Where next for floating wind?

Transcript

Richard Heap:

Hi there, welcome to Tamarindo's latest insight video. Today we're discussing floating wind with Mark Barges, partner at law firm Ashurst. Ashurst advised on the financing of a pioneering floating wind project off the south coast of France and the firm has also acted for offshore wind developers including Oceans Winds, Mainstream, Marubeni and Source Galileo. 

Hello Mark. 

Mark Barges:

Hi Richard, pleasure to be here. 

Richard Heap:

Thank you for joining us. Now, before we dive-in, here are some headline numbers, there are only 270 megawatts worth of floating wind farms in operation globally today, but the global wind energy council has said this could reach 31 gigawatts by 2033. There is also 244 gigawatts worth of floating wind projects in development, IRENA has said. However, floating wind is not immune from the challenges in offshore wind, including supply change disruption, the impact of inflation and the race to the bottom on costs. The technology is also yet to reach commercial maturity. So Mark, from your work in the sector, how close do you think floating wind is to reaching the commercial maturity that it needs? 

Mark Barges:

Thanks Richard, from my perspective if we were to look at where floating offshore wind is compared to other sources of renewable power, I think a good illustration of that is if you compare fixed bottom offshore wind to floating offshore wind. We have approximately 63 gigawatts of installed capacity of fixed bottom offshore wind. So that's 63,000 megawatts of installed capacity. Whereas we have about less than 300 megawatts of installed capacity operating projects in the floating offshore sector. So that's less than 1 percent. So as far as the development of floating offshore wind, I'd say it's kind of a newborn baby when you compare it to offshore wind in terms of experience, in terms of maturity, in terms of the number of projects which have been commissioned and are operating. That's not to say that it can't catch up quickly. And indeed, as the numbers suggest, the pipeline of new projects, which is coming, both in the short term and the medium term, is quite impressive.

But there's still a long way to go before the technology reaches the level of maturity we're seeing in the offshore, fixed bottom offshore wind space, which is still also relatively new. It's less than 15 years old. So there's a fixed bottom offshore wind is new and floating is just a new baby on the block, so to speak. And to give you another example of where the maturity stands, if you look at the levelized cost of electricity, a fixed bottom offshore wind stands around $50 per megawatt hour whereas a floating offshore wind is around $200 per megawatt hour. 

So it's about four times more expensive per megawatt hour to do floating offshore wind against fixed bottom, which is really probably the most important benchmark.

Now that's not to say that there's not lots of room for that to improve very quickly. Indeed, I think there's quite a few projections that say, you know, within the next few years that should reduce dramatically as we start to scale up floating offshore wind. Until now most of the projects, there are a few exceptions, such as projects in Norway and Scotland where you have 50 and 88 megawatt projects, but most of the projects to date have been pilot projects, 20 30 megawatts, so relatively small, so as to test the technology and particular aspects of the technology which we'll touch on a bit later. But clearly there is quite a bit of scope to improve that as soon as we start hitting some of the big projects and there's a number of those which are in the pipeline in the next five years or so, so that should develop quite quickly.

Richard Heap:

And one of the big talking points here in offshore wind generally is about Chinese companies coming in, whether that's turbines makers or contractors or, or other types of investors, whoever it is. It's certainly been a big talking point in WindEnergy Hamburg and our own conferences as well. Do you have a view on how Chinese turbine makers and contractors will affect the market and potentially help on that road to commercial maturity?

Mark Barges:

So historically in Europe, the offshore wind sector and the wind sector in general, has been dominated by European and US manufacturers, so the likes of Siemens Gamesa, Vestas, Nordex and Engie.

So there has been very little action from the Chinese manufacturers up until recently. Having said that, China is the biggest market in the world from an energy perspective. They are the leading manufacturer today of wind turbines. 

And as a result of that, it's not surprising that some of their leading wind turbine manufacturers are starting to target the European market. And indeed, they started to make some forays, particularly in floating offshore wind, where they're involved in, France, for example, they supplied the wind turbine on one of the pilot projects, which is Provence Grand Large, which is an EDF project. Those were eight and a half megawatt turbines. So this was a 25 megawatt project, but shortly before that they were involved in a fixed -bottom offshore wind project in Italy, again a 30 megawatt project, but again it's making a footstep. And they are looking at the Med Wind project, which is a 2.8 gigawatt project, where they're proposing to install 18.8 megawatt wind turbines, which would be the biggest turbines in the world at the moment, far bigger than anything that Europeans can produce. So that would make a dramatic market shift. And indeed, if you look at Ming Yang and what they're planning to do in Europe, they're looking to develop factories here to manufacture the turbines in Europe, which from a competition perspective is probably a clever move and they're looking to develop two factories, one in Italy, one in Scotland and they've obviously involved in this massive 2.8 gigawatt project in Italy, they've also got some projects in the UK and in Germany so you can already see that they're starting to penetrate the European market.

