The contract for difference (CfD) auction process has driven the cost of energy from UK offshore wind down significantly, but at the expense of local companies which have been squeezed out of the market
Speaking at the Reuters Events: Offshore & Floating Wind conference, Red Rock Power head of procurement Lars Svendsen said there is an inherent tension between the requirement for greater local content and the auction system used in the UK, the aim of which is to secure the lowest possible electricity price for consumers.
The issue is topical because Scottish companies have failed recently to secure work supporting Scottish offshore windfarms.
“Local content is a good thing, but the CfD auctions create very intense downward pressure on prices,” said Mr Svendsen. In that sense, he said, there is a contradiction between the aims of the CfD auctions and demands for greater levels of industrial involvement in the countries in which developments will take place. “Developers would love to have 100% local content,” he said, “but they need to deliver the cheapest possible projects.”
Scottish Government head of energy and infrastructure David Stevenson told the conference: “Governments all want local content. Consumers are paying for developments so they expect some kind economic benefit. They do not really like to see the money going to companies in other countries. There needs to be a greater focus on doing more to ensure that local content happens.”
Earlier this year it was announced that as part of the ScotWind Leasing process in Scotland, applicants will be required to submit a Supply Chain Development Statement, to help show how they plan to tap into the potential offered by Scottish suppliers.
Crown Estate Scotland will require ScotWind Leasing applicants to submit a statement outlining the anticipated level and location of supply chain impact from their proposed project, broken down by project stage (development and consenting, construction, operation and maintenance).
The presentation of a statement will be required, but the information contained in it will not form part of any scoring relating to the selection of winning applications. For applicants who are granted a ScotWind Leasing Agreement, the statement will be incorporated into that agreement and a process of regular reporting will be put in place. Through the option period there will be an opportunity to update the statement, setting out the reasons for any changes. Crown Estate Scotland is considering what the potential consequences will be for non-compliance with the terms laid out in an applicant’s statement, including the potential termination of option agreements.
Mr Stevenson said a ‘call to arms’ was required if more Scottish companies are to qualify to participate in projects and compete on cost. “No-one expects suppliers to have a free ride just because they are local,” he said, but he noted that there is “a definite drumbeat” behind political moves to boost local content. “The level of local content in capex has to increase,” he told the conference.
Mr Stevenson said he was encouraged to see Korean manufacturer SeAH sign a memorandum of understanding with Able UK to use the Able Marine Energy Park development to fabricate monopile foundations. However, he said the deal really reflected anticipated volume in the UK market in the next decade, and the potential longevity of the UK market, not a desire to boost local content.
“It was good to see,” said Mr Stevenson, but he cast doubt on whether well-known European fabricators would follow suit. “It would be very challenging for a company with a facility in Denmark, The Netherlands or Belgium to set up in the UK or to relocate,” he said.
Mr Svendsen agreed. He said that as the market grows, more players outside Europe might come in, but he did not expect European players to start manufacturing in the UK if they already successfully compete for projects.
Session chair Wood Mackenzie senior offshore wind analyst Søren Lassen suggested that consolidation among EPCI contractors was making it even harder to achieve higher levels of local content. Fewer contractors allowed less room for competition, he suggested. EIC senior energy analyst Lara Juergens agreed that suppliers to EPCI contractors “have a hard road to follow” and new entrants find it difficult to break into the market.
Mr Stevenson said that tier 1 players are rarely actually based in the UK, and that they have their ‘go to’ companies among lower tiers in the supply chain. He said this makes it very difficult for new players to break into the market. The qualifying period to do so could be one or two years and having qualified they find competition on price is intense. “There are too many hurdles to overcome,” he said.
However, Ms Juergens suggested that new entrants need not only compete on price. She highlighted the growing emphasis in the offshore wind market on driving down the carbon footprint of projects.
As highlighted by OWJ, in early 2020, Ørsted announced plans to be carbon neutral by 2025 and reach net-zero emissions across the company’s entire carbon footprint by 2040. Its carbon footprint consists of two parts, it said: the company’s own emissions from energy generation and operations; and emissions from the energy traded by the company and the goods and services in its supply chain. To decarbonise its supply chain, Ørsted has launched a programme to engage with suppliers in the most carbon-intensive categories.
Speakers in the supply chain session at the conference also agreed that if new developers and new tier one players with new ways of working enter the UK offshore wind market it might help local suppliers gain a foothold. They cited oil major Total’s stake in the Seagreen offshore windfarm in Scotland as a case in point.