Potential partners in the public-private financing initiative are being asked to bid for exclusive rights to develop wind projects in each of the zones. Many zones have potential for more than one wind project. They will be allocated in 2009. The exact location of the zones may be revised as a result of the findings of a Strategic Environmental Assessment (SEA) currently being undertaken by the Department of Business, Enterprise and Regulatory Reform (BERR). This is studying the impact of up to 25 GW of offshore wind on wildlife, shipping and fishing and is due to be completed next year. After this, the Crown Estate will help its development partners identify specific sites for potential wind farms within the zones.
The Crown Estate believes its investment in the development process will help speed up consenting and be instrumental in settling generic zone-wide issues such as environmental concerns, supply chain constraints and grid connections. But it does not intend taking an ownership role in the wind farms. Rather, it will back out of projects once consent has been secured, leaving the partners to construct and operate the wind farms.
Britain's third round of site leasing builds on the 8 GW of offshore wind projects operating or under development in rounds one and two. Altogether, the three rounds could deliver up to 33 GW of offshore wind.
Government risk sharing
Launching round three at the British Wind Energy Association's offshore wind conference last month, Rob Hastings from the Crown Estate explained the thinking behind his organisation's decision to invest directly in wind farm development. "The new approach to the deployment of offshore wind that the Crown Estate have set out requires us to take an important facilitating role in which we will share developers' risk," he said. "We will be helping to identify suitable sites and working closely with commercial partners who we expect to make considerable capital investments in offshore wind farm assets."
Round three projects require a more strategic approach than earlier offshore rounds, said Hastings. "We need economy of scale and we need efficiency from an infrastructural approach. These are infrastructure projects, we do not do them in piecemeal fashion."
The process starts immediately with an invitation to consortia or companies for expressions of interest in developing the zones, he said, pointing out that "2020 sounds a long way away; it is not." To meet the UK renewables target, construction of offshore wind farms needs to start by 2014, no later, he said. To achieve that, sites will have to be consented by 2013. "Which means as of today, 2008, we have got three or four years of active work to effectively consent and get those sites ready for construction."
The wow factor
The Crown Estate's announcement set the tone for the conference. Captain Peter Hodgetts of SeaRoc, a firm of marine engineering consultants for the renewables industry, summed up the enthusiasm many felt: "Wow!" he exclaimed, as he welcomed the Crown Estate's supportive and collaborative approach. "It is a busy time and it is just about to get busier."
The enthusiasm was tempered with the knowledge that if offshore wind is to be deployed in a timely fashion and on such a scale, key obstacles of planning, grid and supply chain will need to be overcome. And whether the support system under the current renewables obligation (RO) for offshore wind would be enough to tempt investors was a major question.
Hodgetts acknowledged that the challenges that round three will pose for the industry are huge, "but they are very doable," he said: "Deeper water, further offshore, different foundation designs and larger turbines will test us all. I believe that it is through working collaboratively that we will find those solutions. And it is very encouraging to see the Crown Estate stepping up and being part of that collaborative process."
Cheaper than offshore oil
The industry should not be scared at the scale of the technology it was taking on, he said, pointing out that in the 1970s, offshore oil and gas developed in water depths of 150-200 metres. "And we thought that was deep. Nowadays developments in two to three thousand metres are commonplace." During that period the oil and gas industry made many mistakes but developed the appropriate solutions. "Our industry comes under a lot of criticism in the press for needing financial support and for the learning curve we are going through," he noted. "The truth is ...the oil and gas sector had massive subsidies in those early years that represent many, many times what the renewables obligation system means to us."
From the Carbon Trust, Tom Delay agreed that the size of the challenge of round three is enormous. So too is the cost. "We have got to recognise that the capital cost of offshore wind has more than doubled over the last five years. That suggests that 30 GW will cost in the range of £55-75 billion." But the rate of growth needed can be done. He explained that in earlier decades, coal and gas-fired plant were built at the same rates as required of offshore wind over the coming 12 years. "The question is what needs to be done to achieve this rate of expansion."
As a matter of urgency, the electrical grid and the consenting process are both problems in need if solution. The current "invest then connect" system for building transmission lines will not deliver the new grids able to absorb offshore wind in the timescales needed, said Delay. This issue must be dealt with in the current Transmission Access Review by energy regulator Ofgem, he said. Moreover, the current consenting regime has led to delays for new onshore grids as well as for offshore wind farms. The government, in its physical planning bill currently going through parliament, proposes an infrastructure planning commission to speed up the consenting of such large infrastructure projects. But the bill is facing a revolt in the House of Commons, he noted.