Other turbine manufacturers include Goldwind and Envision. Goldwind, I understand, is looking at Spain, and they also have sizeable wind turbines, I think, a 16 megawatt turbine. And Envision is more focused on slow wind turbines, which are much more efficient. So you can clearly see that the Chinese are very focused on the European market given that it's the biggest market in the world and it's the one where there's the biggest growth potential over the next decade or so. After that, that may change, but for the foreseeable future, this is where most of the action is taking place, also noting that it's more difficult for them to access the US market. 

Having said that, there are some headwinds. And as you will probably know, the European Commission imposed tariffs on EV manufacturers, Chinese EV manufacturers, due to the level of unfair subsidies. And the same is true with wind turbines in the Chinese wind turbine manufacturers in the sense that they have benefited from massive subsidies, about three times more to give you an example than what French and German industrial players benefit from by way of subsidies.

So it's quite substantial and the commission has started to launch an investigation into it at the start of this year. So it may come down and impose some sort of tariff barriers or the like to try and create a more level playing field between Chinese manufacturers and European ones. So that's definitely a space to look out for. And there's also obviously a political component to this issue, which can't be ignored.

And conversely, and one of the reasons, I may have said so, but just to reiterate, the US market is closed to Chinese manufacturers. They wouldn't benefit from the IRA, which is the inflation reduction act, which was meant to stimulate the growth there.

So that's why there is a real focus on Europe. 

Richard Heap:

Yeah, and I know when we were speaking before, there's sort of various policies in the EU that may affect this carbon border adjustment mechanism. I think it's one that's come up. Now, I don't know whether we need to say more about that now. 

Mark Barges:

Yeah, I mean, it's all part of a strategy of ensuring that European industry is playing on a level, given the requirements on the European industry to become greener and therefore to capture their carbon emissions, to consume low carbon fuels. 

The result of that is that they are less competitive and so certain mechanisms are being put in place, like the CBAM, carbon border adjustment mechanism, and other mechanisms will be put In place to ensure that level playing field, hence the investigation into wind turbine manufacturers because of the level of subsidy in China. 

Richard Heap:

Ok, so, while we're discussing technology then, what are some of the challenges? I mean what do you see as one of the biggest technology challenges for financiers and investors or lenders in the sector at the moment, are there particular issues that they are aware of and trying to find solutions for? 

Mark Barges:

Yes so, in an ideal world, if you look at the way power projects are financed generally through the means of projects finance which is otherwise described as non-recourse finance. And that is the type of financing which looks at the revenue stream of the project as opposed to the balance sheet of the sponsors developing the project, and as a result the lenders tend to be very focused on the ability of the project to work to be built on time, not costs. And to actually generate the revenue required to service the debt. And so when the lenders are looking at technology risk, they tend to be risk averse on these type of non-recourse financings and are reluctant to invest in projects where there is a lack of maturity in the technology, which clearly is the case with offshore wind, floating offshore wind, where a number of technological innovations are being looked at. I think first and foremost what stands out is the floaters. These are massive pieces of infrastructure, which effectively ensure that you have a wind turbine, which is more than 100 meters tall on some of the newer and larger wind turbines, with blades which are also more than 100 meters long. And to create the required level of stability, you need a massive platform or floater system to carry those turbines. And what we've seen in the market in the last few years in the floating offshore wind is that four technologies have really occurred or stood out in terms of the floaters. 

These, effectively are four technologies, a semi-submersible, which is one we've seen on the floating pilot project I've been involved in in France. You also have a pile, a floating pile technology. You have a barge technology and the last one is the submersible platform technology and all of those have advantages and drawbacks, they have all been tested to a certain extent and they're being used in different locations given different circumstances. But the level of tests are being carried out generally on slightly smaller wind turbines and there isn't a long history to see how these floating, these floaters perform in the long term and the level of maintenance required, particularly with some of the more elaborate ones. And so that in itself is a challenge for the lenders. Beyond that, one of the other issues which is also impacting the ability of lenders to finance these types of infrastructures is the fact that the entities manufacturing these floaters are not the entities who've designed them. You generally have specialists, entities who are responsible for the designs, and the manufacturers are reluctant to wrap or to guarantee that design and to guarantee that that design will work. And that from a lender perspective is a real issue because they're used to getting the EPC contract who's going to build the project to wrap whatever it is in terms of design, whatever it is they're building.

