Breaking The Un-virtuous Cycle Edition
John MacAskill
Accelerating renewables one ? at a time | Offshore wind & supply chain expert | Establishing & growing businesses across the offshore wind value chain | BD & marketing expert | Industry Speaker
Nearly 1/6th of the year done!
After that ?? frightening thought, thanks for again opening this newsletter. It started just over 2 years ago with a yearning to talk about ScotWind and local content, with a side of coffee and a heavy soundtrack, and it's grown from there. And thank you for staying the course!
Soooo, what is this edition focusing on?
Well this edition brings you:
? My new lead blog: Breaking The Unvirtuous Cycle (or how to not circle the drain...)
? Some news and where you can bump into us...
? ...and of course some ? coffee, and a review of that AeroPress thing and...of course...
???? ...some of the early great metal albums released in 2024 so far.
So please read on and share this with colleagues...get them to subscribe!
We have read about the financial pains in offshore wind ‘ad infinitum’ over the last few months. In the last few conferences and get togethers I have felt a bit of a buzz as confidence has returned.
But in this blog I try to make the case for not just brushing ourselves down and moving on. We were in an 'Un-virtuous Cycle'; we were locked into a cycle that was only degrading the economics of projects and value chain and so our chance to develop a sustainable industry.
We were circling the drain, and we need a way of breaking that and creating a virtuous cycle.
The offshore wind sector in Europe has been hailed as a cornerstone of the transition to renewable energy. It has led and other markets in APAC and the Americas are trying to follow.
Yet, this transition is not without its challenges. The industry faces a paradox where its success is simultaneously its Achilles' heel. This blog attempts delve into the 'Un-Virtuous Cycle' that has characterised the project economics of offshore wind in Europe and elsewhere, highlighting the pressures on developers, the supply chain, and the broader financial landscape. It seeks to unravel how the industry can navigate these challenges to ensure the sustainable growth of offshore wind as a pivotal component of Europe's energy mix.
Understanding the 'Un-virtuous Cycle'
The 'Un-virtuous Cycle' is a phenomenon driven by the hyper-competitive nature of seabed and offtake auctions. These auctions have consistently seen demand outstrip supply, leading to auction results often falling well below government-set strike prices.
While initially deemed sustainable in an era of stable raw material costs and financing rates, this dynamic has placed undue pressure on the supply chain. Suppliers are forced into contracts that compromise profitability for the sake of competitiveness, undermining their ability to invest in new capacity. This scarcity in supply chain resources has, in turn, fueled inflation within the sector, exacerbating cost pressures and eroding the economic viability of projects.
The boiling frog
The Russian invasion of Ukraine and the resulting spike in energy prices driven by our addiction to gas, and often Russian gas, this put a turbocharger under inflationary pressures. The death of a thousand cuts the industry and it's value chain was suffering became more dramatic. The industry was for a number of years like a slowly boiling frog. We expressed the pain, but then responded to the next ITT.
But the industry decided not to boil itself, but leap out.
The cycle reached a breaking point as projects witnessed inflation rates of 20-40%. High-profile projects like Vattenfall's Norfolk Boreas faced cancellation, and in the US, developers began to exit their offtake contracts. In the UK, the Allocation Round 5 (AR5) saw an unprecedented absence of bids from offshore developers, prompting a significant recalibration in Allocation Round 6 (AR6), with the government adjusting strike prices upwards to reflect the new economic realities. Similarly, in the United States, states like New York and New Jersey have revised their offtake solicitations to better align with current project economics.
Breaking the 'Un-virtuous Cycle'
So we started 2024 in a more positive place than where we finished last summer. But we have to guard against re-entering this 'Un-virtuous Cycle', but only at a higher altitude. Because we we don't break this and create a virtuous cycle. We will be here again.
Developers are at the forefront of navigating the 'Un-virtuous Cycle'. Their perspective is crucial in understanding the path forward. To mitigate cost overruns and enhance project viability, developers are of course advocating for more realistic auction frameworks that account for the true costs of project development; this includes considering raw material price volatility, supply chain constraints, and the cost of financing.
The 'Un-virtuous Cycle' has laid bare the complexities of scaling offshore wind in a financially sustainable manner. Breaking this cycle requires a concerted effort from developers, financiers, and policymakers to create an environment where the economics of offshore wind projects are grounded in realism.
As Europe looks to offshore wind as a key part of its net zero strategy, the lessons learned from navigating the 'Un-virtuous Cycle' will be vital in establishing a resilient, profitable, and sustainable offshore wind sector.
Risks remain...AR6
A few weeks ago we received the UK's AR6 announcement allocating ￡800m ($1.02bn) for offshore wind. On first glance this x4 increase in the pot size is positive news. And it is, (there is a but coming) but as usual its all in the detail.
The references prices are low and drop to ￡24.21/MWh, that with the drop in capacity factor all reduces the budget's impact. But what does that mean in terms of an 'Un-virtuous Cycle'? With 10 projects, c15GW of potential capacity, all eligible for AR6, what could this mean? Well if the strike prices are close the previously awarded ￡73/MWh, then just over 3GW will receive awards. With developers knowing this, and the attractiveness of the stable and mature UK market, I am confident that the bidding strike prices will be much lower.
The risk is that 'bidding hunger' (a phrase used by Maria Holm Bohsen at Aegir) will drive developers to the economic edge once again.
It is important to take breaking this Cycle seriously.
