020 and 12GW to 45GW operational in 2030. Three themes: confidence, capacity and coordination were recurrent throughout the consultation and form the basis of findings and recommendations of the bulk of the report.

CONFIDENCE

The report provides a stark comment on confidence, a subject considered “the most wide reaching and fundamental concerns of the offshore wind industry today” adding, “The potential for uncertainty surrounding EMR to slow down deployment in the near term and the current political discourse about the role and affordability of renewable energy – and the government’s long term commitment to a low-carbon transition – give those working and investing in the industry cause for concern”. It was felt these fears could be allayed by the government giving as much certainty as possible about its commitment to decarbonise the power sector and support for offshore wind to maturity.

It is considered that the benchmark cost reduction target figure of £100/MWh by 2020 should be replaced by a target range, a move that would address the previously mentioned paradox of political commitment and cost reductions rather than a single number by a specific date. Similarly, clarity about the Contract for Difference allocation is urgently required to provide confidence also noting the risk that individual projects may not receive a Contract for Difference.

The supply chain’s ability to support a step up in deployment rate demand was considered dependent on a secure, stable and long-term market. Recent observations during the debate about the government’s policy on the whole question of energy provision into the future surfaces in the consultees view that explicit post 2020 commitments to offshore wind by the government are now required to maintain investor confidence. It is considered that confidence in the scale of the market opportunity, and the technical difficulty of the programme would be helped with further test and demonstration sites. Greater clarity around the subject of the Offshore Transmission Owner regime and transmission charging methodology were considered pre-requisites for increased deployment in the area of the offshore grid.

CAPACITY

Capacity issues, particularly with regard to capital requirements, are considered to be limited by credit agencies’ treatment of JV structures, along with a lack of investor confidence in the operational risk associated with a technology with only around ten years of operational track record. It was considered the resulting additional capital requirement could be eased if the government focused on attracting new entrant investors, particularly non-financial investors in the form of European utilities and oil and gas companies. Recent interest from Japanese trading houses was viewed as encouraging.

The European Investment Bank and Green Investment Bank are seen as examples of ways of providing guarantees during construction, along with the government de-risking construction through risk sharing mechanisms. The consultees felt however that there was little political appetite for significant risk transfer to UK consumers and/or tax payers. It was felt it will need a robust track record of delivering projects on time and to budget along with appropriate contracting structures that transfer some construction risk away from utility sponsors to the supply chain to attract additional equity and debt. An industry-wide approach to develop industry standard contracting packages was recognised as a requirement. Also, engaging with credit rating agencies on the financial structures during the operational phase was seen as a possible action to mitigate such issues.

Areas for concern for the supply chain are the bottlenecks (particularly HVDC infrastructure) and a general lack of competition. Joint industry and government co-ordination, centred on regional “hubs” (as practiced in Germany) are seen as a way of ensuring national, regional and local government policy and resources are aligned to industry needs.

COORDINATION

For developers, a material challenge is seen with transmission network construction, along with access and charging arrangements. Doubts were expressed that the current framework being put in place would enable the considerable cost savings potentially achievable through a coordinated grid solution. A number of issues with both onshore-offshore and offshore-offshore coordination were identified and mitigating actions are addressed. Developers see a “significant challenge” in the shorter term with the time lag between the approach being taken by National Grid with respect to the pursuit of coordinated connection offers, and the regulatory response of DECC and Ofgem as to how to achieve such a more coordinated offshore transmission network.

CONCLUSIONS & RECOMMENDATIONS

The report is a frank assessment of the challenges facing the industry at a somewhat critical stage of its development. It does however recognise the positive and important point that offshore wind can make a significant contribution to achieving 2020 renewables targets and helping decarbonise the UK power sector in line with the legally binding carbon budgets set out in the Climate Change Act. Principal findings are that the two challenges that rank highest amongst stakeholders’ concerns are the policy and regulatory framework and the availability of construction phase finance.