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Lessons learnt from UK offshore wind for global deployment

  • United Kingdom
  • ESG

26-09-2022

As the dust has now settled on the results of the UK’s 4th CfD Allocation round in July 2022, which included awards for 7GW of offshore wind, it feels like the right moment to take stock and look outwards beyond the territorial waters of the UK.

In the last decade actively advising on UK offshore wind projects what lessons have we observed as a law firm and what lessons have been learnt? How can we take those abroad as other countries look to launch or develop their nascent offshore wind industries?

There are obvious benefits in the greater global deployment of offshore wind for our clients accompanied with societal benefits such as energy security and a pivot towards clean energy.  The following brief points may not chime with every reader, and some may be considered obvious, so they can perhaps be most appropriately viewed as 15 starting points for discussion.

New jurisdictions need to actively support offshore wind in order for the industry to develop: Whilst headlines have been made in the UK around the premiums being required to be paid to participate in offshore wind leases this has not always been the case. Premiums on this scale were certainly not the norm for the first movers and in the UK the regulator pointedly protected the promotion of offshore wind in a “pot” of its own, insulating it from competition from other more well established technologies for a number of years. Support and nurturing at the outset may help build a sustainable industry which can then stand unsupported in the near future.

The competition for resources is now global: Host countries need to be cognisant of the fact that they are operating in a competitive world. Under the current capital and supply constraints only a finite amount of resource is available to develop, resource, supply and maintain offshore wind farms. If the market is not sufficiently attractive in one jurisdiction, that resource will soon be deployed elsewhere.

Are high lease premiums a good idea? If you are looking to establish an offshore industry don’t necessarily treat it like a cash cow or start awarding leases defined by their associated financial mill stones. We have noted the global competition for resource and charging a large up front premium in licensing rounds is not necessarily the way to ensure investment from either established or up and coming renewable developers.   A large upfront cost is unattractive to all renewable developers, but may tip the balance in favour of international energy companies with bank accounts buoyed by oil and gas revenues rather than a record of efficient electricity production.  The inevitable end result in either case seems to be a higher levelized cost of energy for consumers.

Regulatory support is necessary, but subsidy is not always a necessity: Well thought out support is required which opens the door for project finance.  And no, the UK’s CfD in its current form is not a subsidy.  Support can also take the form of a flexible approach, such as the Offshore Network Transmission Review in the UK – granting pathfinder status to projects which do not necessarily fit within the traditional ring fenced project finance model with an autonomous radial connection and independent sub-station.

Offshore wind needs to scale up to bring costs down: With an established local industry, larger turbines and larger projects, come lower electricity costs. Ten years ago I can recall having meetings as part of the Offshore Wind Cost Reduction Task Force with the stated challenge of bringing the cost of electricity generated from offshore wind down to £100MWH in the next 8 years.  When we look at the strike price for CfD prices in the UK in July this year of £37.35MWH (coincidentally being based at 2012 prices) we can see how far the industry has come, cost savings largely coming due to the move to scale.

Offshore is only half the story: An offshore wind farm, unless supplying a captive offshore facility such as a hydrogen station or oil platform, at some point needs to connect to the consumers via the onshore grid. If there is insufficient onshore grid capacity or connection, or local opposition to the same, then the offshore wind farm will not be viable. Winning the hearts and minds of local communities is key.  If projects can collaborate and share onshore connections and cables this reduces onshore disruption.  

Floating is the future: The UK’s recent CfD allocation including the award of the first floating offshore wind with a CfD.  Based purely on the constraints of geography and geology it seems clear that in the medium term floating will overtake fixed bottom – the Norwegian licensing round being a case in point.  The future is now:  an unsubsidized floating offshore wind farm at Trøllwind is being developed off the coast of Norway. The UK’s INTOG initiative involves the delivery of electricity from floating offshore wind to offshore oil installations in the Scottish North Sea.  All very interesting but perhaps a bit small you might say.  However the size of the prize is 4GW with no upfront premium payable.  To put things into perspective this is approximately the same capacity as the aggregate of Norway’s announced plans for licensing offshore wind in 2022.

