Now is the time to invest in floating offshore wind

You ca have returns (and risk), or certainty (but low returns)

This is co-written with my colleague Erkan Uysal and was first posted (in slightly edited form) on E-FWD:Time for a contrarian bet in the gloom of offshore wind?

As you may have seen on LinkedIn or trade publications if you are in the industry, there was a big wind conference in Hamburg recently, and lots of people telling how the enjoy catch up with old friends and clients...

The reality is that a lot of people have to spend a lot of time in pre-organized meetings (it's efficient because you can have real face-to-face meetings with lots of people that you want to talk to in a short period, as everyday is in the same place, but it's not really being at the conference), and you hear a lot of corporate-compatible presentations (i.e. a lot of diplomatic bullshit).

No, what's really enjoyable are the unscripted conversations while walking around or, the best, when present at a more selective party with fewer but well targeted guests (and, occasionally good food and drinks - although no one seems to remember to serve real champagne). Such guests are quite often old farts, reminding each other of their own old age but happy to trade juicy stories from the past (on that topic, we have a plan to tell as many back stories of the offshore wind industry as we can remember or find, and we would welcome external contributions, anonymous or not. We'll post the first anecdotes from our own past in the near future), and from the present.

But today we'd like to focus on one item that came up repeatedly - the fact that most seasoned industry players in offshore wind want to buy assets (given that everybody is selling) but are prevented from doing so by their corporate overlords.

Everybody agrees that the mood is gloomy - much more so than in onshore wind and solar or batteries, where a lot is happening, if not everywhere. Most large players are still selling down, focusing on fewer "strategic" assets or countries, and waiting for someone else to give a different signal. The handful of remaining buyers are courted by everybody else and of course not complaining (as much) about the situation.

Most people agree that the oil&gas companies noisily exiting the market has not helped (but who has sympathy for those who overpaid for assets, then overshot bloated budgets,  and then complained loudly that it's not profitable?), and, when prodded, will accept that utilities playing their all-too-frequent game of "heads I win, tails I whine" in auctions also did not help.

Big players get big headlines in papers read outside of the industry, and those players complaining loudly make for breathless stories about the problems of the sector, which structural opponents to the sector (various incumbents in the energy world, including, yes, other bits of the oil&gas sector, including within the same companies) are happy to latch on and amplify...

So the mood music is relentlessly negative, which makes decisions by investment committees to go against that "common wisdom" of the moment all much the harder.

We expect that at some point one of the oil majors will make a substantial acquisition, say that conditions havechanged/stabilised/improved and they expect offshore wind to be profitable (again) and that will get headlines and will become the signal for others to become bullish again. Several European utilities did come in and exit offshore wind at least twice before realizing it was something that actually really made sense for them... We expect the same repeat dance from oil&gas.  But it may take more than a transaction, however high profile to change the narrative - after all the purchase by RWE of Vattenfall's assets in the UK was seen as a sale, not a purchase, and thus spun as bad news for the sector, even though the price was not a distressed one. There needs to be something that gets enough attention so that journalists think "something has changed" which make them write corresponding headlines that sell more than the continued gloom. So this may yet take a while.

In the meantime, the market remains slow and choppy - which makes it the perfect time to make bets that will become highly profitable! In particular, this sounds like the best possible time to make a real move on floating wind, at the time when everybody only sees the (very real) risks and downside, and many people are giving up.

People still dream of the large profits made by early investors in offshore wind when they sold what then looked like "easy to understand" safe assets. But they tend to forget that the very same investors were quite lonely when they made their original investments, and were taking risks that looked rather scary at the time - and often spent years working hard to make these projects actually safe assets.

Well, it's the same now - floating wind certainly looks scary, and there are real questions as to how to make it work, and at what cost. And maybe it will never work (or at least never reach a cost that makes it competitive against available alternatives), but now is definitely the best - and possibly the only - time to make a bet that can show outsized returns.

People are craving the precedents that will reassure them that floating can work at scale. But there is no secret: someone needs to build that precedent, and show that they made it at a reasonable, and replicable (or improvable) price. Whoever takes that bet today,  by spending several hundred million to both build the requisite infrastructure to build floaters serially AND provide meaningful performance guarantees (or own the assets until it is safely operating), will have the market to themselves for a few years on the industrial side, and be able to sell the assets at a nice profit once they are operating.

This is particularly true of the companies that provide floating technology - there's too much choice today, and not enough certainty. Certainty will come by owning the engineering and industrial risks and actually delivering projects. The good news is that the companies that could be expected to take on such risks are precisely those with the engineering and industrial skills to do so - it's their actual job to manage these risks. If they can't do it, nobody will, in all probability.

The great thing about offshore wind is that, outside a handful of ignorant outsiders, nobody has taken unreasonable risks, and risks are, largely, priced correctly. Operating assets with stable revenue regimes attract very cheap capital as they are low(er) risk. Construction, development, merchant risk, new markets, etc., all attract appropriate premia. There's ebb and flow, but, outside of a few outliers, prices have been remarkably consistent. So operating floating projects can be valued with good precision, assuming they are operating correctly with contracted costs and revenues. The upside for risks taken now on such projects is thus easy enough to calculate, for projects that have tariffs, or strong expectations of tariffs.

8 years from now everybody will wonder why they did not make such an easy decision, in hindsight...