For an industry that is currently going nowhere fast, offshore wind power put in a solidly professional performance at its first international conference and exhibition, held in Denmark in late October. An optimistic but distinctly pragmatic reality pervaded Copenhagen Offshore Wind (COW), tempered with a new humility suggesting the time had come to learn some of the lessons on offer from the industry's big brother, offshore oil and gas.
Development of wind power stations at sea is turning out to be more expensive, more problematic and more demanding of new technology than widely anticipated (Windpower Monthly, April 2005), but there was no attempt at COW to sweep these stark realities under the carpet. "Now is the time for a reality check. The initial hype is fading out. We have to innovate. We have to fine new solutions," said Bjarne Lundager Jensen, director of the Danish wind industry association, a co-host of the event.
Offshore wind power is way behind schedule (Windpower Monthly, October 2005). Less than 700 MW of truly offshore wind turbines are turning today, all of them in Europe. Just four short years ago, several thousand megawatt were projected for completion by now.
Many speakers during the three days of conference sessions talked frankly about their technical, practical and financial mistakes, with Vestas setting a new tone of openness from day one. In contrast to a year ago, when well documented and serious technology problems at the 160 MW Horns Rev wind station in the Danish North Sea were studiously ignored in the offshore session of the European Wind Energy Conference, discussion of them was frank and open in Copenhagen. Nobody was in a hurry to repeat the experience of taking 80 wind turbines back to shore for transformer and other repairs.
Live skeletons
As the Horns Rev turbine supplier, Vestas joined Horns Rev owner, utility Elsam, in opening the cupboard on a number of skeletons. A live video transmission from the blustery North Sea site, complete with photos of unexpected corrosion of the monopile foundations and other problems -- above and below the water level -- won cheers and applause from the audience. Destruction of the service boat access platforms on each tower by heavy seas is also cause for vexation. Vestas' CEO, Ditlev Engel, chose to refer to the problems as, "Experiences we like to see as investments for the future."
Engel challenged the industry to rise to its potential for mitigating carbon pollution. "You have to decide if you want to be reactive or proactive," he said. "Don't look at the waves. Look at the current." Offshore wind, said Engel, is a new way of thinking and requires a new state of mind -- not the transfer of existing ways of thinking. "There are many things we need to overcome together." He stressed the industry was as yet very young. "We have not been good enough at telling people how complex the technology is," he said.
From Shell WindEnergy, George Sgouros warned against underestimating project costs. "Don't be afraid to pay the price. It will pay dividends later on," Sgouros told delegates. The wind industry needs to learn from offshore oil and gas about contracting and allocating risk to those best able to handle it, he said, touching on a theme that was to be repeated time and again during COW.
Still more pragmatic advice came from Andreas Nauen, the CEO of the wind turbine division of Siemens Power Generation, which has taken over the Bonus brand. He advocated a steady stepwise approach to offshore development, rather than trying to do it all at once. Installing bigger turbines than ever built before, in deeper water than ever tried before, further offshore than anybody has yet dared to go was not advisable in one project, he said. But there was no doubting Siemens belief in going offshore. "One of the main reason for us to buy Bonus was our trust in the offshore industry," said Nauen.
Before it really hits the big time, however, offshore wind power has some major challenges to tackle -- starting with cost, said Torkil Bentzen from Danish utility Energi E2, part owner and main sponsor of the 165 MW Nysted wind farm in the Baltic Sea. "The cost of building offshore wind plant increased two times since we built Nysted," he said.
Transmission costs
One of the many factors driving up cost is paying for transmission lines to shore, a bill that Eddie O'Connor of project development company Airtricity of Ireland felt should be met by government rather than being part of project costs. "We know the costs of the wind for the next 50 years -- it's the great thing about wind energy, that the fuel is free forever. Our problem is the fixed costs, and one of the biggest problems is grid development. We have a risk management issue here, folks. Europe and the national governments need to find out how to build these grids. If we don't do this, we're going be importing all of our fuel from Siberia."
