Viewpoint: Offshore industry will ride through the storm

EUROPE: The consequences of the UK's decision to vote to leave the European Union has sent a cold front across the political, economic and business worlds.

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What does the referendum result mean for the offshore wind industry in Europe, which is dependent on international cooperation?

In reality, we will not know what the implications are for some time. Detailed exit negotiations are yet to start and could take (at least) two years under Article 50 of the Lisbon Treaty, and that's once that has been triggered. The UK's new chancellor, Philip Hammond, has suggested that the process of separation from the EU could take up to six years to complete

That uncertainty in itself, however, has real implications for renewable projects in the UK. Investors dislike uncertainty, and the price demanded for increased risk is increased returns, driving up the cost of energy. In addition, last year, half of Europe's investment in wind was in the UK. If that slows significantly, the whole sector suffers.

Strong "remain" backer Siemens has already said its UK investment plans beyond its EUR400-million turbine facilities in Hull, north-east England, are now frozen. But for some time, the scale of the EU market has acted as a brake to the investment plans of many, so maybe not so much has changed.

In the turbine-supply space, there needs to be an annual European deployment of at least 3-4GW to drive a reasonable level of competition between players that can win enough work to invest in product and process improvements.

But the combined aspirations across the continent are not at this level. However, investors in other areas of the UK supply chain have said the vote to leave will have no impact on their decision to set up in the UK to sell to UK offshore projects.

Currency woes

The referendum result has already had an immediate and dramatic impact on the value of the UK currency. Electricity from UK projects is sold in pounds, but much of project Capex is in euros, generating more risk and more uncertainty.

The expectation seems to be for sterling's value to remain low for the foreseeable future. This will make exports from the UK cheaper and imports into the UK relatively more expensive.

Given that typically around half of the lifetime project costs are now for non-UK products and services, this will increase the cost of UK offshore wind.

Any regulatory impact on the European offshore wind market will depend on the inevitably protracted negotiations. The industry is starting to benefit from standardisation of regulations and practices in many areas.

Much progress in this area could continue with the UK still in Europe, even if outside of the EU, but the rate of progress can only be expected to slow.

Barriers to growth

One key area that is likely to suffer is the development of a single energy market with interconnects between areas of supply and high demand.

Long-term, continental Europe should ideally benefit from low-cost, low-carbon, low-risk electricity from the UK, the windiest country in Europe, as well as accessing solar resources from the south.

Now, it is distinctly less likely that a pan-EU strategy will fully and efficiently use the continent's natural resources, to the cost of all.

Putting in barriers between the UK, with its globally recognised innovation capability and the largest market in offshore wind, and the main sources of research-and-development funding currently available is also likely to have a long-term negative effect.

Often programmes are open to non-EU countries, such as in the case of Horizon 2020, but there are no guarantees that the UK skills base will be able to participate once current schemes run their course.

Rise to the challenge

Overall, I don't see any need to worry about being shipwrecked. I am confident our industry can rise to the challenges the decision presents and maybe find some new ways to benefit. Our can-do attitude will see us through, but we may need to batten down the hatches to ride through the storm.

Whatever happens, we will do ourselves a favour as an industry if we continue to tell the story about how offshore wind is already making such a positive difference to businesses and communities up and down our coasts across the whole of Europe.

Bruce Valpy is managing director of BVG Associates.

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