What are the opportunities and risks in the floating wind sector?
Michael Kruger, senior associate in the global energy team at law firm Watson Farley & Williams, talks to us about the challenges and opportunities in the floating wind sector. WFW is a platinum sponsor of our Financing Wind Europe event in London.
What role will floating wind play in the future of renewable energy?
Floating wind is going to have a very important role. It hasn’t been a significant feature in the renewable energy mix to date but there are a number of compelling reasons for why I see it becoming important.
First, and most obviously, floating wind is going to open up regions that are currently unsuitable for fixed-base offshore wind, either because of sea depths or because of strong winds and ocean currents. Therefore, we are anticipating projects at deeper waters in established offshore wind geographies as well as in parts of the world where the offshore wind market isn’t as mature, such as California, Korea and Japan.
Finally, floating wind projects are better suited to turbulent weather conditions when compared to fixed-base projects, which is particularly beneficial in Asia. In this regard, the fact that operation and maintenance for floating turbines is undertaken onshore, also reduces the impact of difficult weather and could help to mitigate intermittency concerns.
It could therefore also lead to a reduction in the large contingencies we currently see for offshore wind projects, which need to be put in place to account for offshore O&M requirements.
What are the major challenges for investors in floating wind projects?
The asset class is still young and lacks the type of track record that institutional investors will need to see before they are comfortable investing at scale. Deals demonstrating the bankability of the technology haven’t really happened yet. Whilst the EIB has provided funding to WindFloat Atlantic and the Norwegian Government is supporting some of Equinor’s projects, there hasn’t yet been a commercial project financing which can be held up as a precedent. These deals are coming, and in fact WFW are working on two commercial project financings of floating assets currently, but the industry will need several successful deals to close before it can really take off.
Another challenge is the current subsidy framework.
Mature renewables assets are moving towards a subsidy-free future -- for more on this, see WFW’s recently-launched report here -- but floating offshore wind will likely struggle in this environment. When the Renewable Obligation Scheme was still open, UK floating wind projects could get accredited for 3.5 ROCs (as opposed to 1.8 ROCs for fixed base wind prior to the scheme closing).
However, we now have one Contract for Difference pot that does not distinguish between fixed foundation and floating offshore wind, and which therefore means the support available for floating wind no longer reflects the fact that it is significantly more expensive than fixed foundation offshore wind.
A potential solution would be to have a separate CfD pot that is ring-fenced for floating wind, enabling floating wind developers to compete amongst themselves rather than with established fixed foundation offshore wind developers. Until a solution is found though, it seems likely that the market will be dominated by utilities with strong balance sheets and a strategic desire to develop floating offshore wind projects rather than, for example, financial investors.
Looking at Asia, insurance capacity may be another challenge. Given there is already a large pipeline of fixed-base offshore wind projects there may not be enough supply to meet further project demand. This is another issue that will need to be unlocked in order to make it easier for developers to secure further investment.
And what are the major opportunities compared with fixed-base offshore wind projects?
The opening of new markets is a major opportunity, not just in Asia and the US but also in new areas such as South Africa, Brazil and Australia.
In these new jurisdictions the ground conditions are pretty much unknown when compared to the more mature northern European market. However, this becomes less of an issue with floating projects given that they are less invasive than fixed foundation projects. Given reduced seabed surveying requirements (etc.) should reduce development risks, it doesn’t seem unreasonable to suggest that investors could potentially get comfortable being involved with floating offshore wind projects at an earlier stage.
Another benefit of building floating projects, which can be built further offshore than fixed foundation projects, is that they are less likely to encounter ‘nimbyism’. For example, in many Asian jurisdictions the fishing industries have a lot of influence, which traditional projects have been more likely to interfere with. Addressing the disruption for these parties has the potential to be costly, but these issues are less likely to be faced further offshore where floating projects would be based.
And, last but not least, the potential size of the market should make floating wind look attractive for investors, with operating capacity forecast to increase from 57MW today to 4.3GW by 2030.
How close is the sector to being commercially mature and attracting institutional investors?
It took a long time for the offshore wind sector to reach commercial maturity.
The first fixed-base project was commissioned in Denmark in 1991, the UK’s first large-scale offshore wind farm in 2003, and we only started seeing large projects obtaining project finance between 2008 and 2010. If you consider those kinds of timescales, you might think that it would take a long time for the floating sector to reach commercial maturity.
However, I don’t think it will take anywhere near that long for this industry to mature, not least because there is a clear precedent in fixed-base offshore wind, there are a lot of market participants who are keen to invest / lend when the time is right, and there is also a lot of political will.
Before reaching commercial maturity, the market will need to pass some significant milestones, such as finding a resolution to the question of subsidies, the completion of two or three major project financings and for enough existing projects to have been operating for a reasonable length of time so that the industry has the technical data / track record necessary to back up the assumptions funders will be making when lending to floating projects. Hitting these milestones will all clearly help the market move forward, but this will naturally take time, so it’s likely going to be a few years before we get to that stage.
Which trends are set to affect the floating wind sector the most in the next five years?
Looking at the construction process, there are some strong arguments in favour of developers using EPC wraps on floating offshore wind projects at the moment.
First, interface risk is a bit more of an unknown quantity for now, when compared to fixed foundation offshore wind, which means market participants will want to be comfortable that risk is being appropriately managed and mitigated.
Second, many of the floating technology providers do not have the balance sheet strength typically seen amongst fixed foundation offshore wind contractors. If an EPC contractor with the right level of credit support is able to wrap the work provided by those contractors, that will be very helpful from a point of view of creating a bankable contract structure for the current floating market. This contrasts with the fixed foundation market where lenders are increasingly comfortable with multi-contracting strategies.
On the flip side, given the level of risk they will be wrapping, it may be that proper EPC wraps are prohibitively expensive, in which case, we may see partial EPC wraps instead, where the new floating technology is covered by the wrap but the less "risky" technology is procured directly by the project company and sits outside the wrap.
Another trend we are seeing from a contracting viewpoint is that a lot of the bargaining power is sitting firmly with the contractors, given there are a limited number of contractors who have the relevant experience at the moment. This is in quite stark contrast to the onshore and fixed foundation offshore wind market where there has been a lot of downward pressure on pricing (particularly following the removal of subsidies), there is a greater spread of expertise, and therefore the bargaining power sits more with the developers.
And finally, there is a lot of liquidity in the banking market for fixed foundation offshore wind projects whereas the project finance market for floating offshore wind is very much in its infancy. Accordingly, we expect to see higher margins, lower leverage and tighter covenants, as well as much more involved due diligence processes in the floating offshore wind market for the foreseeable future.
Given the ambitious growth that is being targeted across the industry, it will be interesting to see how long that lasts.