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Blades running?

17 September 12

David Cruickshank and Richard Cockburn of Maclay Murray & Spens explain the regulatory and other challenges currently facing the offshore wind sector

by Peter Nicholson

The clock is ticking towards the 2020 deadline that marks the first major Government targets for renewable energy. By then, Westminster wants the nation to achieve 15% of its energy consumption from renewable sources; Holyrood ministers want 100% of Scottish electricity demand to be met in this way. Over such a timescale, offshore wind farms must have a significant role to play. But is the industry being given a sufficiently clear message from Government as to its energy strategy?

David Cruickshank, head of renewables at Maclay Murray & Spens LLP, and his energy partner colleague Richard Cockburn, believe the potential is there, but that if the industry is to deliver on the target, a better focus is needed from those making the rules.

Take finance. In the absence of the long-term debt funding which has traditionally underpinned UK infrastructure projects, developers in the offshore wind sector continue to build out projects on a phased basis from their own balance sheets, looking to refinance once operational. The question is whether this model can deliver projects at a sufficient pace to achieve the 2020 targets.

One of the UK Government’s key initiatives to unlocking financing will be the Green Investment Bank (GIB). With its ambitions to leverage billions in private investment, Cruickshank believes the GIB could make a “massive contribution” to the financing of offshore wind projects, particularly if other commercial banks become more willing to take on some construction risk. A breakthrough in this respect was the announcement in June that a group of 10 banks had signed a £450 million agreement for the construction of the Lincs offshore wind farm.

But will the GIB be fully functioning quickly enough? Though it plans to launch later this year with £3 billion of capital, Cockburn notes that it will not be able to borrow money until 2014 or 2015, “and that is going to delay any benefits for the offshore market as a whole”. He points to a House of Commons Energy and Climate Change Committee report, published in July, which found that taking offshore and onshore wind together, only one third of the annual investment currently required to meet the Government’s targets is currently being ploughed in.

Price v cost

Another deterrent to investors, Cockburn continues, is price unpredictability once electricity is finally being produced. To meet this problem, a feed-in tariff with a “contract for difference” will be introduced as one of the core pillars of the pending electricity market reform (“EMR”). This sets a benchmark price for a period of years, with top-up payments to the generator if the market price falls lower, or repayments by the generator if market rate rises above the benchmark.

Who will handle the payments constituting the “difference”? The UK Government has been getting cold feet; but the industry is nervous about a private company with a riskier credit rating performing that role. A solution being considered at the moment is that the supply industry, via an intermediary body, funds any top-up payments. “But that is under debate at present, and it needs to be resolved to the satisfaction particularly of the generators before we start to see new investors coming in”, Cockburn comments.

Much could also turn on actual development costs for offshore wind. Successive studies indicate that, measured by kilowatt hour of output, these have more than doubled since 2004, due to increasing size of projects and of individual turbines, along with sites moving further offshore and facing more extreme conditions.

Various measures are in play here. For Scotland, the National Renewables Infrastructure Plan aims to have clusters of areas where the offshore sector will focus, allowing concentration of supply chains. Developers also regard it as beneficial to have the European Offshore Wind Deployment Centre test area in Aberdeen Bay, which would allow them to trial a turbine, or some cables, or a substation out in the sea in a relatively benign location.

Evolving picture

Will the sector become commercially viable, operating in the harsh conditions of the North Sea? Cockburn is sure it will. Although heavily dependent at present on Government subsidy, he says, “many draw strong parallels with the oil and gas industry where in the early 70s people were saying, it’s nice to have but it’s going to be extremely expensive. But over the years oil and gas has managed to bring down costs, and I have no doubt that offshore wind will go through the same evolution. There may even come a time when it reaches the ultimate goal of no subsidies at all, but that’s some way off”.

Until then, the industry needs some assurance of price stability, especially in the run-up to 2017 when the new contracts for difference and feed-in tariff regime kicks in, replacing the renewables obligation certificates (“ROCs”) that generators can currently claim. Over that period there is some planned reduction in the level of ROCs to be earned from offshore wind – not sufficient, Cruickshank believes, to deter investors, though anyone who can come into the supply chain with an innovative cost-saving idea will be welcomed with open arms.

Some say the Government should go further, and rather than leave each project to lay its own cable directly to the shore, co-ordinate the planning of transmission links from generating installations to the National Grid – private investors being reluctant to pay up front for such integration. As yet that is not in early prospect.

More unsettling for the industry are reports of tensions within the coalition, with the Treasury pressing the Liberal Democrat-run Department of Energy and Climate Change to refocus on gas.

“There is a genuine concern from the renewable energy sector that if that actually happens there will be a real weakening of the Government focus on renewable energy,” Cruickshank warns.

While the Scottish Government has its own, more ambitious renewables targets, Cockburn says it is the UK picture that remains the most important, given that DECC sets the overarching energy policy and that the greatest demand is in south-east England, even if natural resources are concentrated in or off Scotland. That imbalance creates another source of difficulty, as Grid charges mean that generators here are said to, in effect, subsidise those closer to the main population centres.

Not to be ignored either are increasing environmental concerns, which while mostly directed at the visual impact of onshore wind farms, are also giving rise to campaigns against some offshore developments – not only near a certain Aberdeenshire golf course. Just pushing them further offshore adds to costs, without resolving the question of effects on marine habitats among other issues – all of which, Cruickshank asserts, the industry is fully aware of and is doing its best to tackle.

With the marine renewables sector still in an embryonic stage, it is clear that the achievement of the UK’s 2020 targets will depend substantially on offshore wind. To facilitate the build out of the huge Round 3 and Scottish Territorial Waters projects there must be a focus on optimising contract structures, increased collaboration between projects, a de-risking of technology, and greater clarity on EMR reform and the role of the GIB. The first Round 3 planning application, for three projects in the Moray Firth with a 1.5GW capacity, has just been lodged. Despite the challenges, the industry continues to move in the right direction. With the UK the global leader in offshore wind, other countries looking at developing their own capability should also be watching closely, with a view to learning from the UK experience.

 

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