UK’s Offshore Wind Industrial Strategy published

Comment is often passed about the level of home-grown content (or lack of) in UK offshore wind projects and the document’s foreword sets out a vision of growing UK based businesses, creating centres of engineering excellence whereby cost reductions can be delivered for both UK projects and exports to overseas markets. The possibility to increase levels of UK content to those of the UK North Sea oil and gas industry, where more than 70% of capital expenditure is through UK based suppliers, is explored.

Key announcements accompanying the strategy include £20m from the Regional Growth Fund for GROW; Offshore Wind (a new Manufacturing Advisory Service programme to support the UK supply chain in becoming more competitive, offering tailored support from specialists); and £46m funding over five years for the Offshore Renewable Energy Catapult Centre, linking innovation between industry, government and academia, helping companies bring new products to market. Other announcements are aimed at building on existing initiatives and developing industry tools to increase home grown content.

The strategy is both detailed and informative, mostly comprising a series of government and industry ‘issues and actions’ covering five areas: providing market confidence and demand visibility; building a competitive supply chain; supporting innovation; finance; and building a highly skilled workforce. It highlights the complex nature of the industry and the perhaps surprising network of industry groups and initiatives already in place promoting and assisting innovation and helping those finding their way in this developing industry. Much is at stake, multi-million pound investments holding the potential for unlocking £7bn in the economy by 2020, the UK the first country in the world to give funding clarity through to 2021, visibility of prices to 2018/19, and price certainty to projects awarded CfD contracts, along with a legally binding emissions target.

PROVIDING CONFIDENCE

The UK supply chain can only flourish if it has confidence that long term orders are forthcoming, particularly where investment in new or expanded facilities is required to meet demand. Electricity Market Reform (EMR) is the Government initiative to make sure the UK remains a leading destination for investment in low-carbon electricity. Government plans to provide that confidence are set out, outlining the price support mechanisms under EMR. The draft strike price was published in June, set at a level to achieve government objectives on renewables and low carbon generation, enabling 30% of Britain’s electricity to come from renewables by 2020. EMR is currently working its way through the legislative process and expected to come into force in 2014.

The current situation, where developers signal demand to the supply chain on a project-by-project basis, together with possible low build rates, can lead to difficulties for suppliers contemplating decisions involving high capital cost investments in new equipment or facilities. Measures to mitigate this uncertainty can include developers providing a pipeline of demand showing key milestones and decision points for contracting and invitation to tender timescales. Similar greater visibility for suppliers for Scottish waters projects is progressing separately. It is stressed that for the UK supply chain to compete effectively with overseas companies it must be competitive and innovative, providing quality and reliable products, this particularly applying to new entrants.

An issue of concern for some developers and top tier manufacturers is that some supply chain companies cannot always meet procurement conditions, are not always cost competitive and are unable to supply the volumes required. This area will receive particular attention, including those with the capability entering the offshore wind manufacturing supply chain. Support could include positioning for new contract opportunities, an innovative design project or access to investment finance.

The Regional Growth Fund has allocated £2.4bn for 300 projects and programmes, pledging to deliver £13bn of investments in England (including non-renewables projects). Another £600m was allocated to the fund recently with further announcements due this autumn. Similar enterprise zone schemes operate in Scotland, Wales and Northern Ireland. A new body is to be established: the Offshore Wind Investment Organisation will promote inward investment in the UK offshore wind sector.

New entrants into the supply chain are considered essential to increase competition and capacity, introduce innovation and reduce costs. Procurement procedures are considered complex however, involving taking on high levels or risk and liability. Some experienced suppliers from the oil and gas industry consider levels of liability disproportionally high compared with their sector. The Oil and Gas Industrial Strategy has committed to maintaining an open dialogue with the renewables sector, identifying areas of shared interest, including procurement. The importance of the value of strategic collaboration for export markets is noted with major overseas contracts more likely to follow from supply chain consortia with complementary skills.