O'Connor's cry did not going unheeded. Behind the scenes, government policy makers from the UK, Germany, Netherlands and Denmark were closeted for hours during COW, hammering out a new policy document for submission to the EU, the Copenhagen Strategy (page 62), based on the Danish model of government sponsored offshore wind power -- with the cost of transmission rolled into the broad electricity rate base.
Spreading the risk
Contracting structures that worked on land will not work at sea, warned several speakers. The standard approach to developing wind stations as engineering, procure and construct (EPC) projects is not a viable way of distributing construction risk among project stakeholders offshore, they felt.
Vestas took the lead, saying it will no longer take the full burden of risk as turnkey supplier (EPC contractor). "In 2000 we accepted contracts on an EPC basis as we were used to doing that onshore," said the company's Erik Sejersen. "But we don't expect to do this anymore. Onshore, our scope as supplier covers 75% of the total investment. But offshore, we only cover 35-40% of the total investment," he said. Cabling and foundation costs are far higher offshore than on land. "From that standpoint, it's nonsensical that we should take these risks."
Instead, Sejersen said, the high risks involved in offshore projects require that everybody co-operate -- sponsors, suppliers, bankers, export credit agencies and the private insurance market -- and each shoulder the risk they understand best. "We must agree on the risks and who can best mitigate them," Sejersen said. "Risk sharing is a matter of creating a win-win situation. If we continue trying to pass the buck to the other parties involved, then everybody will lose business potential."
Energi E2 used a multi-contract structure, rather than an EPC approach, for its 165 MW Nysted development -- and it plans to use it for the newly acquired contract for development of the 200 MW Horns Rev II extension in the North Sea, according to the company's Kim Ernst. "Multi-contracting places risk with those who are able to handle it," Ernst said.
Challenge
The challenge with multi-contracting, according to Torben Andersen of Airtricity, is that although the risk is spread out among the contract holders, the project sponsor still carries an overall risk in securing all the interfaces among the different contractors to keep the project running smoothly. Multi-contracting requires significant experience, a skills base and financial strength. Plus, lenders have reservations about providing non-recourse or limited-recourse construction finance to offshore projects on a multi-contract approach, he said.
Turnkey contractors, on the other hand, place a heavy price on risk. "The real issue here is a single point of contact," Andersen said. "My company is not big enough to carry a multi-contract. An EPC contract takes all the subcontracts and wraps up all the risk. Then you price that risk so you can go and finance it. It's the preferred point for lenders."
For its 500 MW Greater Gabbard project in the North Sea off the east English coast, Airtricity is bringing in a 50/50 EPC equity partner, the American contracting giant Fluor. "Airtricity would lead development up to consent. And then Fluor would take over the lead, with us as active partner. We could follow every activity from the development side." An application to build the project was submitted to the British government in October (Windpower Monthly, November 2005).
No project finance
Lack of systematic risk assessment and distribution of risk is part of the reason for why sources of finance are not currently open to offshore wind, according to Vestas' Sejersen. Although project sponsors are financially strong, not a single offshore project has yet been financed on a non-recourse project finance basis, he said.
"Onshore, project financing works well," he said. "There's a legal framework and banks and investors feel secure. Offshore, the risks are much higher -- both in installation and operation. Bankers are reluctant to consider project finance for new technology. Plus, there is no good insurance coverage offshore yet," said Sejersen. "It definitely leaves something to be desired."
Furthermore, he added, bankers always look for adequate guarantees that projects will be executed on time and on budget. Lack of offshore project finance may limit the future growth potential for the offshore business, Sejersen warned. Projects cannot continue to be financed on the balance sheet of project sponsors.
Andersen agreed. "It's okay to balance sheet a 100 MW wind farm, but once you get to the 500 MW projects -- like we'll see in the round two projects, there's clearly a need for another solution," he said, referring to the second round of offshore permitting by the UK's Crown Estate, which has authority over permitting projects on the UK seabed.
