At a time when we are getting unrelenting negative headlines about offshore wind, with tales of supply chain woes, increasing costs, projects in the UK and US hading back the power purchase contracts they had obtained previously, oil&gas companies seemingly pulling back from the sector, and the stock market valuations of renewable energy companies tanking, it is worth stepping back from a minute and look at the long term prospects of the sector, focusing on a few enduring truths.
For so much of the USA, which has myriad opportunities for onshore wind & solar, and transmission networks that are universally inadequate for the scale of opportunity & need, the only commercial attribute offshore wind has going for it is higher capacity factors. The needed major onshore transmission expansions for offshore may not align well with needed onshore expansions, and vice versa. Onshore has better supporting infrastructure for current turbine sizes and doesn’t need enabling mega investments, e.g., in ports & vessels, to enable project construction - which also brings difference in project lead times (transmission additions aside). I wonder about the relative feasibility & costs of decommissioning and repowering, and the relative amounts & costs of foundation materials. Obviously the cost of getting offshore site control is orders of magnitude higher than onshore. On- and offshore wind both have public acceptance issues with somewhat overlapping communities needing engagement - neither gets a free ride. I also wonder about the relative proportionate impacts of military airspace restrictions on total development potential - many offshore areas are restricted. I also wonder if offshore is or has the risk of being more impacted by avian issues - certainly tracking injuries is different. What do we know about seabirds’ physiology and behavior compared to the decades of raptor research that’s gone into evaluating these risks at onshore projects???
Would offshore wind add to US energy supply security & reliability issues? Access to cable junctions and miles of main gen tie to the shore is all underwater. We’ve seen what can happen to dependency on underwater energy supply when the Nordstream pipelines were blown up w/o an acknowledged culprit. Or is this a non issue because all the US offshore development zones are monitored by underwater military hydrophones but how would an intrusion be responded to in time to prevent - and how will that security question be answered when the network is secret? Or will the US build and become dependent on many GWs of offshore connected by a small number of ocean gen ties that’d cause blackouts when there’s an outage??? This generation strategy raises a system reliability issue. How to provide sufficient reserve margin when 1+GW of wind has an unplanned outage that takes a long time to restore? Will that be financialized with reserves derivatives, larger long term storage or ??? Clearly, there’s a lot of difference in system reliability planning between megaGW plants on a few radial gen ties and a diversity of onshore locations across a network hosting smaller facilities. What strategy is going to provide the lowest cost and most reliable electric system???!
That's a lot of questions... But on your first point - offshore wind does give the ability to deliver power to places that are otherwise difficult to serve (think - end of Long Island, where it is almost impossible to being inland cables or gas pipelines). All the other items are studies and dealt with.
Re grid safety - you mostly have independent power lines for each project (often, several per project), so it is quite decentralized and it would be hard to strike all offhsore wind farms in one go, so it's probably safer than any onshore large plant (wind or otherwise)
Presumably all coastal locations are already served by power lines emanating via ROWs from the backbone grid and more remote central station power plants. If it's difficult to increase transmission capacity, there's proposals to run underwater cables down rivers. Regardless, dedicating an offshore wind project to serve a particular major coastal load would require an equally sized BESS. However, reliability standards mandate that load can be fully served even if the offshore resource gets curtailed or disconnected - so the offshore strategy doesn't alleviate the need for more onshore transmission. In reality, any wind project will not be targetted to a particular utility load but will be a resource serving the utility's entire network. Every resource connected anywhere to a network goes everywhere in the network in inverse proportion to the impedence between source and sink(s).
Yes, each project has a gen tie to a POI, shorter or longer. It's rare the same project has >1 POI for a host of reasons. More likely any project with >1 POI will be electrically segmented, each with its own gen tie to its own or a common POI. Now say those offshore POIs are onto a large undersea loop, for reliability reasons, that connects to the onshore grid at >1 location. That loop and each onshoring of it along with the portions of the onshore grid each connects to must be capable of carrying all the generation from all the offshore POIs on it. If a gen tie goes down, that resource is lost. If one of the onshoring circuits is lost, that's a N-1 condition that must be 'survivable' under peak generation and system loads - without load shedding, aka blackouts.
For reliability purposes, it's necessary but not sufficient for the network to operate fine with all lines and generation in service. Various N-1 contingencies and N-2 contingencies must be anticipated, will get studied, and network upgrades will be required to remedy these. Offshoring resources doesn't simplify or economize this.
Yes, at the end of the day and for on- & off-shore projects, there'll be lots of costly studies. But doing studies don't guarantee achieving economic, financial, technical, construction or market viability. Rather, addressing each identified concern/issue takes it's own pound of flesh, more or less, whether it be downsizing, relocations, spendy mitigations, etc - which can accumulate to make a project infeasible. And placing huge bets (much greater $ per acre, MW or MWh than for onshore projects), for example to win a BOEM leasing competition, doesn't mean the studies or the constraints they reveal will be any easier. I.e., a project isn't a shoe in just because $$$$$ has been put at risk.
