COLUMN | Wind farm subsidies: build back bigger and better? [Offshore Accounts]


“Build back better” is the slogan used shamelessly by both Joe Biden and Boris Johnson. Both believe that the recovery from the pandemic should be spearheaded by green energy, in which offshore wind will play a key role, along with electric cars and lower carbon emissions.

So far, so good, unless you work in oil and gas, of course.

Boris Johnson’s ten-point plan

Unfortunately, Mr Johnson’s ten-point plan touted in the Financial Times here involved trumpeting a paltry £12 billion (US$16 billion) of public spending on a typically scattergun list of random goals, including nuclear power, buying battery-powered vehicles, planting trees, building cycle lanes, and investing in research into hydrogen as a fuel source. In prime position, though, was offshore wind.

“We will make the UK the Saudi Arabia of wind, with enough offshore capacity to power every home by 2030,” the British prime minister boasted.

Cynics observed that hot air and bluster have always been Mr Johnson’s strongest trait, but the UK government has now lifted its target for offshore wind capacity to 40 GW by 2030, up from its previous target of 30 GW. Capacity currently stands at 10 GW, the highest in Europe.

Tesla’s profitability hangs on regulatory credits

Unfortunately, when government funds are available for exciting new projects, there are always private companies eager to get their hands on the cash.

Green energy has always been a game of subsidies; indeed, electric car marker Tesla is only profitable because of the sale of regulatory credits to other carmakers. Despite Tesla’s huge market capitalisation of over US$380 billion (with a “b”), without the US government giving the company these credits, there would have been no profits for Tesla at any time in its history, as Elaine Moore points out (here).

Ms Moore writes “Tesla receives these credits, created to encourage automakers to build electric vehicles. It can choose to sell these on to carmakers such as GM, which need to offset sales of polluting vehicles or risk penalties from states such as California. As these are free, selling tax credits creates an easy source of profit. Last year Tesla’s revenues were almost US$600 million from these sales.”

General Electric seeks some sweeteners

No sooner had Mr Johnson announced his plan for a green revolution than General Electric (GE) set about playing off three different coastal cities in the UK against one another to compete to become the location of its next generation wind turbine factory, where GE will build the 13 MW Haliade-X turbines for the Dogger Bank wind farm in the North Sea.

The plant will create 3,000 jobs, GE claims, and so the company has been busy seeking “regional development” handouts and free infrastructure from former shipbuilding cities to sway its investment decision.

Teesside banks on wind farm factories on its banks

A location between Redcar and Middlesbrough on the River Tees is the likely winner, ahead of Rosyth in Scotland, and ahead of a site on the south bank of the River Humber.

As normal, politics plays a key part. Tees Valley mayor Ben Houchen is a member of Mr Johnson’s Conservative party, and Johnson needs the support of northern MPs from the so-called “Red Wall”, depressed post-industrial areas of England, which switched allegiance from Labour to Conservative in the general election of 2019.

Decommissioning in steel is expensive too

We saw last week how taxpayers in Australia and New Zealand are on the hook for millions of dollars to decommission two offshore fields after the operators went bust (here). So, too, in the UK where taxpayers forked out £212 million (US$282 million) to clean up former steelworks beside the Tees that shut in 2015, when the Thai owners, SSI, closed the plants. Unfortunately, SSI and the previous owners Corus had inadvertently forgotten to make any provision for cleaning up the site.

Haven Seariser 2 (Photo: Tees Valley Combined Authority)

The shuttered blast furnaces briefly became a grim tourist attraction before they were demolished at the government’s expense (here). The South Tees Development Corporation has now released plans for a £90 million (US$119 million), one-kilometre-long heavy lift quay, with 202 hectares of newly cleared land available for development, where the steel mills once stood, aimed at the wind industry. Now, Fugro is busy taking coring geotechnical samples from the river using the jackup Haven Seariser 2 (here) as preparations for the quay-strengthening and dredging proceed.

Mayor Houchen said: “This new heavy lifting quay will give ships and international firms easy access to be able to transport not only these turbines, but also all the other exciting projects and businesses that will be located on site.”

Able has foundations too

Able UK, which first shot to fame when it won a contract to scrap several vintage World War II vessels laid up by the US Navy in 2003 provoking a huge local controversy over “toxic ghost ships” which raged for a decade (here), also wants a British government subsidy to expand its quay for wind turbine loading on the banks of the River Humber.

Able recently signed a memorandum of understanding with the Korean manufacturer Seah to set up the UK’s first large-scale producer of monopile foundations for offshore wind turbines at its Able Marine Energy Park, near Hull. Able has a 320-hectare site there and wants government support for its 1.3-kilometre quay, with its boss claiming it was “uniquely placed to deliver the prime minister’s ambitions” in a press release here.

In 2022 Able’s Hartlepool facility will be the staging point for the installation of the 190 GE 13MW Haliade-X turbines for the Dogger Bank A and B windfarms for SSE and Equinor.

