United Kingdom

United Kingdom

Turbulent waters create market drag

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Offshore wind in Europe is happening far more slowly than expected. Fourteen years after the first project, only 580 MW of truly offshore wind is turning today. That is less than a quarter of projections made just three years ago. What is to blame for the slow progress? High cost? The technology? Governments? The financial markets? Or is it just fear of

xpushing out the boat? We set ourselves the task of finding out.

xWhen the first wave of UK offshore projects were granted site development licences in 2001, all were expected either to be completely operational or to have at least started construction by now. Just two of the 14 projects are operating today and only one is under construction. The much vaunted second wave of larger wind farm projects further offshore, awarded licences in December 2003, has yet to become even a ripple. The expectations of just two years ago have turned out to be wildly optimistic.

xThe original three year development licences have had to be extended by the body in charge of issuing them, the Crown Estate, owner of the seabed. "No one knew at the start how long this was going to take," says the Crown Estate's Frank Parrish. "Some time ago we had to recognise the way the market was working and allow some leeway." Although the consents process has worked reasonably well, a couple of projects still have outstanding issues to resolve before they can be granted permits. This is particularly the case at Shell Flats off Lancashire where the effect that wind turbines may have on birds and radar communication are very real issues, he says.

xParrish feels that the sheer cost of developing wind projects at sea has given developers pause, especially with rising steel prices contributing to the higher foundation prices. But he points out that not all projects with development licences were expected to go ahead. "We have got potentially eight gigawatts optioned in UK waters, he says. The government's aspiration, expressed by the Department of Trade and Industry (DTI), was for 3-4 GW.

xxBeyond control

xxMuch of the delay has come from changes in the entire business of offshore wind energy, say Parrish. Around half the number of projects were sold to utilities by their original developers, while many of the UK utilities have been taken over by new parent companies -- or gone belly up as in the case of TXU and Enron. With just one exception, all the projects from round one of licensing have either changed hands or their parent company has changed hands. Today, most are owned by energy utilities. The only independently owned project, GE Energy's Gunfleet Sands wind farm off the Essex coast, is set to be sold off by GE in the near future. "The whole of the electricity sector has not been a very comfortable place in recent years, so you cannot expect a frontier sector like offshore wind to go blithely forward," says Parrish.

xDavid Farrier from E.ON UK agrees that all the ownership changes have cost time. In addition to its Scroby Sands project, now operating, E.ON UK, formerly Powergen, bought two further round one wind farms: Robin Rigg in the Solway Firth and Scarweather Sands off south Wales. "When you purchase a project you will not be able just to pick it up and run with it. There are many areas that need sorting out first, monitoring for example," says Farrier. After a notoriously lengthy tendering period for the main construction contract for Robin Rigg, E.ON has at last signed a letter of intent with Vestas. "We had to go out to re-price the contract because the original terms and conditions were not satisfactory," he says. Farrier insists that E.ON is determined to proceed with all its offshore wind farms. "We have a Renewables Obligation to meet. If we have projects to put in the ground we will put them in the ground," he says. "We would not have bought Robin Rigg and Scarweather Sands just to sit on them. We intend to learn from them; that should set us up for round two."

xxLack of expertise

xxFrom developer and offshore construction company SLP Energy, Megan Arnold blames unrealistic expectations and lack of offshore expertise in some of the utilities for the slow take-off of the industry. "Most of the development companies are from an electricity generating background; it has taken them time to understand how to work in an offshore environment," she says.

xThis view is strongly supported by Peter Clutterbuck of offshore services company Seacore. Driven by their demand for Renewables Obligation Certificates (ROCs), the new entrants to offshore wind have a strong economic incentive to enter the sector, he says. "But what do they know about it? Nothing." Aware of their lack of experience, the utilities are adopting a defensive contracting strategy by putting the contracting in the hands of an intermediary. "That slows things up because the people who are big and tough enough to be acceptable in that role do have offshore experience but they don't know the end game." Clutterbuck would prefer to see offshore developers cutting out the middlemen by multi-contracting themselves. This approach has been adopted by Elsam to build its Kentish Flats wind farm. "Elsam built up the self confidence to do that in a Danish context first, but if Elsam can do it, then Centrica, E.ON and npower can do it."


xxThe sector is polarised, he says. "There is an enormous gulf between a group of clients who want to spend money but do not want to spend too much money and a group of people -- the cable layers, turbine erectors and foundation installers -- who know how to build the wind farms." This latter group is treated like bricklayers or plumbers: a necessary evil, he says, but one that will turn up when needed. Meantime, companies which have invested money to enter the sector at the construction level are finding their brand new bits of kit lying idle. "They are losing money. We are surviving because offshore wind is not the only thing we do," says Clutterbuck.

