Round 3 Of The UK's Offshore Wind Programme Has Challenges Ahead

Introduction

Progress is lagging behind the Crown Estate's intended timescales for Round 3 of the UK's offshore wind programme. Why is this so and what can be done to put Round 3 projects back on track?

Background to Round 3

The UK is currently the world leader in the generation of offshore wind energy thanks to the first two rounds of site allocations for offshore wind farms which together comprise 8GW of generation capacity. As offshore wind generation is a key component of the UK's energy strategy going forward, the UK government is relying upon plans to extend this through Round 3.

Allocations for Round 3 were launched in 2008 with high hopes of producing an additional 25GW of offshore wind energy. The successful bidders were announced in early 2010 and construction is scheduled to commence in 2014. However, progress has not been as anticipated and industry estimations have queried whether there will be any substantial degree of offshore wind generation by 2018, as originally anticipated by the Crown Estate.

Size matters

The key reason for the pessimistic outlook is the current economic climate. The scale of the Round 3 allocations is so substantial that, even where the developer is a utility, many, if not all, of the projects will require external funding. Funding, it seems, is proving difficult to obtain.

For those utilities seeking to engage in Round 3, the option of conventional funding may not always be viable. In particular, utilities are generally not able or willing to allow a project to carry debt and are rarely willing to cede control. They also need to reconcile risk profiles with investors, which is not easy given investors' typical aversion to risk, and the high level of practical risks inherent with this still-evolving sector.

Suppliers, such as wind turbine manufacturers, might be willing to participate in the investment. However, it is hard for them to agree to the risk profile that utilities require when in joint venture.

The Crown Estate had stated that it will co-invest with developers for up to 50% of the total investment for a development. This would go a long way to minimise the risk for institutional investors; however, there is no evidence that the Crown Estate is still planning to invest to this extent.

Due to the high capital expenditure required at the outset of offshore projects, funding needs to be in place prior to committing to a project. Many obstacles relating to funding need to be addressed before funding can be released. However, funding needs to be in place, or at least a binding commitment to the project needs to be made, before many of the obstacles can be overcome.

Here are some of the main obstacles

Cost of offshore developments

Compared to other renewable technologies, offshore wind is still relatively expensive in the short term. A KPMG report to be published soon reportedly estimates capital expenditure costs of around £3-4m per installed MW capacity, which is much more than equivalent fossil fuel energy.

Of course, any focus...

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