The Covid-19 pandemic could delay projects, auctions and permitting, interrupt supply chains and make finance more expensive. So far, its effects have not been that serious, but uncertainties remain
Leading analysts in the offshore wind industry have confirmed that, to date, the effect of Covid-19 on the global offshore wind industry has been limited. Supply chains have been affected a little, they say, but in the longer term the pandemic could potentially have consequences for financing.
Wood Mackenzie analyst Robert Liew told a May 2020 webinar on the offshore wind market that the company believes the pandemic’s effect on financial markets could affect offshore wind and increased currency risk could delay final investment decisions.
Wood Mackenzie vice president and head of APAC power and renewables Mark Hutchinson told the webinar credit availability and interest rates affect the competitiveness of renewables because of the high level of capital investment required.
Mr Hutchinson said a 10% increase in average costs of capital could lead to a 6% increase in the levelised cost of energy (LCOE) of renewables. “The higher the share of capex as part of LCOE, the more significant the impact of financing costs,” he explained. But he also noted that a double-digit decline in the LCOE of wind over the next five years remains plausible thanks to ongoing cost reduction.
The latest auction for zero-subsidy offshore wind in the Netherlands took place as planned in April, but as Power Advisory president John Dalton noted, an apparent impact of the uncertainty caused by Covid-19 was Vattenfall’s decision not bid in the 700-MW tender for Hollandse Kust Noord offshore wind zone.
“Vattenfall said the ‘risk-reward balance’ had changed,” said Mr Dalton. “That is certainly true as execution risks from project timing uncertainties have increased.”
In the US, Mr Dalton noted, the New York State Energy Research and Development Authority said it was delaying its 2020 offshore wind request for proposals, indicating it would do so “at a date that is sensitive to the significant challenges currently facing private industries and New Yorkers…”
Mr Dalton said the same might occur with other offshore wind procurements in the US, recognising that New York has been particularly hard hit by the pandemic.
As a publicly traded company with offshore wind as its primary business, Ørsted also recently provide insights on the impact of Covid-19 on the sector. While noting it is in a much less vulnerable position than many other sectors, Ørsted disclosed in its Q1 earnings call that “across our projects, we see an increased risk of component and service delays from suppliers impacted by Covid-19…”
The company noted that two early projects in its pipeline, the 120-MW Skipjack project in Maryland and the 130-MW South Fork project in New York are most exposed to the risk of delays. Mr Dalton said a critical issue will be the degree to which any commercial operational delays are excused by buyers under power purchase agreements.
Renewables Consulting Group chief operating officer Lee Clarke recently noted that “although they are resilient, renewables are unlikely to emerge unscathed” from the effects of the pandemic. “Renewable energy infrastructure requires massive upfront investment. Yet the cash flow companies rely on to make investments has been compromised,” Mr Clarke said. “Wholesale power prices have tumbled as electricity demand has slumped. High debt will weigh heavily on the capacity of the private sector to make necessary investments.”
He also highlighted that Vattenfall decided not to take part in the Hollandse Kust Noord tender, but noted the Crown Estate in the UK is pressing ahead with Round 4 with only a small delay to assist bidders with getting to grips with remote working and Crown Estate Scotland has signalled a similar approach for the forthcoming ScotWind offshore wind leasing round.
“But where debt finance is required,” he cautioned, “lenders are likely to be wary of committing funds until the impacts of the pandemic are understood and risks mitigated. Projects underpinned by guaranteed contracts – power purchase agreements or contracts for difference (CfDs) – could provide a relatively safe home for investment, with the sector providing a stable return, but the burden of additional extraordinary costs might overstretch project budgets.”
In mid-April, Cornwall Insight highlighted a growing number of negative pricing events across wholesale markets, events it had predicted, but only in the mid-2020s as the volume of intermittent, subsidised, renewables plant on the system grew significantly.
“The recent shock to demand has brought forward what we might have expected to observe in the future, when renewables make up a greater proportion of generation,” the company said.
Cornwall Insight believes reduced demand and low prices caused by the pandemic could make some developers re-assess the business case for upcoming projects. “Typically, low wholesale prices might attract companies to the comfort and security of a CfD,” the company told OWJ, but their appetite for merchant projects could change.
Generally, it said, generators take a 15-year plus view on the market to underwrite investment and will want to put Covid-19 in this context. But the longer Covid-19’s impact persists, the more influence it would have on the cost of construction and supply changes.
There is another important issue too, says Cornwall Insight. “If prices do stay low, then existing CfDs become more expensive, because of higher top-up payments. That might have an impact on the budget the government is willing to commit to in Round 4.” This already seems to have become a potential issue, with the Department of Business, Energy and Industrial Strategy starting a consultation in May 2020 because – as a result of lower electricity demand, resulting from measures introduced to reduce the spread of Covid-19 – higher payments to CfD generators had been required.
“In addition,” said Cornwall Insight, “whatever budget is there for Round 4 could procure less capacity if the government reflects lower prices in its auction calculations, as each project bidding would also have a higher forecast top-up payment.”
Aurora Energy Research head of commissioned projects, Western Europe, Felix Chow-Kambitsch told OWJ, “Wholesale power prices have certainly fallen significantly due to Covid-19. Subsidy-free and merchant-exposed renewables are adversely affected by this fall.
“This puts prospective wind projects with near-term merchant exposure at risk. It would be challenging to proceed with an investment decision for a project with significant merchant exposure in this environment.
“Low power prices will likely lead to more cautious bidding behaviour by merchant exposed projects in upcoming wind auctions. In contrast, the price certainty provided by CfDs would likely be more valued as a result of the fall in power prices.”
In a policy brief on renewable energy auctions, partners in the AUctions for Renewable Energy Support (AURES II) project said despite seemingly negligible impacts on supply chains and project schedules, the pandemic might yet affect renewable energy auctions.
AURES II said disruptions in global supply chains and national permitting procedures might adversely affect projects. Like Wood Mackenzie, it highlighted higher financing risks and the risks associated with exposure to the wholesale market at a time when wholesale market prices are much lower than originally anticipated.
In contrast, it said, renewables such as offshore wind could benefit from climate-friendly economic stimulus packages, such as the European Green Deal, which is expected to have offshore wind at its heart. This could lead to an increase in clean energy spending and access to finance.
Green Giraffe founder and managing director Jérôme Guillet is more upbeat on offshore wind’s financing case. He told a Norwegian Energy Partners webinar he did not expect the long-term cost of capital for projects to increase as a result of the Covid-19 pandemic.
“Offshore wind has become mainstream,” Mr Guillet said. “Since the crisis in 2008, the banks have refocused on known clients, core countries and strategic sectors of activity. Offshore wind is unambiguously ‘strategic’ for many banks today.
“Debt is currently still extremely cheap,” he told the webinar. “Banks active in offshore wind are very comfortable with the quality of the companies at every level in the market, from developers to contractors.
“The majority of projects take place in extremely safe, politically stable AA- and AAA-rated countries in which risk is perceived as extremely low. Countries where offshore wind is developing are seen as safe and ‘core’ for most banks, and they are familiar with large-scale clean energy projects nowadays.”
Despite the potential effects of the crisis elsewhere, he said, there is more funding available for offshore wind projects than there are bankable deals.
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