Learning from big brother
According to several speakers at COW, the wind industry could learn much from the offshore oil and gas sector about how to financially structure huge energy projects. Andersen stressed that risk assessment and systematic risk management are the bread and butter of the oil and gas industry. "They've done this for so many years, they know exactly what the issues are," he said. "There is so much experience out there that could already have been drawn upon. Oil and gas have proper systems for quality assurance (QA), for example. The issues we saw on Horns Rev -- a lot of those were due to poor QA. That shouldn't have happened, but it did happen."
From Rambøll, a large Danish engineering consultancy with 30 years experience in the offshore oil and gas sector, Kai Olsen delivered a similar message. When he started in offshore wind, said Olsen, he told utilities and wind turbine manufacturers they should learn from the mistakes of the offshore oil and gas industry "They were very reluctant. They said oil and gas made gold-plated solutions for everything they did. This couldn't be more incorrect," he added. "If anybody is competitive, it is oil and gas."
Thomas Stalin from Swedish utility Vattenfall, which has major plans for offshore wind, confronted another representative from Rambøll, Henrik Carstens. "Costs are much higher designing and building an oil and gas structure versus one hundred pieces of the same," Stalin said, referring to offshore wind turbine foundations. "We must decrease the costs much more, but we are afraid your industry does not have much cost awareness."
Carstens replied: "All the oil companies I've worked for have been very cost-conscious. That said, they would rather spend money today than on maintenance for the next 25 years. But your optimal design will not use oil and gas standards, since the safety level is lower for wind turbines than manned oil platforms. You don't have the same risk of losing a life, or serious pollution in a major storm."
Fear of gold plate
Others sympathised with the wind industry's fear of gold plated solutions. Fugro Offshore Geotechnic, a Dutch offshore soil sample company, has been involved with several offshore wind projects in Denmark and the United Kingdom after a long history working with the energy industry. "Oil and gas companies say they want a soil sample NOW and the four days it takes us to sail up to north Norway is too long," said the company's Toon Markus. These companies frequently neglect planning for soil samples until it is very late in the application game -- and are then prepared to pay nearly anything to get them, he said. Wind, on the other hand, plans in detail for months and months. "And when they ask about the cost of a soil sample, they nearly fall over: that's too expensive!"
Peter Dalhoff of German certification agency Germanischer Lloyd said the wind industry would not be as easy to penetrate as the oil and gas sector clearly believes. "If oil and gas are going to come into the business, they really need to understand wind turbines," Dalhoff said. "If you look at strength and load analyses, for example, one needs to understand these in terms of wind and waves together -- not just each one by itself. The wind industry has worked on load combinations for years."
Bent Jørgensen, a semi-retired Elsam wind veteran, was adamant about keeping oil and gas out of wind's future. "Forget it," Jørgensen said. "There are no synergies. Okay, maybe in health and safety and maybe in installation, but otherwise? No way. There are people on oil and gas platforms all the time. But on an offshore wind turbine? Maybe a couple seagulls...."
What is an elephant?
A joke doing the rounds of the conference became symbolic of the undercurrent of suspicion with which the wind and offshore oil and gas industries clearly regard one another: "What is an elephant? A dog designed by the offshore industry." To wind people uncomfortable with the arrival of offshore oil and gas at the table, the joke was funny. But experienced offshore engineers were exasperated rather than amused at the wind industry's refusal to avail itself of their experience.
Whether offshore oil and gas gets the last laugh or not, there was no doubting its intentions in Copenhagen. Shell fielded 12 delegates, while names like Danish Oil and Natural Gas, the UK's Centrica and even Canada's Talisman have become synonymous with offshore wind project sponsorship. In Copenhagen the sector demonstrated it has the financial skills and financial muscle to help make offshore wind happen. What also became clear, however, is that without the unique knowledge of the wind industry, offshore oil and gas cannot diversify into offshore wind.