According to an analysis by the Carbon Trust, a relatively small area -- some 2.5% -- of available sea floor is needed to meet the offshore wind targets, said Delay. But there is a big difference in the risk/return profile between near-shore sites and those further out to sea where there are not many high return opportunities. Most of the area currently available for offshore wind comprises lower return, high risk sites, he said. A crucial question, he added, is whether many of the constraints on offshore wind sites will be relaxed to free up higher return, lower risk sites. The Crown Estate's announcement suggests they might, he concluded.
Delay asked whether the returns available under the current RO regime are sufficient to attract investors. Under the proposal to award offshore wind 1.5 Renewable Obligation Certificates (ROCs) for each MWh delivered, rather than the one ROC for onshore wind, the Carbon Trust estimates that 29 GW could be delivered at a 10% internal rate of return (IRR), provided the RO is extended by five to ten years. "So is a 10% IRR sufficient in this industry and is the RO the right mechanism to deliver that kind of return?"
Delay also stated that the allocation of risk and reward needs to be better understood. "There are some very significant risks in terms of cost, political risk, electricity price and carbon price. Somehow that mix of risks needs to be borne by utilities, other developers, financiers, government, the supply chain and ultimately by consumers. And the combination of who pays to carry what risk really needs to be thought through," he said.
"We should be talking about rates of return, we need to be talking about who should be the players, who will be attracted to make investments of the kind of scale we are talking about with this kind of risk return profile. It is not everybody who can find five, ten, fifteen billion [pounds sterling]. What kind of financial structure is going to make that work?"
From developer Npower Renewables, Paul Cowling disagreed that a 10% IRR is achievable. "I'd give my right arm for a ten percent return today. I don't think we are anywhere near ten percent," he said. "Currently we are around seven to eight percent. That is making people think about what they are doing in the UK market. People are walking away." He pointed to the rise in wind plant prices over the past year. Npower Renewables committed to its 90 MW Rhyl Flats project over a year ago at £2.1 million to £2.2 million a megawatt. Now, published prices for offshore wind are £2.6 million or more. "Where is it going to stop?" The support based on the award of 1.5 ROCs for offshore generation was based on a 10% return, he said. "Things have moved on since then. We need to revisit it."
His theme was also taken up by Mark Giulianotti of the Bank of Scotland. "Unconfirmed reports estimate that some projects are already over EUR 3 million a megawatt," he commented. The 25 GW of offshore wind will require EUR 80 billion of funding, around EUR 6 billion a year he said. This is too much for utilities to finance on balance sheet, so some EUR 4 of bank debt will be needed annually for UK offshore alone. This is a large amount in the current market which is reeling from the liquidity crisis. Moreover, the number of banks considering offshore wind is limited. Only seven were attending the conference, he noted.
The increase in support to 1.5 ROCs is welcome but might not be enough, he said. The RO must be extended beyond its 2027 time frame, otherwise it will act as a backstop to projects. Government support is paramount, he said, and must be consistent and reliable. "Without regulatory certainty projects will not happen and we will not meet the targets."
A government task
The government's role is to remove as many of the regulatory risks for offshore wind developers as possible, so that the rate of return becomes commensurate with the risk, said BERR's Duarte Figuiera. This de-risking process is already happening with the planning bill, work on the grid, "banding" the RO to award offshore wind a higher level of support, and matching the timing of the Strategic Environmental Investment (SEA) to the Crown Estate's bidding process for site leases, he said. No other country in Europe has developed this kind of SEA for offshore wind, he said. Together with the plan for 25 GW, it will create a forward envelope of projects which will give confidence to the supply chain, continued Figuiera. "The next two or three years are critical for getting the structures right for getting agreement in the country about the way forward, not just for offshore wind but for the wider [renewables] target."
Hastings believed the moves to de-risk offshore developments, coupled with high energy prices could counter the effect of the credit crunch on investor appetite. The Crown Estate has seen a constant stream of potential investors, he reported. "I think there is a very strong appetite there. What we can't underplay are the challenges ahead of us. For those people willing to step up to the plate, I think it will be a very healthy and interesting business to be in. Energy prices are only going up. If I was a utility I would be certain I want a place in renewables."