Utility Week

UTILITY WEEK | 24TH - 30TH MAY 2019 | 19 Finance & Investment Market view F ocusing on the strike price could lead developers to lose sight of the key cost drivers and risks when it comes to off- shore wind. As we near the next contracts for difference (CfD) auction later this month, a clear understanding of these key considera- tions has never been so important. Pinpoint the cost drivers With balance of plant costs remaining rela- tively static for a given project capacity, shi•ing from 5-6MW to 8-9MW turbines has helped halve capital costs on a per megawatt basis. By reducing offshore activity volume, turbine upgrades have brought time and cost savings while boosting energy production. A positive outlook for offshore wind glob- ally has also given supply chains the confi- dence to invest in achieving economies of scale and production efficiencies, translating into further cost reductions for the sector. With offshore wind costs driven further down in this new low-subsidy era, effective risk management and due diligence will be the difference between those who develop projects delivering sustained long-term suc- cess and those who find that realities differ from the assumptions underpinning over- optimistic auction bids. Risk management with added value With auction-driven support mechanisms encouraging a 'win at all costs' mindset, some developers may succumb to the pres- sure of this at the expense of fully optimising and derisking their projects. When it comes to effective risk manage- ment and due diligence, developers should be considering the entire value chain, rather than simply analysing typical health, safety and environmental risks. By understanding the contractual, com- mercial, organisational, legal and political implications, developers can realise a more complete picture throughout the develop- ment process of any given project. Keep an eye on ever tightening margins With financial and safety margins tighten- ing as offshore wind costs continue to fall, technical advice, due diligence and risk management early in a project's develop- ment will support long-term bankability. A relatively small change in production, operational expenditure or electricity prices could significantly impact investor returns. Likewise, current assumptions around long- term turbine maintenance costs and avail- ability levels do not have to be out by much to derail projects over a 10-year time horizon. Progress in the UK K2 Management has worked on two of the three CfD-winning offshore wind projects from 2017: Triton Knoll and Moray East. At Triton Knoll, early-stage technical due dili- gence has enabled prompt risk identification and mitigation. Innovative approaches drove further cost reductions without jeopardising the bankability of the business case. What to expect next The race to the bottom in offshore wind should reach new depths later this month. However, the descent is likely to be more of a dip than the dramatic dive seen in 2017. This could be a blessing in disguise. There will be a limit to further cost reductions while turbine technology and scale boundaries are simultaneously pushed to the limit. With pressure to drive down costs further still, financial feasibility will need significant stress testing. Developers are therefore likely to place greater emphasis on due diligence and risk management. Be realistic with emerging markets Where new markets are concerned, offshore wind developers need to be realistic. It may seem as if low-cost European projects can be replicated in new markets, but differences in local supply chains, financing and electricity market influences mean that achieving this is unlikely in the short term. Mindful of this, developers should manage expectations and take a long-term view to ensure success. Three key takeaways As costs fall, project bankability must remain front and centre for long-term success. • Look beyond the obvious when assessing risks. Developers need to ensure they get the full picture, particularly where mar- gins are becoming tighter and tighter. • Engage early for long-term success. That means putting risk management and due diligence at the heart of a project from the outset, ensuring the business case is robust through feasibility, the auction process and financial close. • Do a reality check in new markets. Treat new markets with care and use European experience lightly rather than as a tem- plate for project management regardless of market conditions. Will Sheard, global manager, due diligence, K2 Management Get to grips with costs to sharpen your offshore edge Understanding the key project cost drivers and risks will give offshore wind developers the edge they need in the new low- subsidy era, Will Sheard explains. Assumptions around turbine maintenance do not have to be out by much to derail projects over a 10-year time horizon.

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