EE#9 The (Offshore) Winds of change

The UK can help the offshore wind industry in its time of crisis

Last week was the Global Offshore Wind Industry Awards, fittingly held in London where the wind industry has traditionally had the most to celebrate. As Grant Shapps liked to point out, the UK is home to the 1st, 2nd, 3rd and 4th biggest windfarms, and 2nd only to China in installed capacity. The UK, almost single-handedly, drove down the cost of offshore wind by 70 per cent since 2015 through its Contracts for Difference (CfD) scheme. But will have undoubtedly heard many times from both left and right already about the UK’s world-leading offshore wind industry. 

This year though, the awards I presume were more sombre (though honestly, I don’t really know what industry awards dinners are). The latest CfD round passed without a single new offshore wind project. Major schemes both in the UK, like Vattenfall’s 1.8GW Norfolk Boreas are paused, and along the US East Coast schemes are being abandoned. Installation rates globally are slowing. 

Meanwhile, a critique from both government and Labour is gaining more prominence. The UK has failed to see the material gains from its success, with tiny proportions of manufacturing and jobs based here. Through government’s review of non-price factors and Labour’s British Jobs Bonus, both are looking to increase domestic production at a time when production is slowing. 

This week - what is the state of the industry that UK politics wants to reshore? Might we have reached peak wind just as the UK gets interested?

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Source: UK Government

While the UK didn’t receive a jobs bonus from offshore wind, that shouldn’t take away from the remarkable success of CfDs. This was a policy honed to reduce costs - and it did exactly that. The problem however is it was doing that in an economically benign environment - the vast majority of current renewable generation, with their high upfront capital costs, were financed in a low- or zero-interest world. 

Of course, now inflation and interest rates are at 15-year highs. Developers are saying offshore wind costs are up 40%. Prices for raw materials like steel surged post-Covid, and though many have fallen again, we’re now seeing these pass through to the cost of current projects. Wind also continues to face delays from consenting, particularly for where electricity lands onshore, and the usual British issues with grid connections etc.

CfD is supposed to be adaptable, auction prices can go up as well as down. Industry spent the summer warning government that the strike price would need to rise to reflect higher costs. The strike price didn’t rise and surprise, there was no offshore wind in AR5. However, you have to feel for government, it would take a lot of explaining to the press - that no a higher strike price does not mean higher energy bills and no renewables aren’t to blame for the price of gas. They decided to take the hit from industry and climate advocates instead. 

More interesting for me though are the problems inside the industry itself. I would recommend the excellent podcast Redefining Energy, where Offshore Wind Engineer, Rosemary Barnes gets into turbine engineering. 

In short, innovation and business interests have trumped engineers when it has come to development. Turbines and their blades have got bigger and bigger pushing generation capacity up and up. But now it seems we are reaching an innovation bottleneck. Defects and warranty claims are increasing. When blades are small they were made with pure steel, but as they grow they’ve been blended with carbon fibre to keep them flexible. However, that has created challenges over purity. Meanwhile, every time blades get bigger, port facilities and ships to take them to installation sites need to get bigger too. We don’t have enough boats! That means more investment along the supply chain, and higher costs for them too.

We’re going to need a bigger boat - I love this image from the FT. 

All this has meant that the major global offshore wind players have seen their share prices fall. Some problems like Siemens Energy, are particular to that firm, but it’s hard to find a company that has had a good six months. 

Investors might look at this and think that we have hit peak wind. The years of ever-falling prices and ever-growing installation rates have come to an end and potential returns are lower. But if you’ve paid attention to any energy market projections, we’ve always known that it is onshore wind and solar that are and will be the cheapest forms of energy. Offshore wind though is vital where either land or sun (or both) are constrained. The UK is incredibly windy and not very sunny, and as you may have noticed, has made it very hard to build turbines on land. This is why the government has a 50GW target for offshore by 2030 (Labour’s is 60GW).

