The Blog - Wind energy market analysis

Posted 14/12/2016

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Profit-conscious Shell dives in to offshore

 

Last month Shell chief executive Ben van Beurden told the Energy for Tomorrow conference in Paris that he did not see enough profitability in the renewables industry. We covered this in a Wind Watch at the time, so why are we bringing it up again so soon?

Simply, because Shell seems keener to invest in renewables than his words then suggest. The Dutch utility is leading the consortium that, earlier this week, won the right to develop the 680MW Borssele 3 and 4 schemes in waters off the Netherlands. The group comprises Dutch utility Eneco, Dutch contractor Van Oord, and Japanese investor Mitsubishi/DGE.

How this offshore wind investment fits into Shell’s strategy? For this, we should look at an interview with van Beurden on Reuters at the end of last month. He said: "The idea that you can just be a very clever observer and step in when the moment is right, forget about it", and added that Shell is planning deals in renewables to keep pace with the industry.

In this context, the choices of Shell’s partners in Borssele’s deal make a lot of sense. Eneco and Van Oord are highly specialised companies very familiar with the Dutch market, which should help to assure the process of building the scheme goes smoothly.

The falling price of offshore wind also suggests it is a good time to get into the sector. These cuts enable wind to become an ever-cheaper source of energy – and so a more competitive one compared to other sources. This should mean more support from governments, and more deals in future.

The group led by Shell has won this tender at a strike price of €54.50/MWh excluding transmission, which is the lowest levelised cost of offshore wind energy achieved so far in the Netherlands. Just four months ago, the Dutch government awarded a contract to build the 700MW Borssele 1 and 2 projects to Dong Energy, at a price of €72.20/MWh excluding transmission. That caused shockwaves in wind as it was below the symbolically important €100/MWh – but this new tender has achieved a 25% reduction even compared to that.

However, van Beurden is right to highlight the issue of profitability. 

The risk of ever-cheaper auction prices is that they will squeeze profit margins, and we are sure that Shell will be well aware of that. Nevertheless, it looks like it wants to play a more important role in the renewables even setting aside its concerns about profitability. Even if offshore wind is only a small part of the utility’s business – van Beurden has said that much – it can still play a supporting role in its strategy as oil prices continue to fluctuate.

The Borssele 3 and 4 win is likely to be just a first step for Shell to enter the offshore wind market. The company also plans to invest in schemes in British and German waters.

Whatever happens next, it has made a splash with this first deal.

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