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Offshore wind holds many of the answers to decarbonising the growing economies of emerging markets. But establishing a new industry, especially one with high capital costs, in less well off areas of the world is a tough task. So far that has prevented offshore wind from becoming a pillar of energy systems in developing countries. With forethought that can change
DECARBONISATION EFFORTS
As a large scale electricity generation technology, offshore wind can provide the power to meet baseload demand in emerging markets while at the same time reducing the carbon content of the growing supply mix
INWARD INVESTMENT
By attracting money from overseas, offshore wind construction and operation stimulates economies and provides local jobs, making it a desirable industry to establish in developing countries
KEY QUOTE
You can argue that the rationale for more offshore wind in emerging markets is greater than it is in developed markets
Among a handful of countries in northern Europe—the UK, Germany, Denmark, the Netherlands and Belgium—offshore wind is considered an important technology as both a clean energy source in the energy transition and as an economic driver bringing jobs and investment to neglected port and harbour regions. However, beyond these few countries, plus China and Taiwan, offshore wind projects are rarely seen on any scale. Yet the offshore wind sector can help developing countries industrialise and grow richer without also growing the carbon footprint of their energy sectors. Several countries are waking up to the potential of a technology that until recently was considered out of their reach. A 2020 report by the World Bank found the offshore wind potential across 48 of these markets was 15.6 TW—several times the global demand. “The technical potential is there and the drivers for offshore wind are there,” says Sean Whittaker, co-lead of the World Bank’s Offshore wind Development Programme and a renewables industry specialist at the International Finance Corporation (IFC). Emerging markets for offshore wind—the likes of India, Vietnam, the Philippines, Turkey, and Brazil—recognise the urgent need to decarbonise their energy systems and avoid reliance on fossil fuel from politically unstable markets, with the associated price risk. “Right now, 75% of the world’s coal consumption is in Asia,” Whittaker points out. It is in such markets that introducing clean energy technologies can make the biggest contribution to mitigating climate destruction. “You can argue that the rationale for more offshore wind in emerging markets is greater than it is in developed markets,” Whittaker adds. He and Alastair Dutton, lead consultant with the World Bank Group and chairman of the offshore wind taskforce at the Global Wind Energy Council (GWEC), both accept the industry has a long way to go in establishing itself in new markets. “Offshore wind will not happen in all these emerging markets overnight. Some can do it this decade, but I suspect quite a few will be next decade,” says Dutton.
MARKET DRIVERS
The desire to develop offshore wind is not just about sourcing clean renewable energy. “One of the really big things for these developing countries is employment and economic benefit. I would say they are more interested in that than they are actually in the energy side of it,” Dutton says. Offshore wind has several attributes that make it a good choice for a lot of countries as a way of boosting growth, Whittaker adds. It is an economic driver, creating inward investment and jobs; it can be done at scale, removing existing dirty generation safely and securely; it can be installed closer to population centres often found on coasts; it does not have the land constraints of other renewables; and it is clean. “There are not a lot of technologies that really fit that bill. That is why we can feel optimistic about offshore wind getting into these emerging markets,” says Whittaker. In September 2020, the World Bank Group and GWEC hosted a virtual study tour, which hosted 400 delegates, including government representatives, from 25 countries. The participants discussed the opportunities and barriers to establishing offshore wind in their home market, each bringing their own reasons for wanting to tap into the sector. “If you took all the countries that participated and asked them to list the top five reasons for why they want to pursue offshore wind, you will get 25 different lists. Their priorities are different, their contexts are different,” says Whittaker. “It is remarkable how you have to fit offshore wind into a wider political landscape [in some of these countries],” Dutton adds. Applying the UK’s offshore wind framework in Vietnam would not work, given the different political and cultural landscapes of the two countries. “We do have to adapt it everywhere we go.”
FIND THE MONEY
A big barrier for offshore wind in new markets is the high capital expenditure (Capex) required to establish early projects. Both Whittaker and Dutton concede the first offshore wind projects in new markets will be more expensive, but the investment will be worthwhile and more than paid back over the lifetime of the project. “It is not just the cost of offshore wind, but the cost of offshore wind against the alternative,” Dutton points out. “If you are planning a long way ahead, which ideally you would be, then you will start to pick up the path to the lower prices.” He cites a recent economic development study for Vietnam that demonstrates how investment in an offshore wind industry could be recouped by 2036, or at worst by 2039. Whittaker says the advanced Contract for Difference (CfD) market structure in the UK, which offers investors revenue stability from their sales of offshore wind generation, is currently unimaginable in developing markets. For the UK’s huge Dogger Bank offshore wind cluster at 3.6 GW, power purchase contracts agreed in 2019 secured revenue for the project of €0.048 for every kilowatt-hour of electricity sent to the grid. Although the price represents relatively cheap electricity for the customer, it is not a great earner for Dogger Bank investors, but the revenue stability still makes it an attractive investment. Alternative revenue structures, however, are needed for less sophisticated and less mature markets. Climate finance will play a big role, says Whittaker. “It is a matter of getting the climate funds that have a fairly big-ticket appetite and working with groups like IFC. We can provide our part of it, and we can help to de-risk it, we can bring in commercial financiers. There is a lot of appetite from commercial funds,” he says.
There are many more links in the chain for an offshore wind project. It’s like an onshore wind project, plus an oil and gas project, plus a marine project. So, it is like financing three sectors in one
THINK BIG, THINK REGIONAL
Offshore wind also significantly benefits from economies of scale, which is partly why the Dogger Bank projects can sell their output at such a low CfD price. The larger the project, the more cost-efficient it becomes. Emerging markets may not be able to afford such large projects—nor do they have a need for them. “A demonstration project in offshore wind is 300 MW and has a Capex of a billion dollars—and that’s a small project,” says Whittaker. “At the virtual study tour, somebody said the threshold for an offshore wind project was 600 MW. For some of the countries that we work in, 600 MW is a huge part of the grid.” Whittaker and Dutton suggest developing-country wind markets may be able to benefit from adding offshore capacity to their mix by coordinating activities across the region. “One of the realities of many emerging markets is they don’t have tens of gigawatts of demand. Sri Lanka has demand of around four gigawatts. Is Sri Lanka going to build up an entire supply chain? No. But it does have competitive advantages in certain areas,” says Whittaker. “If you have got heavy metal fabrication, if you make railways or heavy steel, making monopiles or jacket foundations is a possibility. Indonesia is already exporting jacket foundations for Taiwan. Jobs come from a lot of different places. It is a matter of being smart about what can be done locally, but also acknowledge what you can do on a regional basis. That is what Europe did and that is what many of these emerging markets will have to do.”
GOLDILOCKS CONUNDRUM
The complexity of offshore wind projects means they need the right mix of serendipity if they are to reach fruition. Everything from wind resource, supply chain potential, regulatory environment, and the creditworthiness of an offtake deal have to be just right. In Europe, power purchase agreements are secured by financial institutions and regulations. “In most emerging markets where we work that is not a foregone conclusion,” Whittaker says. Whittaker is at pains to express that an offshore wind project needs an entirely different approach compared with building wind turbines on land. “There are many more links in the chain for an offshore wind project. It’s like an onshore wind project, plus an oil and gas project, plus a marine project. So, it is like financing three sectors in one.”
TEXT David Weston