Developers in the offshore wind industry are starting to witness higher costs and tougher terms and conditions (T&Cs) applied as the supply chain faces unprecedented capacity and cost pressures – just as demand in this booming sector is soaring.
History tends to repeat itself. By the looks of it, we are heading back to the pre-financial crisis conditions of 2005-2007. Back then, wind turbine manufacturers and balance of plant and construction suppliers were forced to raise prices and impose tougher T&Cs as they were unable to profitably meet market demand.
The result was a supply chain that, for a while at least, successfully achieved a healthy and sustainable balance – by insisting on profitable deals which included upfront million-euro reservation fee agreements to initiate negotiations or reserve capacity. Crucially, the industry found a way to provide a sustainable supply of wind turbine platforms. But to everyone’s detriment, the industry since has succumbed to a race to the bottom bringing the OEM sector to its present, vulnerable condition. The supply chain pressures come at a time when global ambitions are accelerating day by day and multi-gigawatt projects are emerging at an unprecedented rate to meet climate change and decarbonisation targets worldwide.
The offshore wind market is expanding at such a rate that is again forcibly altering the dynamics between suppliers and developers. There is a heavy pull on developers to lock-in capacity and resources to be able to bid on the fast-growing list of auctions worldwide. OEMs too are struggling to keep up as there is only a very short list of suppliers who deliver bankable products able to withstand the trials of ultra-harsh offshore environments. Developers need a credible combination of equipment and services capability to deliver new projects. The industry needs the scale for several developers to bid on the same project, with availability of early-stage resources to survey weather, soil and seabed conditions and analyse metocean data, just to get a project started.
This abrupt change of dynamics means OEMs have started demanding up to 30% price increases in the past nine months
This abrupt change of dynamics means OEMs have started demanding up to 30% price increases in the past nine months. They have done so to minimise their losses on increased raw material price inputs and old contracts with small or negative margins. At the same time, they are being much far more selective in deciding which developer to partner with when bidding for projects.
With multiple developers bidding in each auction, OEMs will be forced to match each developer with a dedicated sales team accommodating each developers’ strict confidentiality requirements. As will key services suppliers providing customised and confidential tender material. And on top of this, demand is going global well beyond traditional markets in Europe with opportunities surging in the US, South America, and Asia-Pacific.
There are simply not enough human resources in the market to manage the number of bids and contracts to be negotiated for the growing global offshore wind market. The issue is expected to intensify over the decade as more developers emerge worldwide and the demand for experienced people intensifies.
Human resource crunch time
Developers must now compete to contract with OEMs and other suppliers by offering the best conditions as well as chances for winning a project. Looking at earnings distribution across the value chain in recent years, developers have successfully maintained a healthy margin on their projects whereas most OEMs have struggled, resulting in weak or negative EBIT [earnings before interest and taxes] margins; and these pressures have often been pushed down the supply chain through tier 1 contractors and on to their subcontractors.
Apart from demand exceeding supply, macroeconomic factors are impacting global supply shortages along with inflation and geo-political uncertainties playing their role. This means it will be even more critical for suppliers to select the right partners on the developer side.
So where does that leave developers? How can they build new windfarm capacity in these conditions and meet the commitments they have made? They must start rethinking requests for proposals, tenders, and project interfaces to optimise business cases and attract OEMs and supply chain partners to deliver the highest level of certainty and success for their stakeholders. And an innovative approach to contracting and engagement with the supply chain will be a key part of the answer.
· Kasra Jamshidi is head of procurement & contract management at energy transition project consultancy Naver Energy
