OPINION: Ideology and moral conviction alone will not get us to the energy transition
By BIN WANG - Chief Underwriting Officer
Today, in the offshore wind industry, the CFOs have retaken control of their boardrooms.
When politicians say that capital is not a problem, they are right, and yet they are also so very wrong. Yes, there is plenty of capital in the world, but under what circumstances will it deploy? Thus, a return to the fundamentals of the Capital Asset Pricing Model (CAPM) of corporate finance: capital demands a return which is commensurate with the level of risk which it must assume. Unless your shareholders are happy when you subsidize the energy transition, most CFOs are beholden to this simplistic golden rule. When we speak about public funds in democracies, even politicians are held accountable to an electorate every so many years.
‘Little wonder’
It is little wonder that yesterday’s discount rates used in Net Present Value (NPV) calculations have gone out the window in the face of spiraling inflation, attenuated supply chains, rising interest rates, dwindling subsidies, increasingly volatile global geopolitics and, yes, the ever-present requirement that the Levelized Cost of Energy (LCOE) become more and more competitive to the consumer. When these mathematics are revisited with today’s revised estimations, this is why so many projects have been put on hold recently worldwide. Ideology and moral conviction alone will not get us to the energy transition; we must find ways to enable it within the fundamentals of our economic reality.
‘Sobering’
If handled correctly, this industry wide “pause” can be welcomed and timely indeed, if we take this time to reassess and take stock accordingly. In my view, we should be seriously discussing a few key sobering realizations.
Might the industry benefit from signaling a plateau in the offshore wind turbines MWs arms-race? All three of the major Western turbine manufacturers are hurting, and the supply chain reels from a lack of uniformity, insufficient marginal revenues to counter large R&D sunk costs, an inability to build a truly resilient supply chain of spare parts, assembly-line built components, suitable installation and servicing vessels (don’t even get me started on the Jones Act here), etc., all of which would be ameliorated if we can make like Henry Ford and “Model T” this business to a greater degree.
It is time to focus on investment in infrastructure. Yes, we know it is not as sexy to speak about deploying hundreds of millions of dollars for ports and terminals, cranes, and harbor facilities, and this is exactly why many of these important facilities are severely lacking. These facilities are even more imperative when speaking about geographic regions which need to develop floating offshore wind farms, as to date, the only way to service turbines on floating installations is to tow them back to quayside for work to be performed. Often, these facilities are mobilized for the construction processes only, and then demobilized, rendering the O&M aspects completely helpless. Even in the bottom-fixed world, as touched on above, the dearth of Wind Turbine Installation Vessels (WTIVs) will heavily impact repairability and service downtime because of waiting for repairs for the foreseeable future.
In my realist’s mindset, it is unlikely that these issues will be solved without political support and potential increased access to public funds. Simply following projected LCOE curves downward and doubling down on zero or negative bidding policies is wishful thinking at best and is unlikely to jumpstart the industry out of these current doldrums. We have already seen the government in the UK signal more robust CfD (Contract for Differences) strike prices for Allocation Round 6, in view of the lackluster showing in the previous Round 5. And in the US, New York will also offer a new offshore wind auction to revive previously stalled projects, presumably at increased pricing for developers. These are welcomed developments from the perspective of the developers.
The industry needs to think more about value co-creation and co-operation, rather than how to push any and all risks possible across contracts to the other guy that you have leverage over. Yes, perhaps it was easier for the oil and gas industry to implement knock-for-knock philosophies when there was enough margin to go around for everyone to eat. Today’s constraints, however, make it even more imperative to work together with the players of the supply chain. For example, it would make a lot of sense for the various developers committed to the same geographic region to speak about how to get together and work with local governments to invest in infrastructure together, perhaps invest in a vessel, for the benefit of everyone’s upcoming developing wind farms within the same region. In the US, the New England states have begun to do just that. This is something that the industry needs more of, to grow the overall pie, rather than fighting over constrained margins with an industry currently on pause.
‘Wake-up call’
The current time should serve as a wake-up call to everyone involved. For our part, the insurance industry will continue to support the development and operations of existing and emerging technologies within the offshore renewables industry. But we cannot do our part efficiently or effectively unless everyone does theirs. The costs of repair and loss of income due to downtime have gone through the roof for our industry as well. Without further standardization, infrastructural investment, and investment in relevant tonnage, and working together, this trend is likely to continue. When offshore wind projects get bigger per turbine, bigger in terms of number of turbines in a farm, and deeper and further removed from shore, the costs of repair and replacement out on the high seas grows exponentially. And when emerging technologies puts not just any one single turbine at risk, but all turbines of a certain design or installation methodology within a wind farm, or even all similar wind farms within an entire portfolio, you can understand how nerve-racking this industry can be from our perspective as well.
But this is our job, and we take immense pride in it. We all need to work together and help each other to make this tremendous endeavor of humankind work. This is the first energy transition in the history of humanity in which we move from better energy (more constant, more storable, more transportable, denser, etc.) to energy that requires a lot more effort on our part to effectively bring to bear. But this transition is necessary. So, there is nothing more to do than to roll up our sleeves to the tasks before us - that’s certainly the approach we take here at NIORD. We also know that the only way we can do this is together.
