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Offshore in the doldrums

Just as it was expected to hit the big time, construction of offshore wind power stations is grinding to a halt. The pioneering spirit that lifted wind power off the ground is not going to launch it at sea. The cost is too great and the risks too high for idealistic philanthropy, as our survey this month of the offshore wind business in Britain, Belgium, Germany, the Netherlands and Scandinavia all too clearly reveals (pages 47-60). The size of the challenge is huge. Offshore wind power is about a lot more than wind turbines getting their feet wet. It is about establishing a whole new industrial discipline, just as with offshore oil and gas. The stakes are big. Nobody can afford to go out there and get it wrong.

xFear of proceeding too fast, however, has offshore wind gripped in a vicious circle of inaction. The cost of the first two major projects in Britain came in higher than projected (page 52) and fixing even minor technology failures is proving expensive when they happen at sea (pages 21 & 31). The technology undoubtedly works and works well (page 52), but the higher costs have chilled prospective investors to the marrow. From Germany to Holland to Britain, everybody is waiting for somebody else to jump in and warm up the waters. The problem is that with few projects being built, the expected reduction in offshore costs -- through development of larger wind turbines, the lessons of experience, and economies of scale -- is not happening. Yet until costs come down, offshore wind is not proving attractive to even the bravest pioneers, not at current levels of support.

xUtilities in Britain -- driven by an obligation to supply green electricity -- saw from the outset that the financial markets were not an option for covering construction costs. Building "on balance sheet" and refinancing a project once built is more cost effective. All but one of the first round of British projects are now in utility hands. Had those utilities not been hit by the mergers, acquisitions and bankruptcies that have swept the power sector in recent times, their offshore projects may not have been sucked into the vicious circle. Three did escape and are built or building. The others seem caught in the Catch 22, at least for now.

xExperience offshore so far is not enough to accumulate into lessons learned. Specialist offshore industry contractors are frustrated at being left out of early decision making where they could add vital expertise (page 54). Basic construction risks, such as cost of overruns due to weather delays, are being unfairly passed around, instead of properly hedged. The turnkey contractor is often the wrong company: a wind turbine maker is too small and too inexperienced to carry offshore risk. None of this is making investors feel any the more comfortable about taking the plunge. Yet with no investment in new projects, the industry cannot demonstrate its fast track up the learning curve.

xIt is time to break the vicious circle. The first wave of projects needs to get built before the second and much larger wave can roll in with more sophisticated contracts, bigger turbines, and the project financing required once wind stations are too big for even a utility balance sheet. European governments are looking to get at least 10 GW of offshore wind up in the next five years. If they want that to happen, they have to act. The task is to make returns on investment high enough to make it a risk worth taking, but without hooking the sector to a subsidy support machine -- and while maintaining pressure to reduce cost.

xxOptions for action

xxIn the old days, the EU might have stepped forward with hefty support for demonstration projects, as it did onshore. But that can be an expensive and ineffective approach, liable to abuse, and existing demonstration projects have not convinced investors. Capital grants are a variation on the theme. Setting them at the right level to avoid waste, while making them big enough to be of interest, is hard: £97 million is unclaimed in the first round of British offshore and government may well be excused for not wanting to hand out more cash. What might work, though, is a round of bidding for grant money among project sponsors, with those who requested the smallest sums deemed the winners.

xDenmark has decided that building offshore wind farms is akin to building roads: a government job. It is again sponsoring the next two offshore plant. Denmark has a point. Government equity is cheap. It does not expect the 11-12%, or even 15% returns demanded by the private sector; 6% is enough. The effect is significant. Offshore wind generation in Denmark costs around EUR 60/MWh, compared with around EUR 110/MWh in Britain for the same capital outlay and wind regime. Indeed, Belgium is having to offer EUR 107/MWh to get its first offshore plant built. For consumers, paying through taxes, as in Denmark, may be the better deal, at least in the short term.

xSuch largesse with public money will not find favour in most places. The Danish model, however, does raise the option of public-private sector partnerships, currently the rage in Britain. At a Treasury test discount rate recently lowered from 6% to 3.5%, a 60% government loan for offshore wind could be combined with a 40% equity contribution delivering 15% to the private sector and still produce electricity at just under EUR 100/MWh, even if installed cost does not fall immediately. Public-private partnerships might be worth a thought. After all, nuclear will not be asking for less.

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