x"Everyone behaves as though this is easy," he continues. "It is not easy; it is a whole new industry which needs new methods and new equipment. There are real challenges: are there going to be five megawatt turbines on seven metre diameter monopiles? Perhaps, but not with just five minutes notice and using yesterday's technology."

xxToo risky

xxCost is the main obstruction to offshore development, says Andrew Garrad of international consultants Garrad Hassan. This is particularly apparent for round one projects. "Almost all of them have got permits, they are all of a small size where connection into the mainland grid is not a big deal. So what are you left with? You are left with cost." Despite government capital grants of around £10 million per project and support from the Renewables Obligation (RO), the economics of the first wave of offshore projects are too tight for comfort, believes Garrad. "If the capital grants for round one were a bit bigger you would have 13 projects being built right now."

xWith utilities as owners of all the UK projects, the issue of gaining a decent power purchase agreement is sidestepped. Utilities in the UK power market already have an appetite for ROCs and can aggregate the power into their generation portfolio. Projects still need to be commercially viable, however, and here is the rub. The capital costs of building Britain's first two wind farms -- North Hoyle and Scroby Sands -- were around EUR 1800 per kilowatt, according to a report by Garrad Hassan for the Carbon Trust published in December 2003. "That is roughly twice the capital cost for onshore wind," he says.

xGarrad believes that costs could rise further as the industry gets to grips with building wind farms in an environment which throws up a far greater set of risks than onshore. "With onshore projects the industry is very good at building on time and to cost," he says. "With offshore, you have to deal with the variability of the weather and there is as yet no model for mitigating the construction risk."

xThis risk was demonstrated during construction of the first few offshore wind farms around the British Isles. "That pain has not been borne by the project owners; it has been borne by somebody in the contract chain," he says. He sees a new form of contract structure emerging to handle construction risk. This will be very different from onshore projects where the turnkey contractor is usually the supplier of the wind turbines which make up some 75% of the cost. With offshore projects, banks will be happier with the main construction contract going to a large company specialising in building structures at sea, he says. This type of contract structure can already be seen at the Barrow wind farm off north west England, to be built for Centrica and DONG by Kellogg Brown and Root, the engineering and construction subsidiary of the large Halliburton concern.


xxGarrad detects an element of brinkmanship in the reluctance of some of the major utilities to commit the large sums of money needed to build their projects. They are standing on the edge of the pool waiting for the first to spring. "I see these six large businesses deciding how to play the game. And they are all playing different games. A lot of them are thinking it will get cheaper, so when is the right time for them to dive in? Do they help to make it cheaper or do they sit back and wait for someone else to make it cheaper?"

xObtaining finance for good projects should not pose a problem for most developers, says Garrad. But the cheapest way to finance round one projects, he says, is to build them on balance sheet and refinance afterwards, an approach adopted by npower renewables in its Zephyr financing package. "But for the future, a substantial offshore build cannot be achieved just on balance sheet," he says. "There is not enough equity to do it. It will have to be project financed."

xRound one was always meant as a springboard to launch the UK offshore industry and reduce costs by increasing knowledge and creating volume in production. "If we don't get significant action in round one we are not going to get significant benefit for round two," says Garrad.

xxRound two

xxUnder the surface, round two developers appear to be pressing ahead with projects. The most advanced is the 1000 MW London Array in the outer Thames estuary in the south-east of the country, where up to 300 turbines are planned for 12 miles off the Kent and Essex coasts. According to Peter Crone of CORE Limited, one of the project's partners alongside E.ON and Shell, the consortium hopes to lodge an application for a permit late this month. When operational, the site could contribute 10% of the UK's renewables target, or 1% of total electricity. The project would cover 245 square kilometres of seabed on and between two sandbanks. Crone says that with the site's location in the busy approaches to the river Thames, the consortium realised early on that shipping and navigation could be a major issue. But sea traffic avoids the sandbanks, while the channel between the banks is not used very much, he maintains.

xLondon Array is planned to be installed in three or four phases which could allow each phase to be built on balance sheet, with following refinancing once it is operational, says Crone. The experience of Nysted in Denmark, which has operated to expectations, gives the industry confidence that banks will want to invest in operating offshore wind farms, he feels. Crone warns, however, that offshore developers will be cautious in their attempts to avoid costly mistakes after the industry's confidence was dented by the lesson of Horns Reef and the retrofit of all 80 of its Vestas 2 MW turbines last year. "Until then people were going at it in a fairly gung-ho manner," he says. "Whatever you do offshore you have to think about it far more carefully because the costs of getting it wrong are so much greater."