EU plans outgun London’s

And it is not just the UK which is planning to use government funds to boost green energy. For once Boris Johnson can agree with the European Union: both are in unison that offshore wind is the future. Indeed, new plans from Brussels reveal that the EU has a much bigger vision than Mr Johnson, and much bigger subsidies.

Under a new European Commission strategy, the 27 EU member states will dramatically increase their investment in offshore wind to build up installed capacity to 60 GW by 2030, and to have a massive 300 GW in place by 2050, when the entire bloc hopes to be “carbon neutral”. The Bloomberg coverage is here and the EU’s own Q&A here.

€789 billion, 25-fold increase planned

This ambition means that offshore renewable energy capacity in the EU will have to be multiplied by 25 times by 2050 from current EU offshore windfarm capacity of 12 GW. The investment needed is estimated up to €789 billion (US$936 billion), split between generation capacity and upgrades to the electricity grids to take power from the new offshore windfarms to consumers.

Currently, Germany has the largest offshore windfarm capacity in the EU, followed by Denmark, Belgium and the Netherlands. Over the summer, the German government said it would also increase its current 7.5 GW of capacity to 20 GW by 2030, with a new target of 40 GW by 2040.

The EU expects the Atlantic, Baltic, Mediterranean and Black Sea to be the focus of much of the new investment, however, as well as the North Sea, where most current capacity is located. We have already covered how the Romanian government plans to hand a wedge of subsidies to its dominant offshore player GSP for Black Sea turbines (here) and how Van Oord is investing off Estonia. The European Commission hopes to create 62,000 jobs in the offshore wind industry and wants “spade ready projects” for its funds.

Kriegers Flak wind farm (Photo: Vattenfall)

To fully exploit the benefits of wind power, the commission wants the EU member states to work across national borders to scale up capacity through so-called hybrid sites which generate power in one country but sell it in another. At the moment, only the Kriegers Flak offshore windfarm, located between Germany and Denmark, does this and it is forced to operate under a transitional arrangement due to lack of enabling EU legislation.

This new EU strategy is great news for power cable lay providers such as Seaway 7, upgrading Seaway Phoenix, and Nexans, which is building its 10,000-tonne capacity cable layer Nexans Aurora at Ulstein Verft in Norway for delivery next year (more details here).

Subsidies to make investment more attractive

The European strategy calls for investment in both classic fixed-bottom turbines and newer floating infrastructure which can be installed in deeper waters. The Luxembourg Times confirmed that the sector will be on the receiving end of additional EU subsidies, reporting that “the commission wants to use Europe’s €750 billion (US$890 billion) economic rescue fund to help spur investment in the sector” (here).

Let’s hope the spending is properly audited and doesn’t end up in the pockets of cronies, as happened in Bulgaria here with rural grants for guesthouses, and in Hungary (here) for farm subsidies. We particularly liked the quote from Mina Andreeva, spokeswoman for OLAF, the EU anti-fraud office, who “denied that it was the EU’s job to ensure farming subsidies were spent correctly” (quoted here).

That fills us all with confidence that the oligarchs and crooks will not be lining their pockets with windfarm scams.

Are we too negative?

With such large sums of money being bandied around, perhaps our prognostications of a bubble forming in the sector are unnecessarily pessimistic. When €750 billion is available, betting against the house is unadvisable, but we caution that 2050 is a long way away and investor sentiment is currently running red hot in favour of new capacity.

Projects dependent on public subsidies are vulnerable to changes of policy. We note the North/South divide between northern European countries focused on wind and southern countries correctly focused on solar power for renewables. If Algeria could get its act together it could become the “Saudi Arabia of solar” and render much of northern Europe’s wind capacity unviable.

So the jury’s out. The new government policies provide further tailwinds to the rush of investment in the sector, but governments are fickle and priorities change. Graphs showing forecasts of ever-increasing growth may not be accurate, and even if there is massive investment, there could be over-investment by shipowners and offshore construction companies chasing high returns.

Shipping is a boom and bust business and the boom in offshore wind may yet end in bust in the 2030s. Meanwhile, enjoy it and profit while you can!

Coming next

Later this week we’ll be running a quick update covering BW Offshore’s decision to “unliquidate” its New Zealand subsidiary after taxpayers agreed to cover its costs on the Umuroa FPSO; the Sohmen-Pao family buying into Cadeler, the Swire Group’s offshore wind turbine company ahead of its IPO; and MMA Offshore in Australia launching a “rescue” rights issue to raise capital…as well as creating a generous retention plan to reward its hardworking top executives.

Meanwhile, our favourite construction company McDermott International said it had raised another US$500 million to fund “future growth” after it emerged from Chapter 11 bankruptcy. Whilst James Fisher and Sons’ shares plunged 19 per cent in a single day earlier this month when the company warned that its profits would be hard hit by an impairment on the value of its dive support vessels Subtech Paladin and Subtech Swordfish…an impairment that we had flagged as very likely four months ago (here).

Hieronymus Bosch

This anonymous commentator is our insider in the world of offshore oil and gas operations. With decades in the business and a raft of contacts, this is the go-to column for the behind-the-scenes wheelings and dealings of the volatile offshore market.