26 January 2017

Johnny Gowdy and Kerry Hayes 

There was a very interesting press release which slipped out at the end of last year, announcing that DONG energy has sold 50% of the 573 MW Race Bank offshore wind farm to Macquarie.  The deal which involved both an equity sale and a financing package for the capex of the project was reported to be worth GBP 1.6 billion.

We don’t know what the precise profit was on the sale but the Financial Times reported that “The deal led Dong to increase its 2016 operating profit forecast to DKr24bn-DKr25bn ($3.4bn-$3.5bn) this year, up about 14 per cent from an earlier guidance range of DKr20bn-DKr23bn.”

So we can surmise that it was a good deal, especially when you consider that DONG acquired the then “troubled” Race Bank from Centrica in 2013 for a mere £50 million. At the time Race Bank had missed out on the early Contract for Difference (CfD) subsidy under the UK Government FIDER scheme. So although it had planning, it seems likely that Centrica, just did not have the appetite or balance sheet to support its offshore wind investments. With the benefit of hindsight this was probably a mistake.

Thinking back, and only a few years ago, the perceived wisdom was that offshore wind projects were difficult, high risk and invariably expensive. So there has been quite a turnaround in the offshore wind sector. Costs have plummeted and the sense now is that offshore wind is one of the less risky new energy technologies, and an extremely good investment if a company knows what it is doing and can get in early.

Image credit: DONG Energy

It is ironic really that so many of the Round 3 offshore wind leases were given to large utilities like Centrica and RWE, but if you look at the portfolio now it is dominated by the likes of DONG, an offshore specialist who received not a single Round 3 lease.

The bigger utilities also pulled out of the Atlantic Array in the Bristol Channel and the Celtic Array in the Irish Sea along with half a dozen or so other projects. These projects were also considered to be “troubled” either because of location, water depth or seabed conditions. Or they were just too much of a stretch at a time when investment was being cut to protect balance sheets across the utility sector.

It is understandable that, with the introduction of a fierce CfD auction process and a very successful cost cutting programme, those projects which were considered more difficult and therefore expensive would be at risk. The result however is that the UK, and indeed Europe, now has a very lopsided offshore wind portfolio with the bulk of its capacity, and the overwhelming majority of its new projects, concentrated in the shallow waters of the southern North Sea.

Cheaper to build and easier to maintain, this concentration of activity has enabled the sector to drive down costs, already exceeding the UK target to be less than £100MWh by 2020, and make offshore wind the most successful of the renewable technologies.

Image Credit: Regen Progress Report 2016

The flipside however is that, when we have high pressure weather systems centred over the southern North Sea bringing low winds, as anyone who has been looking at the wind generation statistics* last week will have noticed, the level of generation in the UK drops off significantly. To make matters worse our European cousins who have invested in the same area of sea have also seen their generation fall. A more balanced spread of offshore wind farms across the UK, and especially in the more consistently windier areas of the west, would greatly improve our energy supply.

So, given that under most credible scenarios to meet our 2030 and our 2050 decarbonisation targets, the UK will have to build out a minimum of 30GW of offshore wind and perhaps much more, it would now make a lot of sense to look again at potential sites on the western seaboard. Making these sites a success may involve new foundation technologies, such as floating wind, and new installation techniques. They may at the outset be more expensive. But the offshore wind sector must be encouraged to push into new frontiers and bring forward new innovation.  It certainly cannot rest on its laurels.

*See the excellent Europe CO2 Electricity Map Live

 Author: Johnny Gowdy and Kerry Hayes 

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