The UK offshore wind industry is surpassing all estimations as it continues to mature.
A new report released last week by the Offshore Renewable Energy (ORE) Catapult showed calculations that the offshore wind sector could be worth up to £2.9billion to the UK economy by 2030. This increase from the current level has been predicated on continuing industry cost-reduction and an increase in domestic content throughout the offshore wind supply chain. This bears good news for both the economy and the offshore industry more widely as UK firms are given confidence in the future of the market.
Historically, the UK is well-positioned for creating value from offshore wind, not only having a competitive advantage geographically, but also an ability to capitalise from a heritage in offshore energy that began with oil and gas operations. From this, we have an established offshore operations and maintenance offering that translates easily into the offshore wind industry. We also have an opportunity to capitalise on the strength of the UK’s professional service sector, which is traditionally one of our greatest exports.
The specific nature of the development of the UK offshore wind market also provides a good opportunity. The Offshore Transmission Owners (OFTO) market – that is the separate ownership of the power lines from offshore wind farms – will also likely see a strong domestic presence of home grown expertise. Balfour Beatty, for example, is already making a strong play in this sector of the market.
That said, however, to date the share of UK content has been small and the ultimate target of 65% UK content by 2030 is a big ask, considering that the advance of UK firms in the sector has been historically slow. Despite offshore energy experience, UK companies have until recently lacked the sector-specific expertise garnered by their peers in Germany, Denmark and the Netherlands through contracts with the major German and Danish equipment suppliers.
As a result, large offshore wind developer businesses have historically shied away from employing UK firms who haven’t had an opportunity to build track records in the sector.
In the early days of the industry, the market saw UK firms without a foothold in the sector pricing their services too low in order to win contracts. The culmination of this ‘race to the bottom’ pricing strategy and lack of experience meant that there were some insolvencies that made large developers hesitant to return to UK firms in future.
And, despite the growth of the industry, offshore wind is still a financially risky business. As technology and projects ramp up in scale, capital costs are increasing proportionally, meaning that, when delays or errors do occur, losses can escalate sharply. Cable-related and foundation-related losses, in particular, attributed to contractor error, have led to costly financial and reputational impacts.
With the political incentive to cut the costs of offshore wind, contractors are often under pressure to complete work under tighter timeframes or with less working capital, leading to errors in the installation process. Fostering the growth of a domestic industry and supply chain under these conditions is, not unsurprisingly, difficult.
But times are changing, and there is every good chance that the UK can hit is targets in winning offshore wind work for domestic firms.
Notably, RES Offshore has secured work with Spanish energy business, Iberdrola, to develop the French Saint Brieuc project, whilst JDR cables, the market leader for array cables, has bucked the trend of European dominance and won work to supply and install offshore cabling in Maryland for a forthcoming US offshore wind development.
The lesson here for UK contractors, then, is to tread carefully, and balance the ambitions for working across a number of projects with a recognition that it takes time to build track records and experience.
Once this experience has been secured, the opportunities, as we can see, are significant. Like the examples above, as offshore wind starts to proliferate in new markets, European developers will look to take familiar contractors with them, and new developers will look to firms who are trusted in their own markets.
Ultimately, the UK is well-equipped to significantly contribute to domestic economic growth through its offshore wind industry over the next decade. As the global offshore wind market becomes increasingly competitive in price and expertise, the UK must be careful not to be defined by errors incurred by hasty cost-cutting. In a bid to achieve its economic potential value, the UK industry must recognise its value beyond pricing and pay close attention to the line between risk and reward.
Jonny Allen is head of offshore, at London based insurance firm GCube Underwriting Ltd.