New offshore wind investors 'may balk at zero-subsidy projects'

Zero-subsidy European offshore wind projects may prove to be solid investments, but their risks are too steep for many big potential investors, said Torsten Lodberg Smed, senior partner at Copenhagen Infrastructure Partners (CIP), speaking at the Recharge Thought Leaders roundtable in Amsterdam on Monday.

The global offshore wind sector was stunned earlier this year when Orsted (then known as Dong) and utility EnBW won 1.38GW of future German offshore capacity with zero-subsidy bids, prompting the Netherlands to launch its own subsidy-free tender, with bids due next month.

Some in the industry are concerned that such subsidy-free projects require an overly optimistic view of future cost reductions, while underestimating the risks of projects that may not be on line for nearly a decade.

“Generally for Europe, I’m a bit concerned about the viability of everything that’s going on,” Smed said.

“We’ve seen zero [subsidy] bids. All I can say is, if these projects end up being purely merchant, I think there will not be a big investor appetite – at least not from many of the investors I know.”

CIP has invested in several European offshore wind projects, including Germany’s recently completed 402MW Veja Mate, and is also active in the early-stage US and Taiwanese offshore markets. The Danish fund manager has raised €6bn to date, much of it coming from institutional investors.

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With the most aggressively priced offshore wind projects not expected on line until the mid-2020s, developers are counting on substantial advancements in turbine size and efficiency to make the economics pencil out. “But it remains to be seen whether that new technology will actually be available” in time, says Smed, who was an offshore wind executive at Dong before co-founding CIP.

Meanwhile, the economic climate could be much less favourable in a few years’ time.

“You can’t rule out that before these big projects reach [their final investment decision] we have a new economic crisis,” he says. “It’s actually not unlikely we’ll have a big issue at some of the projects.”

Zero-subsidy bids have been a thrilling development for the offshore wind industry, but they must be assessed in the proper context, says Jonathan Cole, managing director for global offshore wind at Iberdrola Renewables.

As an industry, “some of our biggest achievements are not actually achievements – they’re promises”, Cole notes. “Some of the things we talk about with cost reductions are for projects that haven’t yet been built.

Market might not support mega-turbines

European offshore developers are counting on a new generation of huge turbines for their zero-subsidy projects, but the market may not be big enough to justify the R&D investment for a 15MW machine, says Henrik Bæk Jørgenson, chief product manager at MHI Vestas.

“To deliver turbines of 15MW, we’d have to invest a lot of money,” says Jørgenson, whose company currently offers a 9.5MW model – and has kept its cards close to its vest regarding future upgrades.

Jørgenson notes that an “optimistic” forecast for the near-term European offshore market is 4GW a year, equivalent to less than 300 turbines at 15MW each.

“With two, three, maybe four players in the market, is that sufficient for us to make a return on our investments, build the factories, and so on? I think the answer speaks for itself.”

The potential take-off of US and Asian offshore wind will help, but the conditions in these markets will require substantial product modifications – “it’s not a one to one”, he says.

So would the European market need to be bigger than its current trajectory to warrant the investment needed to develop of a 15MW turbine? “I would say so, yes,” Jørgenson says.