Gone with the wind?
Offshore wind energy has become a focal part of the EU’s legally binding commitment to decarbonise its economy by 2020. In recent years, it has enjoyed strong growth on the back of government incentives and regulatory frameworks. However, the deployment of offshore wind farms in the North Sea is slowing down. Not due to a lack of interest from developers or investors, but to rising regulatory risks and uncertainty emerging in individual countries.
Offshore wind energy has become a focal part of the European Union’s legally binding commitment to decarbonise its economy by 2020. In recent years, it has enjoyed strong growth on the back of government incentives and regulatory frameworks designed to increase its competitiveness and encourage investment. In 2011 and 2012, installed capacity in offshore wind power expanded by 10.5 percent and 11.4 percent respectively, according to the European Wind Energy Association. The industry seemed to be on its way to deliver around 40GW in installed capacity by 2020, which is relatively close to its stated goal of 43GW.
Deployment of offshore wind on the North Sea slowing down due to regulatory risks that need to be addressed
The great expectation for wind power in the North Sea is that it will eventually be deployed at a large enough scale and a low enough price to compete against fossil fuel-based energy. The North Sea has the potential to achieve this because it is an ideal environment for multi-megawatt wind turbines and large scale developments that offer better efficiencies, which are impossible to replicate on land. Today’s offshore wind technology can be deployed further from the shore and in deeper waters where there is stronger and more reliable wind. Industry manufacturers have also developed lighter blades and rotors that last longer and increase energy production.
Offshore wind is a long term business with large-scale financing requirements that has piqued the interest of a wide range of investors globally. A growing number of them have become more comfortable with the construction, operation and maintenance risks that are involved. They include utilities, technology manufacturers, engineering and construction companies, oil & gas companies, pension funds, private equity players, commercial banks, development banks, and export credit agencies.
Multiple companies typically invest together, with one lead sponsor. These parties often have different risk appetites, and usually undertake extensive research before committing any funds. So wide is the range of project risks associated with offshore wind that lenders invariably look for clarity in the regulatory environment and experienced sponsors to partner with.
ING first recognised the potential for offshore wind power projects in 2010 and has actively sought to increase its activity in the sector. In July 2011 it signed its first offshore wind project financing with a participation in the € 1,047 million financing for the 400MW Global Tech I project in German waters. In 2012, it acted as lead arranger on the 216MW Northwind offshore wind farm in the Belgian North Sea, 37km offshore Oostende on the Lodewijkbank. More recently, in 2013, it joined a syndicate of investors to assemble € 1.3bn for the 288 MW Butendiek wind farm in North Sea for German developers WPD. When complete, the farm will provide green energy to approximately 370,000 households – a major contribution to the nation’s transition to renewables.
A good start
The main proponents of North Sea wind in recent years have been Belgium, Denmark, Germany, and the UK. These countries have provided legal and regulatory structures aimed at reducing the financial risks for developers and investors. Each member state determines its own milestones and targets for reaching the legally binding 2020 targets as part of their National Renewable Energy Action Plans (NREAPs) and as a result, their progress has varied considerably.
Denmark and Sweden were the earliest adopters of offshore technology in the North Sea over a decade ago, but the regulatory frameworks offered by other countries has seen the industry grow rapidly elsewhere. For example, the UK implemented its successful Renewable Obligation Certificate (ROC) programme that provides incentives for renewable investments, while Germany used a feed-in tariff system to guarantee the financial feasibility of its own projects, allocating responsibility for the grid connection to grid operators.
By 2013, an estimated 6GW of offshore wind had been deployed in Europe, representing an investment of between € 17bn and € 24bn, and more than 90 percent of all installed offshore wind capacity globally. While 4.5GW in offshore wind projects were in construction by mid 2013, an additional 18.4GW in projects had been consented but were being delayed by developers. There is now every indication that the industry is heading for a slowdown. Not only is progress against the 2020 targets beginning to lag significantly, it is expected to fall further behind in the foreseeable future. The EWEA estimates that Europe’s offshore wind industry will require an additional € 90bn - € 123bn in investments to meet its 2020 goals, which under present conditions seems unlikely. Even if those projects approved to date were to move forward, the total deployment of European offshore wind power would reach just 28GW, which is in line with the 2018 targets set by the various NREAPs, but falls well below the overall 43GW target for 2020.
