United Kingdom: Grand wind-power plans far from assured
DOZENS of wind farms are in the pipeline and manufacturers are queuing up to build turbines in the UK, attracted by positive noises from the new coalition government and existing incentives
But long-term financing for the country's massive offshore wind-power programme remains far from assured.
An ambitious plan to provide the UK with more than 40 gigawatts (GW) of offshore wind capacity over the next two decades is gathering momentum: 32 GW of that is due to come from the winners of the government's Round 3 tender, the results of which were announced in January (PE 2/10 p29). While the original aim was for this extra capacity to be operational by 2020, few in the industry believe it can all be built, virtually from scratch, in a decade.
Bloomberg New Energy Finance (BNEF), a consultancy, estimates the UK could realistically expect to have around 18 GW of offshore wind capacity installed by 2020 with the rest to follow after that. The country has around 1 GW of operational wind capacity, with a further 1.45 GW under construction.
If Round 3 is fully realised, it could cost well over £75bn ($120bn) to build, according to the British Wind Energy Association. It features several massive projects, the largest of which is a proposed 9 GW farm on Dogger Bank, off England's east coast, where Scottish and Southern Energy and Statoil are part of the consortium. That and other Round 3 projects will dwarf the 1 GW London Array wind farm in the Thames estuary – a venture between Denmark's Dong Energy, E.On Renewables and Abu Dhabi's Masdar initiative – although that will be the largest offshore project in the world itself, if and when its two phases are finished. Work on the first 630 MW stage is expected to start in April 2011 and to be completed the following year.
Meanwhile, GE, Mitsubishi and Siemens have all said this year that they want to build turbine-construction plants in the UK, each mentioning investments in the £80m-100m range. Speculation is also rife that Indian turbine maker Suzlon is in talks with the government over an investment of a much as £1bn in UK turbine manufacturing – the company has declined to comment. Suzlon is already a significant player in the Asian market and a rising force in Europe, following its purchase of German renewables firm Repower in 2009.
The UK's new Conservative/Liberal Democrat coalition government, elected in May, has seemed keen to maintain the enthusiasm for offshore wind shown by the ousted Labour administration, which put the programme in place. The choice of Chris Huhne, from the Lib Dem minority coalition partner, as energy and climate change minister suggests renewables will feature strongly in energy policy, given his party's long-time support for them.
Meanwhile, one of his deputies, the Conservative Charles Hendry, said in May – at the opening of the latest phase of Dong's 172 MW Gunfleet Sands project off Essex, southeast England – that he wanted "to make sure we grab all the opportunities the rapidly expanding offshore wind industry has to offer, and that offshore wind power can come of age under this government".
The incentives the previous government brought in to kick-start the industry have remained in place, so far. The existing version of the Renewables Obligation Certificate (ROC) system – a subsidy through the issuing of tradable green credits to renewable-energy generators – does not expire until 2014. Analysts say it has been highly effective in mobilising finance over the last year or so, despite the economic downturn.
"Utilities are broadly maintaining their capital expenditure at expected levels, encouraged by the government's stance on offshore wind," says William Young, head of wind-industry research at BNEF.
Meanwhile, a £60m government-backed competition to establish ports as hubs for turbine manufacturing has prompted a wave of promotional efforts all the way up the UK east coast – none of the big manufacturers have yet decided on locations for their prospective plants.
However, there is yet no indication of what will replace ROC valuations, when the present arrangement expires. This is a worry for the industry at a time when the government has embarked on a programme of huge public-spending cuts. The government has mooted the idea of switching to feed-in tariffs, as used in Germany, Spain and elsewhere, but has not outlined firm plans.
Developers are likely to need some £10bn a year to keep their plans on track after 2014, according to The Crown Estate, which manages the UK's seabed and offshore wind tenders – and, at present, funding beyond that available from developers' balance sheets and debt financing is limited. Project finance is hard to come by in many industries and the potentially high risks involved in the construction phase of pioneering offshore wind projects are a further reason for caution among financiers.
At present, backing from export-credit agencies and development institutions, such as the European Investment Bank, are providing the sector both in the UK and on the continent with vital support. "These bodies are supporting the industry through a slightly more difficult time, while banks are still getting comfortable with management of the known risks," says Young.
However, if investors fail to warm to the offshore wind-sector changes, the effects could be felt rapidly, jeopardising project targets. BNEF notes that of the 36 GW of installations it forecasts will be built in Europe before 2020, only 3.2 GW has been financed and is under construction, and that no project slated for later than 2012 has yet had large contracts signed or capital committed.
Another potential problem is the high cost of establishing the fledgling supply chain for the industry, which needs to develop rapidly if construction targets are to be met. Rob Hastings, director of marine estates for The Crown Estate, says the government may need to provide greater incentives to supply chain companies – those providing turbine components, construction vessels and so on – that may not otherwise see big returns from their investments for years. Meanwhile, Ian Johnson, head of E.On UK's Robin Rigg project, said earlier this year that a failure to invest enough in construction vessels risked creating project bottlenecks, although he noted growing interest in supply side investment as the UK wind programme accelerated.
The price of projects can be expected to fall in coming years, however, as a result of economies of scale, greater experience of building offshore and technological developments. So if the industry can weather technological teething problems and early financing difficulties, the UK's offshore wind gambit could still pay off.