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A great time to be in offshore wind

With the prospect of the UK government requiring 30-40% of electricity from renewables by 2020 and a major increase in government support for offshore wind just announced, delegates at a conference last month agreed that the offshore wind industry could deliver up to 25 GW in British waters in the next decade or so. The electricity regulator, however, raised a warning about super profits

A clearer prospect of increased support for offshore wind in the UK, coupled with tougher national targets for renewable energy, boosted optimism and led to an upbeat mood at this year's annual offshore wind conference, organised by the British Wind Energy Association (BWEA). Held in Liverpool on June 7, the event came just two weeks after the government revealed plans to increase support to offshore wind under the Renewables Obligation (RO) by awarding the technology 1.5 renewables obligation certificates (ROCs) per megawatt hour -- up from the current 1 ROC/MWh.

According to Andrew Perkins from Ernst & Young (E&Y), the cost per megawatt hour of offshore wind is estimated to be £91 in a report prepared by E&Y for the government's Department of Trade and Industry (DTI). But there are significant variations in costs between the cheapest and the most expensive sites, he added. Investor appetite is there, he claimed, and the multiple ROC for offshore wind now enables the investor to invest. "There will now be projects that will go ahead which wouldn't have done before," said Perkins.

The RO requires electricity retailers to source a rising proportion of their power from renewables sources by buying ROCs or paying a penalty to "buy out" of their obligation. For the current year 2007/08, the buy out price stands at £34.30 per ROC. Buy out funds are distributed to retailers who fulfil their obligations. The buy out price, together with expected income from the buy out fund, effectively sets the price at which ROCs are traded.

Alistair Buchanan, CEO of energy regulator Ofgem, noted that the increased ROCs for offshore wind will be seen by consumers as giving "very chunky" internal rates of returns to generators. "That is something that will require very careful news management if indeed your industry is going to be fortunate enough to be dwelling in the world of super profits," he warned.

Offshore project developers, however, hotly denied there was any prospect of super profits. The 1.5 ROCs for offshore wind will allow more capacity to be built, said Neil Birch from Npower Renewables. But the ROC market remains volatile. "What we can build at comes back to the stability of the market. If we had a stable ROC price, a return over 20 years of 10% is viable," he said. "We as a utility are seeing borderline rates of return." From Shell WindEnergy, Andrew Murfin said the company views offshore wind as a lower risk and lower return investment than oil and gas. The multiple ROC will be "very helpful," he said. "It will deliver more capacity but it won't deliver all the schemes that are out there. And maybe it wasn't intended to."

Despite the tight financial margins, tight supply and increasingly complex delivery structures, Murfin observed that the industry is enjoying a high growth rate at the moment. "It's a great time to be in the offshore wind market," he said.

High growth

The growth is driven by targets for renewable energy. In its recent energy policy paper, the government confirmed its plan to increase the RO to 20% by 2020. As developers noted, the number of suitable onshore wind sites is diminishing, so offshore wind presents the best alternative for large scale renewables deployment. This is reflected in the DTI's expectations that under a future RO, with "bands" of different support levels for different technologies, by 2015 offshore wind will deliver the single biggest contribution of any renewable technology -- 16.7 TWh annually, some 36% of all renewables electricity.

Peter Crone from small developer Farm Energy, which has initiated some of the largest offshore wind projects put forward, also pointed out that by the end of this year, the UK will have agreed to new EU binding targets for renewable energy. While the government may try to secure a less ambitious renewable energy goal of 20%, which would require renewables to supply 34% of electricity, Crone suggested that, given the country's outstanding wind resource, the EU Commission may pressure it to accept a higher target of 25%. This would demand renewables delivering 42.5% of UK electricity. Under both the 20% and 25% scenarios, offshore wind would have to provide more than half the UK's EU target, resulting in either 23 or 28 GW of wind turbines built at sea.

Crone calculated that the two rounds of project licensing so far for UK offshore development should result in around 6.2 GW of installed capacity. This means that between 17 to 22 GW of new capacity would have to come from further offshore rounds. This is within the industry's ability to deliver, he said. He reported that at a BWEA offshore wind workshop earlier last month, the majority of those present believed that 15-25 GW was achievable by 2020.

Future support

Looking at the future for offshore development beyond the first two rounds, the workshop also produced a consensus in favour of a rolling program of awards of site development leases. Crone explained that from his experience with the 1000 MW London Array project -- which was originated by Farm Energy -- it takes a minimum of seven years to take large offshore projects from site award to full commissioning. This means that to meet the 2020 target, most sites must be allocated by the end of 2013. Crone urged that annual licensing rounds should take place from 2009 onwards. These would continue to be administered by the seabed owner, the Crown Estate. Five rounds of licenses, each for 5-6.6 GW, would produce 17-22 GW by 2020, assuming a 70% success rate as likely with rounds one and two.

From the DTI, Duarte Figueira warned that annual rounds may not be the approach adopted. He pointed out that the government, in its energy policy paper, stated that it would publish proposals for the future of offshore development by the end of 2007. These will set out the geographical areas to be taken forward. And before any further development can take place, strategic environmental assessments of offshore waters will have to be completed, he added.

Rob Hastings from the Crown Estate gave an insight into current thinking among policy makers about the future of the next licensing regime. "We are as much as we can decoupling ourselves -- the commercial or contractual process of leasing agreements -- from the regulatory processes of government to give us flexibility to provide leases that work," he said. This would get round the current problem afflicting some round two projects, particularly in the Greater Wash, which are stalled by navigational and environmental issues, he said. "We've now got a situation in the Wash where if we need to change sites we have to revisit the regulatory process as well as the competitive process," he explained.

Delivery first

A logical way forward would be to construct a competitive process for leasing blocs of offshore seabed, Hastings said. But the determining factor in awarding leases will be the ability of developers to deliver their projects on time. "Applications for lease will be on the basis of when the project will be generating," he said. "That's when it starts making money." A pipeline of projects is essential to support the supply chain.

But Hastings stressed that the industry cannot proceed to round three until it solves some of the problems that beset round two sites. Developers need to deliver the sites already allocated to them. This will prove that the technology works, costs will come down and investors will be encouraged to spend more money, he said. "I am optimistic that round three will be a fantastic opportunity," he said. "It is possible to get 20-25 GW out there, but it is not going to happen just simply because there is a round three. It will happen if you guys get up and actually build them."

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