xReliability of offshore turbines is all important, adds Eddie O'Connor of developer and retailer Airtricity. More money needs to be channelled into research and development of offshore wind technology, he says. Construction of Airtricity's Arklow Banks wind farm of six GE turbines demonstrated the need for the industry to get to grips with issues of access and reliability. "Building Arklow Banks was as tough as it gets in terms of access," he says. "That problem has to be solved. People have got to find out how to get to turbines at sea to build and maintain them."

xxNew designs needed

xxGarrad points out that the turbines so far installed at sea are not what he would call true offshore turbines. "They are onshore turbines that have been marinised," he says. "Onshore we are able to achieve availability of 98%. Offshore we will need to get the same level of reliability by design." The industry now has the opportunity to design purpose built offshore machines that are not bound by the requirements to be visually acceptable, quiet and transportable along rural lanes. "In ten years time there could be a complete bifurcation between onshore and offshore turbines," he says. "There are completely different constraints in the two markets so the characteristics of the turbines will be completely different." Garrad says the new generation of offshore machines could be fast, downwind turbines with two blades that are easier to install. "Also, wind offshore is much smoother than onshore so turbines at sea have an easier time. You can capitalize on that."

xxBird and radar blocks

xxWhile Garrad's vision is a flavour of what may lie in the future, the industry today is struggling with more mundane issues standing in the way of offshore developments. With two years of bird study data required in UK waters, it will be some time before most round two projects are ready to submit planning applications. Birds are a major issue. The Royal Society for the Protection of Birds (RSPB) rattled the industry a year ago with its warning that virtually all round two sites are in areas of potential international importance.

xSince then good progress has been made in discussions between the RSPB and offshore developers and by government in identifying and funding research to deal with the society's concerns, reports the RSPB's Paul Jefferiss. But more could have been done, he says, to identify which areas should be designated as marine protected areas. "Without that it is difficult for anyone to know where development should or should not proceed." Work on defining the criteria for designating areas for protection and then making the designations is taking too long, he warns. This is in nobody's interest.

xConcerns from the Ministry of Defence (MOD) represent another issue for a number of round two developers. The MOD claims that virtually all the round two projects in the Greater Wash would affect air defence radar located at Trimingham in Norfolk and Staxton Wold in Yorkshire. But the MOD's worries are not, according to SLP Energy's Arnold, a major show stopper. SLP's Sheringham Shoal project off Norfolk, which it is developing in partnership with Ecoventures of the Netherlands, is one of the affected wind farms. Arnold says that government ministers from the Department of Trade and Industry (DTI) and MOD are working together to find a solution. "There is a lot of goodwill now between the industry and the MOD."

xJulian Chafer from Defence Estates says trials conducted last year confirm that wind turbines can prevent radar from detecting aircraft in the airspace immediately above a wind farm. "We appreciate that the Greater Wash is a strategic area for wind farm development and we are trying to find a way forward," he says. "With the DTI we have commissioned a study to identify the most appropriate method to resolve our concerns." Consultants Aleni-Marconi Systems are due to report in soon, he adds.

xxLearning from Henry Ford

xxEven if the issues of birds, MOD, shipping and navigation and grid can be surmounted, no one expects round two projects to go ahead without additional financial support from government. Offshore wind farms cannot be built on the strength solely of income under the Renewables Obligation, most developers insist.

xOne of the solutions being considered is socialisation of the offshore grid costs across all network users. O'Connor of Airtricity, which is developing a 500 MW wind farm at Greater Gabbard off Suffolk, favours this approach. He draws an analogy with the early days of the motor car. "Henry Ford quite rightly refused to contribute to building the roads. He judged that society should pay for them," he says. "It is quite appropriate that offshore grids should be paid for by the government. If you want a new technology you should not over-burden it with costs."

xThe DTI's consultation and review of the Renewables Obligation this year presents an opportunity to close the funding gap for the more expensive renewable energy technologies. The British Wind Energy Association says it is still considering its response to the review -- in particular, what form of additional support should be asked of government to boost offshore wind. Rumour has it, however, that DTI officials are unhappy that developers have still not used up the £97 million of capital grants for projects under the first offshore round. It remains to be seen whether the government will be willing to throw more money at offshore wind when its first spray of cheques is yet to be cashed.

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