Good point on risk-weighted; though it would probably make the UK uninvestable if the O&G industry teaches us anything (both tounge in cheek and semi-serious)
The entire energy / power production portfolio is capital intensive and therefore heavily leveraged to interest rates across the range of producers.
I'm not sure why you argue that Wind, of all these producers gets a pass - or maybe I missed the point. Or the unspoken point being; given lower return expectations (and some fairly heroic long term production assumptions) Wind is particularly affected by cost of capital.
I'd argue, that today's downturn is directly attributable to very poor capital allocation to Offshore Wind. An analysis of a Norwegian State Energy company by an IB in 2020 indicated that if it was being entirely return driven it would sell its renewable (largely wind) portfolio as itbwa valued significantly higher than its DCF. It didn't, for other reasons.
I'm being intentionally reductionist to make a point.
My last one being; I've been part of a FPSO centric oil field start of production West of Shetland - on time and on budget. The last person I listened to was my banker.
There's no heroic long term production assumptions, but revenues are definitely capped if you are in a fixed price regime, and since most of your costs are upfront, discipline during construction is even more important. Developers think they like merchant prices because it gives access to the upside (but in reality they want the Dutch or German system which is a floor plus upside, ie the best of all worlds, which I think is bad policy)
What is true is that returns are definitely lower than in oil&gas. I did see the Norwegian study: all it said was that Equinor would have trouble matching the returns it gets from oil&gas in its offshore wind investments, which is definitely true - but that fact that returns are lower does not doom the sector, or make it worse, if risks are also lower - which I believe can be the case for well managed projects
" but that fact that returns are lower does not doom the sector, or make it worse, if risks are also lower"; Quid of the Floating project you mentioned. Unproven at large scale deployment so far.
It's a real question, and nobody has the answer yet - will risk perception (and thus cost of capital) go down fast enough that governments do not lose patience in the meantime and stop subsidizing the early projects that are more expensive.
It'll probably come down to places like Japan than simply have no other alternative.
Brilliant analysis from an experienced perspective. Leave the production lines alone so they can amortize their investment, and please, industry leaders, stop welcoming the fossil industry into our sector. They simply have other goals, as we will see in COP28. Mercy, Jérôme
For so much of the USA, which has myriad opportunities for onshore wind & solar, and transmission networks that are universally inadequate for the scale of opportunity & need, the only commercial attribute offshore wind has going for it is higher capacity factors. The needed major onshore transmission expansions for offshore may not align well with needed onshore expansions, and vice versa. Onshore has better supporting infrastructure for current turbine sizes and doesn’t need enabling mega investments, e.g., in ports & vessels, to enable project construction - which also brings difference in project lead times (transmission additions aside). I wonder about the relative feasibility & costs of decommissioning and repowering, and the relative amounts & costs of foundation materials. Obviously the cost of getting offshore site control is orders of magnitude higher than onshore. On- and offshore wind both have public acceptance issues with somewhat overlapping communities needing engagement - neither gets a free ride. I also wonder about the relative proportionate impacts of military airspace restrictions on total development potential - many offshore areas are restricted. I also wonder if offshore is or has the risk of being more impacted by avian issues - certainly tracking injuries is different. What do we know about seabirds’ physiology and behavior compared to the decades of raptor research that’s gone into evaluating these risks at onshore projects???
Would offshore wind add to US energy supply security & reliability issues? Access to cable junctions and miles of main gen tie to the shore is all underwater. We’ve seen what can happen to dependency on underwater energy supply when the Nordstream pipelines were blown up w/o an acknowledged culprit. Or is this a non issue because all the US offshore development zones are monitored by underwater military hydrophones but how would an intrusion be responded to in time to prevent - and how will that security question be answered when the network is secret? Or will the US build and become dependent on many GWs of offshore connected by a small number of ocean gen ties that’d cause blackouts when there’s an outage??? This generation strategy raises a system reliability issue. How to provide sufficient reserve margin when 1+GW of wind has an unplanned outage that takes a long time to restore? Will that be financialized with reserves derivatives, larger long term storage or ??? Clearly, there’s a lot of difference in system reliability planning between megaGW plants on a few radial gen ties and a diversity of onshore locations across a network hosting smaller facilities. What strategy is going to provide the lowest cost and most reliable electric system???!
That's a lot of questions... But on your first point - offshore wind does give the ability to deliver power to places that are otherwise difficult to serve (think - end of Long Island, where it is almost impossible to being inland cables or gas pipelines). All the other items are studies and dealt with.