What’s the hold up?
What is stifling the continued growth of North Sea wind is not a lack of interest from developers or investors, but high levels of regulatory risk and uncertainty emerging in individual countries. The national frameworks that have successfully driven the development of the industry since 2009 are either undergoing revision or are being brought into question.
In the UK, the EU’s leading proponent of offshore wind, the RoC system is being replaced by a contracts-for-difference system of which the exact workings are still unclear and creating uncertainty. Sponsors are adopting a wait-and-see approach and delaying projects until they have a better understanding of how the new mechanisms will work in practice from 2014 onwards. Industry players estimate that the slowdown in UK deployment during this transitional period could last well into 2017, and may affect whether the UK meets its targets.
In Germany, which decided in 2011 to phase out its nuclear energy capacity and replace it with offshore wind and solar power, implementation delays are being caused by uncertainties surrounding offshore grid connections. The risk for developers was addressed by a December 2012 amendment to the Renewable Energy Law that entitles them to receive 90 percent of the Feed-in Tariff if the offshore grid connection is provided later than promised. Nevertheless, supply chain issues continue to cause delays in completing the offshore grid connections and grid operators have been asked to provide a new planning. More recently, in the run-up to the 2013 German elections, some politicians put the long trusted Feed-in Tariff system up for discussion, which caused further uncertainty. Although the new German government has sought to provide necessary clarity, developments were put on hold for much of 2013 pending the elections and the formation of a new government.
In the Benelux region, the Netherlands had successfully realised two offshore wind farms based on the previous MEP subsidy regime of fixed prices per kWh on top of grey electricity prices. In 2008, the MEP subsidy regime was deemed too expensive, and was replaced by the current SDE system, which provides projects with a capped top up on grey electricity prices for a 15 year tenor. The total available SDE subsidy for offshore wind was tendered and awarded to the 600MW Gemini offshore wind project and to Eneco’s 129MW Luchterduinen project, which are currently under construction. The 2013 Energy Agreement for Sustainable Growth provides clear intent for the further implementation of offshore wind (4.5GW additional installed capacity by 2023) but there are questions as to whether the indicated SDE levels are feasible and overall subsidy funds made available are sufficient to achieve the targets set.
Belgium, which has so far successfully realised three offshore wind farms (two operating and one under construction) has five more projects which have been awarded concessions. However, the development of these concessions slowed down in 2013 due to a lack of clarity over changes to the subsidy regime, and pending decisions on grid connections. Clarity on the new subsidy regime tariff level was finally provided in January 2014, although the grid-related issues remain to be solved.
France meanwhile, has initiated plans to build 6GW in offshore wind power generation capacity by 2020. The process is conducted by means of auctions to obtain the right to exploit sites and is supported through an 20-year PPA with EDF at the price proposed by the bidders. The nation has arrived relatively late to offshore wind, mainly due to difficulties in selecting suitable sites given the more challenging geological conditions in the French seabed. Round 1 tenders (four sites, total ~2GW) were awarded in 2012 to two consortia led by EDF/Dong and Iberdrola. The winning bidders are currently performing the feasibility studies and going through the permitting process. These parks are expected to come online around 2018. A Round 2 tender (two sites with a combined 1GW) was launched in 2013 and EDPR/GDF and EDF/Dong presented bids to both sites. A preferred bidder is expected in April this year but the projects are not expected to come online before 2021
Adding to these localised disruptions, there have been lingering doubts as to what the EU’s commitment level to offshore wind will be after the 2020 target date has passed. The combination of these factors has significantly increased the perceived risks in what is still a very long term investment for developers and investors. The former point was finally addressed in January this year, when the European Parliament reaffirmed its support for an ambitious climate and energy policy and committed to binding targets for renewables, greenhouse gas reductions and energy efficiency by 2030.
Finding a way forward
The 2030 renewable energy targets at a European level are a move in the right direction, but one that must be met by the right response from the various North Sea member states. They now have the freedom to find the best way to meet these targets, particularly those that are lagging severely behind. Until then, delays will continue to plague the industry, or may even intensify. Although it is almost certainly too late to meet the 2020 ambitions, the North Sea is ready make its important contribution to Europe’s renewables pledge. What is required now is a step change from each of the North Sea members states that will help Europe deliver on its promise.