Targets needed to cut offshore costs

The offshore wind industry must get its costs down to EUR100 per megawatt hour by 2020, said Ian Marchant, chief executive of British utility SSE Renewables, speaking at the EWEA offshore conference in Amsterdam last month.

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In exchange, the offshore wind industry should demand that political leaders introduce longer-term and binding targets for new offshore capacity, said Marchant.

"We have to promise on cost as an industry and, in return, the politicians have to promise on volume," he said. This would mean mandatory EU targets for wind capacity beyond the current 2020 goal, so that investors could be sure of a long-term sustainable offshore market. "Suppliers will not build factories for five or six years of orders," said Marchant. "They need 15, 20 or 25 years. Targets and milestones for 2030 are more important for our industry than any target for 2020."

Marchant insisted that the €100/MWh goal is achievable, arguing that premiums paid by electricity consumers to support offshore wind cannot be expected to last indefinitely. "There are two sides to this deal," he said. "If the industry starts asking for volume without promising on price, society and politicians will lose patience."

Policy driven

New policy measures could prove the most powerful force in driving cost reductions, claimed Jerome Guillet, managing director of renewable-energy financial advisors Green Giraffe Energy Bankers. For a capital-intensive industry like wind, "the cost of capital is largely driven by the regulations that politicians put in place," he said. Consistency, stability and long-term frameworks for offshore wind would reduce investment risk, widen investor participation and thus encourage cheaper finance.

Guillet is confident that money will be available to finance Europe's offshore wind ambitions. At least EUR2 billion a year is currently available from commercial banks - enough debt funding for four to six industrial-size projects. "It's more than what's needed today from the banking market, and there will be more in future," he said. "The hardest bit has been done, which was to do the early deals, create the precedents, and let the banks acquire the internal expertise and familiarity with the risk. The number and size of deals is increasing every year."

Banks have been willing to finance new turbine designs such as the Repower 5MW and 6MW machines and the Areva 5MW, noted Guillet. "This requires more thorough and intrusive due diligence," he added. For their part, manufacturers have been willing to explain their designs, testing and certification processes.

Careful approach

A more cautious perspective has been expressed by Marc Schmitz, senior vice president for renewable-energy and infrastructure finance at Rabobank International. The role of commercial banks needs to increase, he said, with more involvement from institutional investors and long-term funding. Difficulties with finding finance are more a result of the ongoing European financial crisis rather than the perceived risks of offshore wind, said Schmitz. "Construction risk and operating risk are much more accepted. Cost overruns are below 10% and so far wind parks are performing well, and above expectations," he added.

Schmitz believes that offshore wind remains an attractive investment with good returns compared with the risks. "I would prefer to put EUR10,000 in a wind farm than on the stock exchange," he concluded.

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