Offshore wind and the emerging markets
I am writing this looking out of our 37th floor office window here in Singapore. Singapore is not alone in having a fascinating history, but its history of stumbling into independence in the 1960s with little to no natural resources or wealth, to its position today as a high wealth and knowledge island economy is captivating. Singapore is now obsessed with its independence. So it’s surprising then that as a country, it is so heavily dependent on other nations for its energy (which comes predominantly as gas imports from Malaysia and Indonesia), its water and its food. Singapore is now trying very hard to increase its independence on these key parts to its economy, particularly on energy and water, yet given its size, its options are limited. For example, it is currently running an energy import tender to help diversify away from natural gas imports and building desalination plants, which is ironic as these projects build water independence but require vast (imported) energy to produce this water. I’m sure Singapore has a plan though, as it does for everything else; its fair to say that offshore wind is unlikely to be part of that plan, but as a business and finance hub, it will play a strong role especially in Asia (one of the key emerging areas).
I wrote in a recent blog about offshore wind that the emergence of new markets will only accelerate. So time to follow up on that.
As a first step we should establish what an emerging market for offshore wind is. It would be useful to focus on those countries that show potential and interest, but to date have not seen an investment decision for a utility scale offshore wind project. This of course removes some interesting markets, particularly the US and Taiwan, that may well be seen as emerging still, especially given the relative lack of operating capacity, but it does leave room to focus on “newer” players. I would broadly categorise these as follows (lists not exhaustive):
- European continent: Sweden, Spain, Portugal, Italy, Ireland, Poland, Greece, Finland, Latvia, Estonia, Lithuania
- Non-Europe (developed world): Japan, South Korea, Canada, Australia, New Zealand
- Non-Europe (emerging world): Brazil, Vietnam, Philippines, Indonesia, India, Turkey, Chile, Colombia
More and more markets are becoming viable due to a confluence of technology evolution (floating foundations, power-to-X etc) and LCOE compression. Many of the markets on the European continent are likely to follow a similar mould to those of existing European markets. These evolutions are very exciting for the sector but don’t represent the step change that other new markets drive and that is required for offshore to really become a global business.
Let’s take a closer look at those new markets outside of Europe, where we see tremendous development-stage M&A activity. Here are three important learnings/perspectives we see from some of those deals:
Firstly, in all of these markets, climate change is not necessarily the trigger behind the uptake of offshore wind and renewables more generally as it was/is in Europe (recent geo-political events notwithstanding). Security of supply, investment, jobs, are all examples of key drivers in these markets. Of course, these benefits also helped in Europe but they weren’t necessarily driving. My Singapore example is useful in that it shows security of supply as a key consideration, but it doesn’t link to offshore wind directly. Australia is a better example in that respect. “Climate change” is a politically charged term there and can be divisive; what the Australian populace want at large is to see investment in large infrastructure assets and job creation. Hammering the usual messages about offshore wind and expecting the same results may not create the results you want. Astute developers know that of course.
Secondly, have reasonable expectations on the market you are entering. While the “developed world” markets are becoming more standardised and competitive – commoditised even – the emerging world countries mentioned above with large potential in offshore wind, are naturally very complex. Challenges such as heavy grid constraints, counterparty risk, local supply chain restrictions, illiberal energy markets, challenging offtake regimes, and lack of asset life matching financing instruments, among others, all mean conventions need to be put aside to get started. Things should not be taken for granted. Take Vietnam as a helpful example. Vietnam has some strong fundamentals for offshore wind, but its current PPA structure means setting up non-recourse project finance with construction risk is not a reasonable assumption to make when you evaluate opportunities there. The risk-return profile for offshore wind in Vietnam is of course very different to Germany (for example); not worse, just different.
Globalised supply chain
Finally, if offshore wind is to become the global sector it wants to be, we have to start looking at it through that lens. The sheer size of these units and market forces will ultimately mean that a mature offshore wind sector has production placed at convenient locations the world over, but if each individual country tries to include local content obligations, the rub here of course is we risk seriously kneecapping (in terms of cost but also ability to deliver in a timely way) a sector that could otherwise deliver everything individual nations desire (be it clean energy, energy independence, major infrastructure assets, jobs, etc). With the size of pipelines around the world, supply chain is already going to be a clear bottleneck; as a sector we should be doing everything we can to make it easier for the supply chain to deliver, not harder.
And this final point brings us back to our well-organised and coordinated friends in Singapore. Offshore wind, as an aspiring global industry is extremely well placed but it must recognize both the need for a local understanding and approach, and at the same time a global cohesion to ensure the right policies are delivered in an extraordinarily planned and methodical way, so that not only do local markets thrive, but offshore wind as a global sector does too. This challenge is still to be adequately addressed. In an industry that has overcome massive obstacles to build one of the most remarkable industrial successes of our time, I am sure it will get there though.