Offshore wind costs have plummeted over the last three years and projects are being installed in record times and under budget

Our latest report on global energy M&A trends makes it clear investors are committed to renewable energy, driven by market potential, improving economics, customer preference and corporate sustainability goals. But while investment in all renewables continues to increase in momentum, offshore wind is particularly gathering pace across the globe. What is driving the increased interest and how can investors make the most of these projects?

Falling costs, rising capacity

Around the world, financial sponsors and strategic investors are eyeing renewable assets, resulting in a significant pool of investment capital at play. An increasing amount of capital is making its way to offshore wind, where greenfield investment is increasing in many markets. As reported in EY’s Q1 issue of Power Transactions and Trends, major new offshore wind projects have been announced in Australia, Japan, China, Korea, India and the Netherlands. Meanwhile, the US offshore wind market is on the cusp of a tipping point as interest in offshore leases continues to grow. The sharp rise in offshore wind investment is driven by a combination of factors:

• Improving economics
  : Offshore wind costs have plummeted over the last three years and projects are being installed in record times and under budget. This is particularly true in areas with relatively shallow coastlines. In April, Vestas announced the completion of 44 x 8.4 megawatts (MW) of turbines in its Northern Offshore wind project in the Belgian North Sea, citing a 50% faster installation time compared with turbines installed three years ago. Similarly, Siemens Gamesa Renewable Energy completed the Akora wind farm — 40 x 6 MW turbines located in the Baltic sea — in a record five months.
• Advancing technology:
  Compared to onshore wind, offshore wind has fewer restrictions on size and height, and in recent years, the height of turbines has more than doubled, increasing total output. Offshore wind speeds also tend to be faster and steadier than those on land, creating higher capacity factors. Advancements in floating technology will also open up new coastlines for development. According to Equinor, 80% of offshore wind resources are in water that is too deep for bottom-fixed wind turbines. Companies like Equinor, Saipem and Royal Dutch Shell continue to explore floating foundations to capture these opportunities.
• Localising generation closer to load pockets
  : While offshore wind’s levelised cost of energy (LCOE) is still higher than onshore wind, consideration needs to be given to the development of transmitting the electricity into load zones with demand. In highly populated coastal regions, offshore wind can be located closer to population centres, reducing the need for new lengthy onshore transmission lines and eroding some of the price differential. This is not always the case, as producing and installing power cables under the sea floor to transmit electricity back to land can be expensive.
• Propelling ambitious renewable targets
  : Across the world, countries have mandated renewable energy targets. In the US, 37 states have passed renewable energy standards that require utilities to commit to certain levels of renewable energy. These standards are enforced via a punitive compliance payment system. Another six states have specific offshore wind requirements. But despite ambitious targets, it looks more likely that several markets will miss their clean energy goals. Belgium has set a 2030 target of 18.3% renewable energy, but will struggle to meet its 2020 goal of 13%. Renewables currently make up just 10% of the country’s total energy consumption. In some cases, offshore wind could help bridge the gap, as these projects can add significant capacity.

Offshore wind expansion offers opportunities

As all indicators point to the expansion of offshore wind, now is the time for potential investors to consider how to participate in the value chain, either in project development, supply chain, logistics or financial sponsorship. Early offshore wind projects were financed by the balance sheet of utilities, but there has been increasing interest from financial institutions. Development of new offshore wind projects will provide opportunities for financial sponsors who typically enter a project either after a power purchase agreement is in place or after construction. The larger size of offshore wind projects compared to onshore will allow more capital to be deployed, but will also concentrate investor risk. Those financial sponsors and corporates seeking opportunities in offshore wind development should consider these key factors:

Partner with experienced European players:
Europe is the world’s most advanced region in offshore wind development, with a majority of installed capacity located in Northern Europe. The European supply chain has recognised this competitive advantage. Established European offshore wind developers have been proactive in expanding into new geographies including the US and Asia Pacific. Most have chosen to do so through local strategic partnerships offering opportunities to mitigate risk.

• Ørsted recently acquired US offshore wind developer Deepwater Wind and subsequently partnered with local US utility Eversource to develop a portion of the Deepwater portfolio. Ørsted has also signed a Memorandum of Understanding with Tokyo Electric Power Company Holdings to work jointly on developing offshore wind projects in Japan.
• In February 2019, Equinor and Korea National Oil Corporation signed a Memorandum of Understanding to explore opportunities to develop commercial floating offshore wind in South Korea.
• In April 2019, Massachusetts gave approval to power purchase agreements supporting Vineyard Wind, a joint venture between Copenhagen Infrastructure Partners and US-based Avangrid Renewables.

Understand the local market
: A detailed understanding of local market conditions, the timing and risk around the procurement of offshore leases, interconnection and power purchase agreements and regulatory relationships will help reduce potential project delays and mitigate project risk. This is particularly important for a foreign company seeking investments in new markets.

Adapt financing structure and off-take agreements
: A number of financing structures will support the development of offshore wind. The key is selecting the most appropriate model for each project. Whether the project is funded off-balance sheet or developed through project financing, local market conditions and risks must be considered. In Europe, awarding engineering, procurement, construction and installation (EPCI) contracts has helped limit financial risks. In a new geography where risks are less clear, it is unlikely EPCI contracts would provide price benefits as higher risks will initially be priced in. Another practice for financing offshore wind does not include an EPCI wrap and splits construction into several smaller packages of work. This has become more common practice as offshore wind projects are more modular than other large-scale renewables. In terms of off-take, financiers will prefer a long-term power purchase agreement and may expect off-takers to take on the system imbalance risk associated with the variability of renewable energy production.

Dip your toe in the water

Marrying the best experience both locally and from overseas, and developing a financing structure that works in the local market, will provide bankable projects delivered on time and below cost. This, however, will only be achieved through time and experience in a market that continues to evolve.