Re grid safety - you mostly have independent power lines for each project (often, several per project), so it is quite decentralized and it would be hard to strike all offhsore wind farms in one go, so it's probably safer than any onshore large plant (wind or otherwise)
Presumably all coastal locations are already served by power lines emanating via ROWs from the backbone grid and more remote central station power plants. If it's difficult to increase transmission capacity, there's proposals to run underwater cables down rivers. Regardless, dedicating an offshore wind project to serve a particular major coastal load would require an equally sized BESS. However, reliability standards mandate that load can be fully served even if the offshore resource gets curtailed or disconnected - so the offshore strategy doesn't alleviate the need for more onshore transmission. In reality, any wind project will not be targetted to a particular utility load but will be a resource serving the utility's entire network. Every resource connected anywhere to a network goes everywhere in the network in inverse proportion to the impedence between source and sink(s).
Yes, each project has a gen tie to a POI, shorter or longer. It's rare the same project has >1 POI for a host of reasons. More likely any project with >1 POI will be electrically segmented, each with its own gen tie to its own or a common POI. Now say those offshore POIs are onto a large undersea loop, for reliability reasons, that connects to the onshore grid at >1 location. That loop and each onshoring of it along with the portions of the onshore grid each connects to must be capable of carrying all the generation from all the offshore POIs on it. If a gen tie goes down, that resource is lost. If one of the onshoring circuits is lost, that's a N-1 condition that must be 'survivable' under peak generation and system loads - without load shedding, aka blackouts.
For reliability purposes, it's necessary but not sufficient for the network to operate fine with all lines and generation in service. Various N-1 contingencies and N-2 contingencies must be anticipated, will get studied, and network upgrades will be required to remedy these. Offshoring resources doesn't simplify or economize this.
Yes, at the end of the day and for on- & off-shore projects, there'll be lots of costly studies. But doing studies don't guarantee achieving economic, financial, technical, construction or market viability. Rather, addressing each identified concern/issue takes it's own pound of flesh, more or less, whether it be downsizing, relocations, spendy mitigations, etc - which can accumulate to make a project infeasible. And placing huge bets (much greater $ per acre, MW or MWh than for onshore projects), for example to win a BOEM leasing competition, doesn't mean the studies or the constraints they reveal will be any easier. I.e., a project isn't a shoe in just because $$$$$ has been put at risk.
Good point on risk-weighted; though it would probably make the UK uninvestable if the O&G industry teaches us anything (both tounge in cheek and semi-serious)
The entire energy / power production portfolio is capital intensive and therefore heavily leveraged to interest rates across the range of producers.
I'm not sure why you argue that Wind, of all these producers gets a pass - or maybe I missed the point. Or the unspoken point being; given lower return expectations (and some fairly heroic long term production assumptions) Wind is particularly affected by cost of capital.
I'd argue, that today's downturn is directly attributable to very poor capital allocation to Offshore Wind. An analysis of a Norwegian State Energy company by an IB in 2020 indicated that if it was being entirely return driven it would sell its renewable (largely wind) portfolio as itbwa valued significantly higher than its DCF. It didn't, for other reasons.
I'm being intentionally reductionist to make a point.
My last one being; I've been part of a FPSO centric oil field start of production West of Shetland - on time and on budget. The last person I listened to was my banker.
Thanks for the perspective.
Wind is definitely more sensitive to cost of capital than fossil fuel generation (see the second graph in this earlier post: https://jeromeaparis.substack.com/p/the-cost-of-wind-the-price-of-wind) where most of the cost is, fuel.
There's no heroic long term production assumptions, but revenues are definitely capped if you are in a fixed price regime, and since most of your costs are upfront, discipline during construction is even more important. Developers think they like merchant prices because it gives access to the upside (but in reality they want the Dutch or German system which is a floor plus upside, ie the best of all worlds, which I think is bad policy)
What is true is that returns are definitely lower than in oil&gas. I did see the Norwegian study: all it said was that Equinor would have trouble matching the returns it gets from oil&gas in its offshore wind investments, which is definitely true - but that fact that returns are lower does not doom the sector, or make it worse, if risks are also lower - which I believe can be the case for well managed projects
Thanks for your article Jerome.
" but that fact that returns are lower does not doom the sector, or make it worse, if risks are also lower"; Quid of the Floating project you mentioned. Unproven at large scale deployment so far.
It's a real question, and nobody has the answer yet - will risk perception (and thus cost of capital) go down fast enough that governments do not lose patience in the meantime and stop subsidizing the early projects that are more expensive.
It'll probably come down to places like Japan than simply have no other alternative.
Brilliant analysis from an experienced perspective. Leave the production lines alone so they can amortize their investment, and please, industry leaders, stop welcoming the fossil industry into our sector. They simply have other goals, as we will see in COP28. Mercy, Jérôme