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United Kingdom

Key offshore issues still to be resolved

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A determined and enthusiastic offshore wind industry is still at the mercy of a British government which has yet to finish the job of structuring a market with enough long term stability to pull in the massive investment needed if the UK's goals for renewable energy are to be met. Delegates at a London conference last month went home knowing that much rests on the shoulders of a few key public sector employees and the relatively new energy minister

The UK will be the global powerhouse for offshore wind power development. That was the key message to come out of a conference in London last month on offshore wind power development. Gordon Edge, the British Wind Energy Association's new head of offshore wind, predicted that 20% to 30% of the total worldwide market for offshore wind plant will be in Britain. "The biggest coherent offshore program is the UK program," he said.

Nonetheless, key issues still to be resolved are getting projects financed and getting the power to customers over the national electricity grid, Edge added. During the two days of the conference, held March 3-4, delegates heard that conflicts with birds and defence radar also present potential barriers.

Prospects for the second, much larger round of offshore development to follow the first round, now underway, will depend on a satisfactory outcome from the government's review in 2005/6 of its Renewables Obligation legislation. A suitable legislative framework to make projects bankable is still missing, said Edge. Construction of round two projects could begin from 2007. Wind farms will be built over several seasons, with very large projects, such as National Wind Power's 1200 MW Triton Knoll project off the east coast, built over four years. The cost of installing an offshore wind power plant under round two is likely to be 85% of today's going rate -- and could be as low as 75% of round one levels, he said.

Rapid pace

Commenting on the rate of progress in the UK offshore market, Jake Ulrich from UK energy giant Centrica pointed out that last July his board approved the company's new strategy to be a major player in UK offshore wind. "Three years ago we would not have been interested," he said. The group now has a portfolio of over 1500 MW of offshore wind projects and expects to invest up to £750 million in the sector.

Ulrich said the government had set up a good long term framework for renewables. But he warned that major change to the Renewables Obligation as a result of the upcoming review is the last thing the industry needs. Centrica is committed to building its round one projects, whatever the regulatory framework, he said. "It's when we start talking about the larger round two offshore projects that regulatory uncertainty becomes an issue." New players need to be attracted to the sector, he said. "In our mind there is not enough infrastructure development or participation at this stage. When we look at the number of turbines required, the number of ships required, the amount of wiring that has to be fabricated, these numbers become fairly staggering if we are to get anywhere near the total Renewables Obligation over the next ten years."

Minister's desire

Energy minister Stephen Timms said that he wanted to see "UK plc" win a stake in the offshore wind industry. "We face stiff competition from overseas," he said. Project developers who are offering contracts need to give British companies the opportunity to bid for business and show what they are capable of. But nobody should be deceived into believing that entering the wind business is going to be easy, he said, pointing out that Cambrian Engineering, a maker of towers for wind turbines, is now in administration as a result of uncertainties in the market. "That is a blow for the whole sector. I don't want to see more UK companies going into administration," he said. "Other companies are taking the risks to enter the market as Cambrian did and it's time to see those risks being rewarded," he added.

The shift in sources of financing needed for round two projects was highlighted by Andrew Perkins from Ernst & Young. Consortia developing most round one sites are considering using corporate funds to finance their projects, he said. But round two projects will stretch the balance sheet capacities of utilities' and their desire to increase their liability for renewable energy. "Therefore we need to get new finance providers into the sector, new structures and innovative financing techniques," he said. To get finance from the capital markets, developers have to get rid of all the risks, he said. "You need an excellent offtake arrangement [for power purchase], probably no construction risk and operating risk that has been minimised."

Round two projects will need a longer revenue stream than is currently guaranteed under the Renewables Obligation (RO), said Perkins. The legislation requires electricity retailers to supply a proportion of their power from renewables. Under existing RO rules, the level of the obligation rises to up to 15% of electricity by 2015 and remains at 15% until 2027. To avoid a return to the boom and bust characteristics of the UK's previous support mechanism, the Non Fossil Fuel Obligation, he said, the industry should lobby the government for regular extensions to the RO -- or some equivalent long term incentive. He warned, however, that the energy minister is understood not to favour the idea of a "rolling obligation" that contains regular incremental increases. This is the way similar legislation in the US and elsewhere is structured.

Grid priority

With developers of round two offshore wind farms hoping to start construction from 2007, work on the grid infrastructure is a priority, Timms told the conference. "We'll be working very hard to make sure that the transmission grid will be built to match the timetable for the wind farms themselves. Our key concerns are that we deliver the offshore connections on time with the least environmental impact and at minimum cost to the consumer."

Work on the timetable is already well underway, said Richard Mellish from the government's Department of Trade and Industry (DTI). Legislation to establish an offshore grid infrastructure is contained in the government's Energy Bill currently progressing through parliament, with Royal Assent expected in July. This will allow the offshore infrastructure to be regulated in the same way as the onshore regime. Mellish envisages connections for several offshore wind farms via transmission hubs out at sea.

Energy market regulator, Ofgem, will issue tenders for the licences to construct and own the offshore grids. The wires and connections, however, will be operated by the Great Britain System Operator -- a role which the Secretary of State is "minded" to give to National Grid Company, explained Mellish. A number of wind plant developers, meanwhile, are pre-empting the offshore grid and are already progressing their own plans for connections, Mellish reported. Some of these are anxious that legislation and tenders to establish a regulatory regime for offshore connections should not hamper their own progress, he said.

The government's proposal for an offshore grid infrastructure is a paradigm shift in the country's approach to grid connections, said Guy Nicholson from Econnect. The low or even zero up front charges for connecting into it are potentially very good news for generators, he said. But there are still some issues to be resolved, which pose a challenge for Ofgem in particular. "We have got a step change for regulation which so far has dealt with only incremental change in existing networks; we haven't done anything as radically different as this before."

Nicholson, however, doubts that the infrastructure will take the form of an offshore grid. "What I think we're going to have instead is a more project specific approach to connections, with individual projects, one at a time connecting in to this new regulated asset infrastructure, as and when, with the most appropriate connection for that project." But he added that there is room for some interconnection between projects to give additional security of supply.

The voice of experience

"It's all about access, access, access," said GE Wind Energy's John Stephens when he recounted some of the lessons learned in building the Arklow Bank wind farm in the Irish Sea. Seven GE 3.6 MW turbines are now installed on a shallow sand bank 10 kilometres from the east coast of Ireland. Three are commissioned and under final testing; the remaining machines are 50% commissioned, he said. The turbines were built on GE's balance sheet as a build, own, operate and transfer (BOOT) project. "We wanted to do a demonstration of the turbines in a rugged offshore environment." When GE has completed its demonstration phase the project will be bought by Ireland's green power trader, Airtricity.

But Stephens admitted that GE underestimated the environmental health and safety risk associated with transferring the method of access that had been used in the calmer waters around the company's Swedish project to the harsher conditions in the Irish Sea. The company explains that using boats and ladders to access the wind turbines worked satisfactorily at Utgrunden off the coast of Sweden. But at Arklow, the tidal range, coupled with the shallowness and exposed nature of the bank means that access via boats is only possible at certain times. Moreover, under some conditions, the height of the waves is amplified by the bank.

A new system of access is now being tested by the company, which refuses to give details. "We are going to turn environmental health and safety into a competitive advantage," says Stephens.

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