THE IMPORTANCE OF PORTS

Ports have three main functions with offshore wind: those with waterside locations allowing establishment of manufacturing facilities, marshalling ports where components are consolidated prior to loading onto installation vessels, and operations and maintenance bases.

The first function is currently of significant interest for the port of Hull, eagerly awaiting Siemens decision on their proposed manufacturing facilities at the port. This challenge is seen as the most significant, with European ports often able to offer cheaper space and services. Particular requirements include accommodating increasingly larger turbines with buffer storage space for components due to the seasonal nature of installing.

Cost efficiencies can be gained developing clusters of manufacturers and supply chain facilities close to development sites. Port developments for manufacturing of note include: JDR Cable Systems Ltd (Hartlepool), TAG Energy Solutions Ltd (Tees Valley), Steel Engineering Ltd (Renfrew), Global Energy Group (Nigg), and Burntisland Fabrications Ltd (Burntisland and Arnish).

A feature with Irish Sea windfarms is they cannot be economically served from continental locations. This has led to port development including at Mostyn, Barrow and Belfast and the Cammell Laird Shipyard. DECC and The Crown Estate are increasing their activities here, including unlocking the significant port land available and ensuring prospective manufacturers understand the public support available for such developments.

Recently developed methodology is to be used to measure the extent of UK content with windfarm projects. The Offshore Wind Developers Forum have a vision of over 50% UK content (over the lifetime), a figure expected to be reached on the Robin Rigg and Scroby Sands projects.

KNOWLEDGE SHARING

It is acknowledged that lessons can be learned from the proven track record of the oil and gas industry, in particular synergies with contracting models and the approach to risk sharing in that sector. Significant potential also exists with sharing of knowledge from automotive, UK aerospace and logistics industries. With one estimate of cost savings of around 60% possible from innovation by 2050, RenewableUK and Oil & Gas UK are to work together improving the sharing of knowledge and information.

Funding of £46.1m has been confirmed for the Offshore Renewable Energy Catapult, intended to be the ‘go to place’ for renewable energy innovation, integrating key players, and acting as a hub for UK innovation work streams. The Crown Estate and The Scottish Government are promoting the deployment of test and demonstration sites, an area considered essential with turbine and foundation development entering a phase of rapid growth in scale and technology.

Windfarm financing has previously typically come from developers’ balance sheets with estimates that the ‘big six’ utilities could raise around £2bn with relative ease, equating to around 600MW of new capacity. The Green Investment Bank, Infrastructure UK and UK Trade and Investment are principle government bodies with the remit to address funding on this scale.

The perception that the UK market for offshore wind is uncertain beyond 2020 can make it difficult for small and medium supply chain enterprises to access finance at reasonable costs for establishment of facilities and innovative technology development. Again, action is planned to ease the situation, part of the Business Bank programme including assistance from Enterprise Capital Funds, Business Angel Co-investment Fund, and Enterprise Finance Guarantee. Just under £4bn of existing commitments and new government capital are expected to become available when the bank becomes fully operational in 2014.

The Cost Reduction Task Force identified the need for better education of the finance sector on the true risk involved with offshore wind, particularly with the unique risk profile during construction phases being less well understood than say oil and gas due to offshore wind being a relatively new sector. Government will facilitate discussion and engagement between the financial services sector and main energy trade associations to assist the latter in better understanding the scale of the issues.

An adequate skilled workforce is essential, particularly as build rates increase. The number of jobs is expected to grow significantly, with 47% of the workforce occupying managerial, professional or associate professional roles compared with 40% on average for the UK. A number of government and industry led programmes are aimed at developing and retaining skills, including support by devolved administrations. The list of actions intended to develop and retain skills is impressive to say the least. There are a number of programmes underway and planned for the future to ensure the issue is addressed, avoiding bottlenecks and ensuring UK workers are able to take advantage of the opportunities on offer.

By Peter Barker