Early cost cutting could put offshore projects at risk

Short-term savings can work out costly if they result in construction overruns or even reduce the life cycle of a wind farm.

Short-term cost saving in the initial stages of offshore wind projects could affect performance over their whole life cycle, according to renewable-energy underwriter GCube. The warning comes as a UK-government-sponsored taskforce began work at the end of last month to find ways of reducing electricity costs from offshore wind to as little as £100 (EUR116) per megawatt hour.

"We are told by the UK government that offshore costs must come down from £147/MWh to £100/MWh. But the taskforce now looking at this must look at whole life-cycle costs, including construction-cost overruns, not just procurement costs," said Jatin Sharma, head of offshore at GCube.

As offshore projects become higher risk, investors will first look at human issues - the balance between in-house and external expertise, workforce turnover, shortage of skills and experience and the absence of a risk management culture, he said.

"Investors will look carefully to see if cost competitiveness in procurement is at the expense of a better project," he explained.

Technology failures can be a direct consequence of procurement - turbine prototype failures, quality-control issues, lack of independent third-party inspection, cables, grouting, foundations and new vessels and crews can all lead to schedule overruns and result in reduced electricity output later on.

Price pressure on the supply chain could have unforeseen consequences. "It's only a matter of time before we see another major insolvency in the offshore supply chain," Sharma said. "Germany has ramped up its supply chain at breakneck speed, doing in four years what took Denmark two decades. Developers must find the right balance between local economic benefit and delivering a more robust project."

The weather and logistics can also cause problems, Sharma added, if cost pressures early on affect contingency planning, project interdependencies and cause vessel operational thresholds to be exceeded.

"Vessels have to be fit for purpose - that means appropriate sea trials for new vessels, ensuring suitability for project locations and examining past project track records," he said.

He added that it may help to use project-management contractors as a stabilising "umbrella" that can manage stakeholders' expectations, adopt proven technology and install the right risk-management culture within the project team from the outset.

Competing for investment

Speaking at the International Energy Agency's Energy Forum in London last month, James Cameron, executive vice-chairman at Climate Change Capital, said investors have to be convinced that offshore wind's bigger risks will bring a greater return than conventional energy.

"That all 'new energy' is high risk is patently a myth, but we still have to release the investment and absorb the risk," he said. "Once offshore wind is built and operating it is a different story, but will investors be persuaded to provide equity support?"

Cameron also suggested that the next phase of offshore wind projects might need to be undertaken by freestanding 'special vehicles', independently capitalised.

Others believe offshore wind will still struggle to compete for investment with other, more conventional, technologies.

Citing the rise of shale gas as a fuel of the future, the economist Dieter Helm wrote in The Guardian newspaper last month: "Switching from coal to gas generation is cheap - and it cuts emissions by roughly half. It doesn't solve the climate-change problem in the long run, but it gets emissions down much faster and much cheaper than all those offshore wind farms in the short to medium term."

Offshore wind still has to convince some investors on short-term costs and long-term economic viability. Government-sponsored taskforces take note.