LIVERPOOL, England – When engineers faced resistance from residents in Denmark over plans to build wind turbines on the Nordic country’s flat farmland, they found a better locale: the sea. The offshore wind farm, the world’s first, had just 11 turbines and could power about 3,000 homes.
That project now looks like a minnow compared with the whales that sprawl for miles across the seas of Northern Europe.
Off this venerable British port city, a Danish company, Dong Energy, is installing 32 turbines that stretch 600 feet high. Each turbine produces more power than that first facility.
It is precisely the size, both of the projects and the profits they can bring, that has grabbed the attention of financial institutions, money managers and private equity funds, like the investment bank Goldman Sachs, as well as wealthy individuals like the owner of the Danish toymaker Lego. As the technology has improved and demand for renewable energy has risen, costs have fallen.
Continue reading the main story
And offshore wind, once a fringe investment, with limited scope and reliant on government subsidies, is moving into the mainstream. Europe, too, looks all the more attractive, as the United States under President Trump rethinks its stance on renewables.
“If you had polled infrastructure investors five years ago, only a few would have been looking at offshore wind,” said Suzanne Buchta, the Bank of America Merrill Lynch global co-head of green bonds.
Now, she said, they “are a little more comfortable.”
Offshore wind has several advantages over land-based renewable energy, whether wind or solar. Turbines can be deployed at sea with fewer complaints than on land, where they are often condemned as eyesores.
But the technology had been expensive and heavily dependent on government subsidies, leaving investors wary. That is now changing.
Turbines today are bigger, produce much more electricity and are deployed on much larger sites than in the past. The result is more clean power and extra revenue.
The number of major players has also expanded, creating more competition. A joint venture of Vestas, the Danish turbine maker, and Mitsubishi Heavy Industries of Japan, is now competing with Siemens, which had long dominated the market for building offshore turbines. Others, like the American giant General Electric and Chinese manufacturers, are also jumping into the game.
“For us competition is great,” said Benj Sykes, Britain country manager for Dong. “It drives innovation. It drives performance. It also drives cost.”
Companies are developing specialized vessels and improving installation techniques (taking a cue from the oil industry), cutting construction timetables. Dong and its competitors are learning to better cope with the bad weather, corrosive saltwater and scouring currents that increase costs.
The first offshore wind facility, Vindeby, began generating electricity in 1991. Frank A. Olsen, the Danish executive who led its construction, recalls that it was built using a barge with a crane mounted on a truck. Dong’s Burbo Bank Extension off Liverpool is far more advanced. In the distance, a ship lays electric cable, while a small fleet of other vessels about 80 feet long bobbed on the swell as maintenance crews finished their work.
All of those factors in concert have helped push costs down. Dong says its anticipated costs of electricity generation have halved. As recently as 2014, they were 156 euros, or $166, per megawatt-hour, a wholesale unit of electricity, on a British project. By last year, they had fallen to €78 per megawatt-hour on a series of wind farms off the Netherlands.
Those falling prices have raised hopes that offshore wind can soon compete with conventional power sources like natural gas and, eventually, do without subsidies.
Offshore is “on the cusp of a new world,” said Samuel Leupold, Dong’s executive vice president for wind.
The industry is not without challenges. Governments have been cutting financial support for clean power in a bid to balance their budgets, while President Trump’s administration seems likely, based on his promises during his election campaign, to forcefully support fossil fuels.
Planned mega-projects that will dwarf the Burbo Bank Extension will test whether investors still see renewables as an attractive investment and whether Europe will retain a leadership role when it comes to green energy in the Trump era.
For now, offshore wind is a relatively small industry, albeit one that is growing fast.
It currently accounts for less than a tenth of installations of new wind capacity around the world.
But investment in the industry nearly tripled in the five years to 2015, according to Michael Gulbrandtsen, an analyst at the Danish consulting firm Make. Offshore wind has become a significant force around Britain, Denmark, Germany and the Netherlands, where shallow and breezy waters provide ideal conditions for offshore wind. Experts say parts of North America and China also have potential.
Offshore wind “has been an area of great interest to us,” said Carol Gould, the head of power and renewables for Europe at MUFG, a Japanese bank that is backing a separate giant wind farm off Britain, among other projects.
With interest rates in the Western world at historic lows, investors have been attracted by offshore wind’s higher returns. And, with projects that have lifetimes of 15 years or more, those returns are long-lasting as well.
PensionDanmark, a Danish pension provider, has invested more than €1.6 billion in equity stakes in offshore wind projects and expects returns of 6 percent to 9 percent, said Torben Moger Pedersen, the chief executive.
Those rewards reflect the substantial risks.
Basically, they are investing in power plants and face myriad potential issues: storms, construction problems, severed power cables, fluctuations in electricity prices and even the chance that governments may not honor promises. Four years ago, the discovery of tons of unexploded munitions along a cable route led to costly delays for a German offshore wind farm.
For a company like Dong, which builds and in many cases operates the wind farms, the risks are amplified. Unlike investors, who are a step removed from the process, it also expects higher returns.
The company could earn about 12 percent from the Burbo Bank Extension, according to Deepa Venkateswaran, an analyst at Bernstein Research in London. The estimates are based on projections of Dong’s construction and operating costs, as well as the revenue it will gain from selling the electricity. The company declined to comment on the profitability of individual projects.
Dong, whose name is an acronym of Danish Oil and Natural Gas, has managed to attract a wide range of top investors.
Goldman Sachs holds a large stake in the company itself, but several other companies, individuals and funds have taken stakes in its many projects and more are in the works – a giant new facility off the English coast known as Hornsea 1 will dwarf the Burbo Bank Extension.
Dong sold 25 percent stakes in the Burbo Bank Extension to PKA, a Danish pension fund, and Kirkbi, the investment vehicle of the Kristiansen family, which owns Lego.
Its other facilities have obtained cash from the likes of E.On of Germany and Centrica of Britain. Masdar, the clean energy company owned by oil-rich Abu Dhabi, and the Japanese trading house Marubeni have also committed money.
The increasing variety of investors looking to join is a major shift from a quarter-century ago.
“Offshore makes sense as the next frontier,” said Jonathan Levy, head of policy and strategy for Vision Ridge Partners, an investment firm based in Colorado.
|Wind Watch relies entirely
on User Funding