Offshore wind: Not yet a mature asset class

Offshore wind is not yet a mature asset class despite huge levels of investor interest. That was the verdict of a panel of six experts in a session at the WindEurope summit in Hamburg on Wednesday.

While the sector has been making big strides towards maturity and investors have become more comfortable with the risks of building offshore, the industry still has some major challenges to overcome.

These include how to operate and maintain offshore wind farms through their life cycle; the effect of competitive auctions on cost-cutting; and other trends including interest rates and steel prices.

Nick Gardiner, managing director and head of offshore wind at the UK Green Investment Bank, said he would only call the sector mature when investors such as pension funds and sovereign wealth funds are happy to take development risk: “That would be a sign that it really is a mature sector,” he said.

And before that, the industry faces some big challenges.

Paul Bradley, chief financial officer at Northland Power, which is the majority owner of projects including the 600MW Gemini, said construction risks have fallen in the last three years but that some investors were not aware enough of the risks of running offshore wind farms for 20 years or more. Financially, this is a big threat.

“You can lose just as much money on your O&M as on your construction,” he said. This risk is compounded by the fast evolution of turbines, which means developers have to commit
now to using machines that will not be available for many years.

And Bradley said his biggest concern for the offshore industry was that developers were making overly-optimistic assumptions on continued low interest rates and steel prices. Any rises in these would put pressure on the margins of firms that are already being squeezed by the competitive auction process.

Michael van der Heijden, founder of Amsterdam Capital Partners, said the move to competitive auctions in countries including Germany and the Netherlands has had a significant impact too.

He said: “Competition has become brutal because of this new tender system that governments have introduced. I’m not saying that’s a bad thing. It’s just a fact.”

The competitive auction run by the Dutch government in the 700MW Borssele 1 and 2 tender helped it to secure a winning bid of €72.70/MWh from Danish utility Dong Energy. However, some panelists said they were concerned that moves to drive down the levelised cost of offshore wind power so aggressively could also force investors to cut corners on their developments.

Achim Berge Olsen, managing director at developer WPD, said there is a risk that reducing the cost of offshore power too quickly could encourage developers to cut corners, which de-rail the successes that the sector has already achieved.

Olsen argued that tender systems encourage short-term thinking by companies, whereas businesses that tended to do best were those that took more of a long-term view.

And Ranjan Moulik, global head of power at French bank Natixis, added that there was a risk of “bid fever” where, in the heat of a competitive bidding process, companies bet too aggressively on the potential for future cost reductions.

But despite these risks, the panelists were broadly optimistic that the sector was going in the right direction to becoming a mature asset class; and that it was only a matter of time before offshore wind takes off in Asia and North America.

Construction risks are now relatively low and it is one of the few renewable energy sources that operate at a utility-scale size. This is largely down to the past successes of those building offshore — who now have a host of other challenges to solve too.

Offshore wind is not yet a mature asset class despite huge levels of investor interest. That was the verdict of a panel of six experts in a session at the WindEurope summit in Hamburg on Wednesday.

While the sector has been making big strides towards maturity and investors have become more comfortable with the risks of building offshore, the industry still has some major challenges to overcome.

These include how to operate and maintain offshore wind farms through their life cycle; the effect of competitive auctions on cost-cutting; and other trends including interest rates and steel prices.

Nick Gardiner, managing director and head of offshore wind at the UK Green Investment Bank, said he would only call the sector mature when investors such as pension funds and sovereign wealth funds are happy to take development risk: “That would be a sign that it really is a mature sector,” he said.

And before that, the industry faces some big challenges.

Paul Bradley, chief financial officer at Northland Power, which is the majority owner of projects including the 600MW Gemini, said construction risks have fallen in the last three years but that some investors were not aware enough of the risks of running offshore wind farms for 20 years or more. Financially, this is a big threat.

“You can lose just as much money on your O&M as on your construction,” he said. This risk is compounded by the fast evolution of turbines, which means developers have to commit
now to using machines that will not be available for many years.

And Bradley said his biggest concern for the offshore industry was that developers were making overly-optimistic assumptions on continued low interest rates and steel prices. Any rises in these would put pressure on the margins of firms that are already being squeezed by the competitive auction process.