And so unless, until, we get over that particular issue, that is going to be a major challenge from a lenders' perspective. In addition to that, there's other items of technology which come into play when you're dealing with floating, which you don't have with fixed bottom offshore, such as the anchoring system, the cabling system of course, because it's not just a simple cable which connects, you have all sorts of ballasting, a de-connection system to ensure you can disconnect in an emergency or you need to do major maintenance on these wind turbines. The port infrastructure is really important because these are massive floaters and so you need to adapt ports.

So there's a lot of challenges around building at scale floating offshore wind which you don't necessarily have for fixed bottom. 

Richard Heap:

Okay and how closely do you follow developments in the floating wind sector outside of Europe? 

Mark Barges:

So as a global firm, Ashurst covers a number of jurisdictions across the world, both Europe, America, Asia, Australia, and therefore we have a global energy practice and we're very involved in what our colleagues do in sharing expertise. And so we do follow where the developments are taking place. Now, I think the first thing to note is that Europe dominates the offshore wind space and has done so for a number of years, probably for the last 15 years, and will continue to do so for the foreseeable future. Behind Europe, you have probably two countries which really stand out, and that is China and the US. China has been at this for quite a while. I mean, to give you an idea of the pipeline, out of a 60-odd gigawatt pipeline, China delivered 18 gigawatts last year. So they are accounting for about one third of the total offshore wind installation in the world, which is quite staggering. The US comes second or third, so to speak, just behind China, and they're around 8 to 10 gigawatts. Thanks in particular to the IRA and the stimulus package we're seeing in the renewable space there. And then after that you have a number of other OECD countries such as Japan, Korea, Vietnam also is looking quite a bit.

But the key activity is really taking place in the countries I've mentioned, mostly because of the intensive capital investment required for these types of projects, they require very high capex and therefore you are only going to see relatively mature markets developing those types of projects. There is in the long term a pipeline of projects in a number of other jurisdictions you know Brazil for example has a massive coastline and I think they're planning 18 gigawatts of projects in the medium to long term but that's going to take quite a while before those types of countries start really developing those projects.

Richard Heap:

That makes sense and so a huge number of global opportunities there. So a final quick question, so what are your future projections for the floating wind markets? I mean we started out with some headline statistics and we discussed some of the trends, but where do you see things going from five or 10 years from today?

Mark Barges:

Well, I mean, placing the drive for renewable energy in the context of the climate change debate, clearly there is a massive imperative for renewable power to develop at scale very quickly across the world in order for us to meet the requirements of the Paris Agreement. And in order to do that, you know, you effectively need to double or triple the installed capacity, you know, the installed capacity which we're seeing at the moment every single year. And as a result of that, I think the development of offshore wind in general and floating offshore wind at the same time will be a critical part of that.

As you may know, onshore wind is limited to a certain scale because installing massive wind turbines, which are several hundred meters high is going to be a problem with lots of nimbyism across Europe in particular, which has really prevented a lot of onshore wind being developed. So, offshore wind is a real game changer in the sense that you can really go develop projects at scale and it offers a number of advantages in terms of the size of the turbines you can install, particularly with floating offshore wind because you can go much further off the coast and therefore you no longer see the wind turbines. With floating you can actually choose which is the optimal place to locate a wind farm, as opposed to having constraints around the seabed and the depth. And as a result, the efficiency of the wind farms in floating offshore wind is likely to be a lot higher than fixed bottom and in a different scale on order of magnitude compared to onshore wind. And as a result of that, you know, bigger turbines in windier areas further offshore are going to mean there's about five times more areas where you can build floating offshore than compared to fixed bottom offshore. So there's vastly more areas which you can target for building floating. So for all of those reasons, there is massive scope for floating offshore to prosper quite dramatically and even in some ways potentially overtake fixed bottom because the returns and the potential is so great.

But that's in a medium to long -term scale as opposed to anything in the immediate future because of the nature of the technology and the massive CAPEX required to get there.

Richard Heap:

It's great to know there's people working in the industry every day to try and achieve those targets.

Well, that feels like a good place to leave it. Mark, thank you for sharing your insights today. 

Mark Barges:

My pleasure. Thank you, Richard. 

Richard Heap:

And to you, the viewers, you can find more insight videos on the Tamarindo website.

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