Increased costs may signal lull for offshore wind supply chain

Whilst the recent AR6 renewable energy auction has given a welcome boost to the offshore wind sector, a lack of earlier schemes reaching a final investment decision (FID) is creating challenges for a Scottish supply chain which could, with the right support, lead the world, writes Robert Logue , Head of Energy Services and Infrastructure at Gneiss Energy | Cleantech & Renewables .

This article first appeared in The Scotsman newspaper.

Whilst the recent AR6 renewable energy auction round run by the UK Government has given a welcome shot in the arm to Britain’s offshore wind sector, a lack of earlier schemes reaching final investment decision (FID) is now creating a more difficult investment environment for the supply chain in Scotland, the rest of the UK and worldwide.

AR6 brought a dose of reality back to the market, reflecting the supply chain price and debt cost increases which made many projects under AR5 untenable.

However, offshore wind projects which won contracts prior to the cost hikes but did not reach FID have not been so lucky. They are stuck between a rock and a hard place, with lower energy strike prices, but the same cost pressures that later projects now face.

This has created a potential lull in offshore construction, with multiple major schemes currently on hold and a number now cancelled.

Vattenfall has stopped development of its 1.4GW Norfolk Boreas offshore wind project due to rising costs, warning that Britain could struggle to meet its wind targets without improved incentives.

In the US, Invenergy has paused it 2.4GW New Jersey project, citing turbine price spikes, whilst Norwegian state-backed energy company Equinor has now cancelled its offshore wind projects in Spain and Portugal in an effort to rein in spending.

This hiatus is creating a real dilemma for a supply chain eager to reskill, tool up and win business. Without sufficient visibility, firms struggle to attract investors, and without investment, firms cannot grow as quickly as the market requires to deliver on net zero commitments.

For the ports and the Tier 1s and the multinational OEMs, a calm year or two is, arguably, less of a challenge as they know there are sunny (and windy) days ahead with big projects to come, and with understanding shareholders and patient capital, many can afford to wait.

Of course, few of these firms are UK-owned – the ship has very much sailed here – and these global businesses will follow the market, wherever the wind blows. Once Scotland’s Scotwind and INTOG projects are built out, they’ll be gone.

But below these top tiers lies a potentially rich and growing supply chain of indigenous Scottish SMEs which, with the right investment climate, could become phenomenally successful export-led firms.?

For them, the problem is more pointed. Many of these businesses are already significant concerns – delivering solutions and services into oil and gas – with the ideal capabilities to change tack and grow in a growing global market.

What they need is private capital – in the ￡5-20 million range – to support growth, develop or repurpose technologies and upskill and win big in the new sunrise industry. But without a pipeline of work over the next three to four years, private capital is reluctant to play.

New frontiers

However, if the right investors can be found, the opportunity is vast: there are very few industrial sectors where the UK can make a genuine claim to be a global leader – but offshore wind is one.

The frontiers we are pushing, and the lessons we are learning – installing monopiles in 60 metres water depth and deploying and maintaining floating wind structures off our wild northern isles – will be of immense value to other countries as they follow our lead.

The parallels with the past are clear. In the 1970s, Nigg, Cromarty, Ardersier and Kishorn were at the vanguard of a very different energy revolution: engineering, constructing and supporting vast offshore structures deployed in challenging conditions offshore.

That buccaneering construction phase is now long gone, but on the back of this the UK built a unique and expert supply chain, with companies such as Wood Group exporting home-grown expertise around the world.

We could do the same with offshore wind today. Play it right, and the expertise gained in the construction phase can have a very long tail. But if we miss the boat – and we could – overseas operators will enter the space.

Already we are seeing major supply chain companies making moves, with Ramboll acquiring K2, Global Energy Group investing in Nigg, OEG building an offshore wind service business and Venterra being established and developed – each positioning themselves to become major delivery partners of tomorrow.

Making it happen

There is no magic bullet.

Offshore wind is a project-based business – build projects and the supply chain will come, but medium-term uncertainty is making it more difficult for SME boards to invest ahead of this growth

Private capital will be key but will be harder to unlock until confidence that projects will successfully reach FID and be delivered. ?Until that comes, every step our public agencies can do to reduce uncertainty and increase confidence will boost our chances of success in supporting the supply chain build out.

Schemes such as the Offshore Wind Growth Partnership’s manufacturing facility support programme (MFSP) are ideal – offering match funding to accelerate and de-risk pre-FID investment in manufacturing components, systems and facilities.

However, accelerating the route to FID is key. How do we shorten the timeframe between CfD and FID, and how do we fast-track grid, so projects can come onstream on time? New thinking on phasing and delivery windows is extremely valuable, reducing deployment risk and easing pressure on supply chain bottlenecks.

But there is more to do on making the process as short as we can – and the current frustration around Berwick Bank is a tangible reminder of the challenge we face.

Naturally, all our agencies must work as one – HIE and Scottish Enterprise need to be in lockstep, delivering funding pots for training and technology development, with a relentless focus on using public support to derisk and draw in private investment.

Nature Scot needs to be in the fold too, working constructively with developers to ensure that future schemes can be easily and quickly consented – an adversarial approach serves no one.

Engagement is fundamental. Supply chain firms need to be in dialogue with developers now – working wherever possible collaboratively in innovative solutions which can simplify delivery, reduce risk and cost, and potentially lower O&M requirements in the long term. Which ultimately will help support increased private investment across the supply chain.

The much-anticipated GB Energy and National Wealth Fund will have critical roles (still to be defined), but already the Scottish National Investment Bank (SNIB) and the UK Investment Bank (UKIB) are showing the way, collaborating to invest public risk capital in companies across the UK which is unlocking significant private investment.

The size of the prize is tantalising, both for Scotland and the whole of the UK.

If we can act fast, and in concert, we can accelerate projects towards FID and leverage public funds to help indigenous firms prepare and attract the private capital they need to grow.

Investors won’t get fired for following the offshore wind megatrend, be they do need to see revenue and growth opportunities in the near term and be assured they won’t get their fingers burned.

More certainty across the board is key. Get this right, and we can build a successful Scottish and UK offshore wind supply chain – generating jobs and revenues in the years to come, and potentially exporting our skills and expertise for many decades thereafter.