Michael van der Heijden, founder of Amsterdam Capital Partners, said the move to competitive auctions in countries including Germany and the Netherlands has had a significant impact too.

He said: “Competition has become brutal because of this new tender system that governments have introduced. I’m not saying that’s a bad thing. It’s just a fact.”

The competitive auction run by the Dutch government in the 700MW Borssele 1 and 2 tender helped it to secure a winning bid of €72.70/MWh from Danish utility Dong Energy. However, some panelists said they were concerned that moves to drive down the levelised cost of offshore wind power so aggressively could also force investors to cut corners on their developments.

Achim Berge Olsen, managing director at developer WPD, said there is a risk that reducing the cost of offshore power too quickly could encourage developers to cut corners, which de-rail the successes that the sector has already achieved.

Olsen argued that tender systems encourage short-term thinking by companies, whereas businesses that tended to do best were those that took more of a long-term view.

And Ranjan Moulik, global head of power at French bank Natixis, added that there was a risk of “bid fever” where, in the heat of a competitive bidding process, companies bet too aggressively on the potential for future cost reductions.

But despite these risks, the panelists were broadly optimistic that the sector was going in the right direction to becoming a mature asset class; and that it was only a matter of time before offshore wind takes off in Asia and North America.

Construction risks are now relatively low and it is one of the few renewable energy sources that operate at a utility-scale size. This is largely down to the past successes of those building offshore — who now have a host of other challenges to solve too.

Offshore wind is not yet a mature asset class despite huge levels of investor interest. That was the verdict of a panel of six experts in a session at the WindEurope summit in Hamburg on Wednesday.

While the sector has been making big strides towards maturity and investors have become more comfortable with the risks of building offshore, the industry still has some major challenges to overcome.

These include how to operate and maintain offshore wind farms through their life cycle; the effect of competitive auctions on cost-cutting; and other trends including interest rates and steel prices.

Nick Gardiner, managing director and head of offshore wind at the UK Green Investment Bank, said he would only call the sector mature when investors such as pension funds and sovereign wealth funds are happy to take development risk: “That would be a sign that it really is a mature sector,” he said.

And before that, the industry faces some big challenges.

Paul Bradley, chief financial officer at Northland Power, which is the majority owner of projects including the 600MW Gemini, said construction risks have fallen in the last three years but that some investors were not aware enough of the risks of running offshore wind farms for 20 years or more. Financially, this is a big threat.

“You can lose just as much money on your O&M as on your construction,” he said. This risk is compounded by the fast evolution of turbines, which means developers have to commit
now to using machines that will not be available for many years.

And Bradley said his biggest concern for the offshore industry was that developers were making overly-optimistic assumptions on continued low interest rates and steel prices. Any rises in these would put pressure on the margins of firms that are already being squeezed by the competitive auction process.

Michael van der Heijden, founder of Amsterdam Capital Partners, said the move to competitive auctions in countries including Germany and the Netherlands has had a significant impact too.

He said: “Competition has become brutal because of this new tender system that governments have introduced. I’m not saying that’s a bad thing. It’s just a fact.”

The competitive auction run by the Dutch government in the 700MW Borssele 1 and 2 tender helped it to secure a winning bid of €72.70/MWh from Danish utility Dong Energy. However, some panelists said they were concerned that moves to drive down the levelised cost of offshore wind power so aggressively could also force investors to cut corners on their developments.

Achim Berge Olsen, managing director at developer WPD, said there is a risk that reducing the cost of offshore power too quickly could encourage developers to cut corners, which de-rail the successes that the sector has already achieved.

Olsen argued that tender systems encourage short-term thinking by companies, whereas businesses that tended to do best were those that took more of a long-term view.

And Ranjan Moulik, global head of power at French bank Natixis, added that there was a risk of “bid fever” where, in the heat of a competitive bidding process, companies bet too aggressively on the potential for future cost reductions.

But despite these risks, the panelists were broadly optimistic that the sector was going in the right direction to becoming a mature asset class; and that it was only a matter of time before offshore wind takes off in Asia and North America.

Construction risks are now relatively low and it is one of the few renewable energy sources that operate at a utility-scale size. This is largely down to the past successes of those building offshore — who now have a host of other challenges to solve too.