Learn from our friends in oil and gas: The oil and gas industry has a lot to bring to the table – offshore skills, contracting models, resource and financial clout.  From a purely legal efficiency perspective if the joint venture agreements for wind deployment can reach the same level of standardization, as the joint operating agreements used to govern upstream E&P activities in oil and gas, this is likely to result in significant cost and time savings.  However, there are also limits – the degree of operator discretion and no-gain no-loss approach usual in the oil and gas business has not made its way into the offshore wind space.

 

Get a complete team of legal advisors: Work with a legal team with expertise in all of the right areas: regulatory, real estate (offshore), real estate (onshore), planning, PPA, procurement, construction and finance.  As the corporate lawyer I am constantly reminded (usually by some or all or the above specialists) that I possess the least, rather than most, important skill set.  

Give the developers control: Part of the success in the UK context doubtlessly lie in the fact that the developers were crucially given the option to take control and develop the required offshore and onshore transmission cables and connections rather than being reliant on an arguably less reliable third party.  To date every offshore developer in the UK has taken up this option, known as the “generator build model” subsequently transferring ownership to an OFTO on/around commissioning.  A regime which leaves developers dependent on a third party over which it has limited or no control is unattractive, unless confidence can be given in a timely and efficient delivery.

Realism on local supply chain requirements: States understandably want the presence of an offshore wind farm to bring a range of advantages, both to local infrastructure and the local supply chain.  However, realism is required.  The ambition of a state looking to kick start its first offshore wind programme should be to first attract the first offshore wind farms in the expectation that it then leads to the development of a local supply chain.  Taking the alternative approach of requiring a developer to establish a local industry in the expectation that it will inevitably lead to the development of a wind farm will see capital deployed elsewhere.  Similarly, a requirement to use the local supply chain where one doesn’t exist is a non-starter.

Community benefits: The rate of investment return and payback on an offshore wind farm is not comparable to a large offshore upstream oil or gas operation.  A host country’s requirement that a developer funds a community centre, school or hospital is not a footnote in the financial model for an offshore wind farm in the same way as it would be for the oil and gas operation.

The importance of supply chain: It is impossible to construct offshore wind at scale without a supply chain.  Do not squeeze the supply chain too hard – it is needed as a long term partner and ideally with more than one supplier being available to ensure healthy competition. Supply chain risks such as inflation and bottlenecks (installation vessels, cables, fabrication) need to be identified early.

Partner for success: In order to spread the economic risk of a planned project partnering with like-minded investment partners is crucial, particularly in the development stage. An operator led model does not necessarily sit easily with a utility model. Too many members in a consortium generally makes for slower progress: both in agreeing documents at the outset and in longer decision making during the time sensitive development phase.

Repeat business is good business: No doubt an unhelpful final point in how to establish a new industry, but worthy of being highlighted to demonstrate the challenge for new entrants.  It’s generally easier to do repeat business in a jurisdiction with already installed capacity than it is to be the first mover in a new jurisdiction.  The UK, Northern Europe (Germany, Netherlands, Denmark and Belgium), China and Southeast Asia remain the countries with the most installed offshore wind capacity. They are also the countries where we see the most near term potential. As a case in point there are opportunities to participate in auctions in Europe, USA and Asia totalling over 100GW of offshore wind in the next three years.

About the author: Jason Lovell has been a partner in the corporate energy team at Eversheds Sutherland for over 10 years and during that time has advised on the development of the world’s largest offshore wind farm at Doggerbank; the co-development of the Scira and Dudgeon extension projects; advised on the acquisition of ownership of the Europe’s largest onshore wind farm at Markbygden in Sweden and the acquisition and divestiture of ownership of Europe’s largest unsubsidized wind farm at Piiparinmäki in Finland.

Jason is a Legal 500 Recommended lawyer, with a listed in Who’s Who Legal and recognised in the Legal Power list in Global Wind 2022. He has spoken internationally on the development of offshore wind projects.