Challenging recipe for supply chain cost cuts

Ignorance of investment community must be overcome

Improving the finance community’s basic understanding of the European offshore wind industry would help support the sector’s supply chain at a time when  it must introduce a series of changes to cut costs, concludes a leading consultancy.

A short report outlining a ‘recipe’ for cost-saving improvements to the way the offshore wind supply chain operates has been published by leading project management consultancy, EC Harris. The consultancy recently advised the UK Crown Estate on opportunities for cost reductions within the UK offshore wind supply chain.

Six changes are identified as necessary to achieve cost reductions in Making Offshore Wind Schemes Commercially Viable: The Supply Chain Opportunity. These are:

- greater competition in the supply of turbines and in the supply of installation and operation and maintenance services. There are currently "very few competitors" in these fields

- greater collaboration within the supply chain, via alliances, framework agreements, and "vertical" cooperation. This would allow for optimisation of processes and better planning

- greater efficiency through economies of scale. As the volume of offshore wind work increases supply chain firms will be in a position to ‘sweat’ their assets and learn from mistakes, while developers will be able to rationalise their suppliers, negotiate volume discounts, and standardise protocols

- sharing best practice, development of standards and information sharing. There is currently "little evidence" of information sharing within the sector

- improvements to the terms and conditions of key contracts. To date, contracts have been "poorly defined", with "inadequate" incentives for good performance and penalties for delays. Developers should move away from relying on lump sum contracts and should introduce risk sharing mechanisms

- greater risk sharing with suppliers, including sharing the cost of "uncontrollable risks", such as poor weather, unforeseen ground conditions and technology failure. Practice to date has been for developers to carry the costs of uncontrollable risk. If suppliers shared such risks they would likely collaborate with developers to "accrue savings", notes the report.

In addition, EC Harris presents a series of "prerequisites" needed to support the offshore wind supply chain as it cuts its costs. Among these is the need for the finance and insurance community to improve its understanding of the sector, so that it can "modify" its decisionmaking on risk allocation.

Overcoming ignorance within the financial services sector might also help attract new investors to the market, such as institutional investors, pension funds and sovereign wealth funds, notes the report.

EC Harris is owned by €2bn/year Dutch-headquartered consultancy, Arcadis.