Breaking the 'Un-virtuous Cycle' within the offshore wind sector necessitates a multifaceted approach that addresses the root causes of the cycle:
Here are the key strategies needed to create a virtuous cycle:
1. Reforming auction mechanisms
Auctions should be designed to reflect the true costs of project development, including considerations for environmental impact, supply chain limitations, and technological challenges. This could involve setting minimum price floors or adjusting auction designs to account for qualitative factors such as supply chain development commitments or technological innovations.
To accommodate the volatility in raw material prices and other cost variables, auction terms should include provisions for price adjustments based on predefined indices or market conditions. This flexibility would help developers manage risks more effectively.
2. Enhancing supply chain resilience
Govts and industry players must collaborate to invest in the expansion and diversification of the supply chain for offshore wind. This includes encouraging the development of local supply chains to reduce dependencies on international markets, more local content equals more capacity in the supply chain.
More innovation in materials, manufacturing processes, and installation techniques can lead to cost reductions and efficiency improvements. Public and private investments in research and development are crucial in this regard.
This will necessitate a cap on WTG sizes, to industrialise, we need to have stability in WTG size growth.
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3. Diversifying financing models
Going beyond traditional debt financing? The sector should leverage green bonds, sustainability-linked loans, and other innovative financial instruments that offer more favorable terms for renewable energy projects.
4. Regulatory and policy support
Clear, stable, and supportive regulatory environments are essential for attracting investment. This includes streamlined permitting processes, grid transmission infrastructure development and investment, long-term policy commitments, and mechanisms to mitigate regulatory risks.
Policies such as tax incentives, subsidies for technological innovation, and mechanisms for risk-sharing can significantly improve project economics. These measures can help offset the higher costs associated with pioneering new technologies or developing projects in challenging environments.
5. Fostering collaboration and knowledge sharing
Encouraging true collaboration among developers, suppliers, financiers, and governments can lead to shared best practices, reduced costs, and more innovative solutions to common challenges.
Offshore wind is a global industry, and international cooperation can help harmonise standards, share risks, and pool resources for research and development.
Conclusion
Breaking the 'Un-Virtuous Cycle' for good, requires concerted efforts across the industry and supportive action from our Govts/policymakers. By reforming auction mechanisms, enhancing supply chain resilience, diversifying financing models, providing regulatory support, and fostering collaboration, the offshore wind sector can not just break the previous 'Un-Virtuous Cycle', it could create a new virtuous cycle and prevent us from just circling the drain again...but just from a higher altitude.
Some recent news and blogs from OWC and the rest of the ABL Group. Check out the news and insights and reach out if you want to know how we can help you:
Some LinkedIn posts you may have missed:
Meet me and our renewables teams at the following events over the next month or so:
This edition comes to you powered by KAWA Coffee Ltd. Thanks again to KAWA founder Regan Black for his continued support of this Newsletter...it runs on coffee...
So a review of the AeroPress...
So this thingy was mentioned positively in an FT article and I immediately thought, a new method of making coffee? I need that! It was not cheap for some plastic, rubber and some thin disc filters.
It is curious device that promises a world of flavours but demands a ritual akin to a morning workout.
It's the Swiss Army knife(!) of coffee making, attempting to blend espresso and drip coffee into one. Whether it is the best tool for anything is debatable. Using it feels like dabbling in a minor bit of alchemy, where precision and a bit of luck determine whether your coffee embraces its identity crisis with gusto.
Brewing with an AeroPress is an exercise in patience and physical prowess. It’s you versus the coffee, in a kitchen turned gym, where each press is a triumph or a potential disaster...indeed I normally have to mop up after making one.
From spending some time on X under the #auropress hashtag, one finds that the AeroPress community is a passionate lot, debating brewing techniques with the enthusiasm of scholars. And indeed for me, when all the stars align—the grind, the pressure, the magic—you’re rewarded with a cup of coffee that’s smooth, rich, and justifiably satisfying. It’s a brew that’s earned its stripe...even if it makes you question your life choices along the way.
In essence, the AeroPress is a blend of genius and bloody madness. It’s not for everyone, especially if you value your morning routine unencumbered by physical exertion.
The AeroPress: where coffee making meets muscle building, and every cup is a victory. If you have some decent guidance on this or sources, please link in the comments. I've not given up yet...
There is a rite of passage in my family...brother, sister, wife, son, granddaughters and nieces...all get their first taste of live metal music from brother, husband, dad, granddad, uncle John...in other words, me. Back in the pre-COVID days we even had an ' OWC Metal Night' where I would suggest 3 bands and the consensus would have some of the team and me trundle out for a spot of headbanging.
Last month it was my niece Rebecca who enjoyed as her first metal gig a hardcore night with Malevolence headlining in a smallish Edinburgh venue.
It was a great night, 4th time on this album cycle I seen these bruisers from Sheffield, a 5th will be a Bloodstock in August.
Last week it was one for the more, ahem, light of hair brigade. Uriah Heep, Saxon and Judas Priest played the OVO and it was a great night of classic metal.
In terms of albums in 2024 I have quite a few favs so far:
Could easily have added Judas Priest, Midnight and more. A strong year so far. So see if these tickle your metal bone. Let me know if you are attending Download or Bloodstock in the summer!
Well that's it for this edition.
Thanks for spending some time reading it. Please subscribe, comment, and share with colleagues.
So stay safe, enjoy life, and catch you next time and at events in the real world. ????
Cheers
Sales & Marketing Manager
6 个月A little bit of what you fancy .. always does you good ??