With 78GW (ish) of offshore wind in the pipeline it’s clear we’re going to need to support the industry to deliver, and may as well use that support to realise gains that politics is agitating for. Enter Industrial Strategy. 

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Contrary to belief on the right industrial policy is not just about blank cheques to existing industry players. It’s about easing specific barriers that an industry faces to allow it to grow, whilst expecting additional efforts towards a social, environmental or other non-business goal in return (e.g., job creation or emissions reductions).

The current Offshore Wind Sector deal tries to do some of this. Increases to the frequency of CfDs, export support, R&D support and ports investment all came in return for a series of voluntary targets from industry on UK content, gender diversity and supply chain reform. Given how much has changed since this was launched in 209, something new is needed. 

If the fundamental problem is cost, then clearly this raises the question of subsidy. Raising the CfD strike price will help with this, even if it goes up the cost of offshore is still far less than the current cost of electricity. As the Offshore Wind Champion, Tim Pick, recommended this may need offshore wind to be in a separate pot, or to change the structure of the CfD scheme. 

But policymakers need to ask what problem subsidies are fixing. If it is simply to reduce costs then this is probably sufficient. However, with global competition increasing and private capital potentially starting to slow my view is you are subsidising to ensure that projects come to the UK at all, let alone deliver at an affordable price. The UK market is much less competitive than it was in the 2010s, easing decisions to build here for example through state-backed loans or guarantees could help. 

As for engineering issues, I’d launch a UK government-backed industry challenge - £500m or more for the longest, purest UK-manufactured blade that can be produced by 2027. Bonus points if each of the three blades are red, white and blue. 

There is a long list of other things industry needs and wants, most of which are in Tim Pick’s review. These will be of no surprise to anyone working on UK energy and economic policy and include: a clearer long-term policy framework, spatial planning of infrastructure (offshore and onshore), accelerated environmental assessments, grid connection reform and more grid building. Regulatory clarity will mean constraining some operators so that plans are cohesive and deliverable, but the certainty is more than enough of a reward.

Most importantly we need to do more for the supply chain that we wanted located here, and invest both in port infrastructure and manufacturing capacity. This will be particularly acute not just for existing technologies but for the UK to establish any headstart in floating offshore wind (FLOW) (something for a future post). This is where some of the biggest export opportunities are, and why it makes sense to build in the UK. Much of the South China Sea bed for example is too shallow for fixed offshore, but when I asked a Japanese Diplomat about the UK’s role in this recently his reply (paraphrased) I think the UK might take too long, and in the end, Japan will decide to do it [build and export FLOW] instead.

Given the litany of things required from government to help this industry I think we are beyond receiving voluntary commitments in return. Like Biden in the US, we should explore eligibility criteria to public spending like CfDs.

The challenge for the UK is both that development is already risky, there is significant upfront cost before the CfD stage (which isn’t a guarantee). And of course, shifting supply chains could also affect costs. HM Treasury has traditionally preferred the lowest cost, regardless of production location, that perspective will need to change if policymakers want more made here. 

One advantage the UK has here is its unique seabed leasing scheme. Increasingly the Crown Estate and Crown Estate Scotland are using this as a proto-industrial strategy. They are exploring how to use eligibility for leasing schemes as a way to incentivise say investment in former Welsh Mining Towns. Having to evidence and deliver this for a lease is good preparation for scaling impacts to qualify for a CfD scheme. 

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While the wind has been knocked out of the sails of many offshore generators, that doesn’t mean the industry is dead. Offshore wind is going to be vital to hit climate goals both in the UK and globally. That means the state needs to support the industry, but can expect more in return. Besides we have underestimated the excellence of turbine engineers before, no one expected costs to fall quite like they did, it may be that Orsted, Vattenfall and the rest get a second wind - especially with FLOW. 

There’s no reason to think that with all we’ve learned since the CfD was launched in 2011, we can’t adapt and realise the gains of an industry in flux. If the UK can revitalise offshore at its inflexion point, that would be award-worthy.