Offshore Wind Value Chain and Stakeholders

The offshore industry is important for investors, bankers, and operators – as well as an important policy piece for governments who want to meet global climate mandates.

Investment banks have their hands full project financing large scale offshore wind projects which keep getting bigger and bigger. This includes the usual suspects with strong project finance practices and attractive cost of capital, including European, Japanese and Chinese banks.

Think BNP Paribas, Credit Agricole, Natixis, MUFG, Sumitomo Mitsui Banking Corporation, Mizuho, ICBC, Bank of China and China Construction Bank.

Power and utilities as well as infrastructure advisory teams will also be active in marketing assets and selling equity for utilities that have many offshore wind assets to smaller, nimbler players possibly backed by private equity looking to expand in the space. Corporates with offshore wind assets are also major bond issuers, including green bond issuance (environmentally friendly) that meets institutional investor criteria.

Big wind operators include Orsted (ex-DONG Energy, which drew a lot of attention in the investment banking world owing to Goldman Sachs’ investment in the entity plus the outstanding name), Vattenfall and E.on/RWE. Investors in offshore wind are power generators and private equity firms, who act both on an operated and non-operated basis. Some private equity and pension funds will invest if the IRRs meet their hurdles but will require that the assets come with a team or JV with an established operator.

Large players upstream in the value chain include Siemens Wind Power, Vestas, Senvion (owned by Centerbridge Partners) and Adwen who are the largest turbine suppliers. Ironically, for this new era clean energy, major suppliers and contractors are oilfield services companies – because OFS companies have been setting up similar platforms and know the engineering from offshore drilling – from shallow to deepwater. During a time of declining oil and gas prices, this ends up being a countercyclical business segment for them.

And of course the most important stakeholder is the offtake – who is the electricity generated for? Often you will have an integrated utility where the generator and the utility are the same, but there are also many standalone utilities as well as industrial firms that need power for projects. Clean energy is becoming more important for the ethical company, and many major technology firms have put up contracts to supply energy for auction provided that it is zero carbon.

China installed the most offshore wind capacity in 2018, with 1.8GW. Other major players in offshore wind are Germany and the UK, with the US having a large market opportunity that has not been exploited at the same scale so far.

Wind Power Generation Recap

Wind generation is a form of renewable generation that started off being ridiculed by conventional power generators that used dirtier fuels such as coal, but has since come in-line cost wise with other conventional power generation.

The marginal cost of wind power is essentially zero, but wind has historically been unreliable because electricity generation (or the fuel) is dependent on how strong winds are at the moment. As energy storage and batteries are still in nascent stages of development, wind can end up generating electricity when the grid is already sufficiently supplied and not able to contribute electricity to the grid during peak hours. Wind is accordingly not attractive as a base load power source.

Despite a shift towards more environmentally neutral energy sources, onshore wind generation has run into problems with NIMBYism as wind farms are seen as eyesores and also have the unfortunate side effect of killing birds in a gruesome manner. With the right incentives, policymakers can push wind farms through. As a pragmatic example, wind farms were widely opposed in certain rural areas in China but immediately became popular after local government officials offered a percentage of sales to the farmers.

China now is the only country with over 200GW of installed wind energy capacity.

Offshore Wind versus Onshore Wind Generation

Offshore wind is a subset of wind power generation that addresses both of these problems. Stationed in large water bodies such as oceans, lakes and bays, offshore wind sees much stronger winds and does not face opposition from residents because mermaids are not real.

Offshore wind also tends to experience strong winds during peak hours, which makes offshore wind farms particularly useful to nearby coastal cities that use them for power – with prominent cities having bottlenecks for onshore space to house power generation assets.

However, owing to the incremental difficulty of building something in the water that is exposed to the elements (corrosive seawater) and requires more sophisticated engineering and regular maintenance, offshore wind tends to be more expensive to erect and sustain versus an onshore wind farm.

Comparable to offshore drilling or anything that is related to the maritime industry, staffing and getting resources to the platform is exponentially more difficult.

All of these will play into the project finance and discounted cash flow models of various stakeholders and investors.

4.5GW of new offshore wind capacity was installed globally in 2018, representing ¬8% of the market.

Government and Business Case Study – Offshore Wind

Offshore wind was prohibitively expensive, along with most other renewables as recently as the early 2010’s. Government and pension funding promoting offshore wind have allowed firms to move up the learning curve and offer low-cost energy with minimal carbon emissions.

This subsidy model has offered a great social benefit in addition to helping foster a low-cost generation feedstock, and as the industry has matured and offshore wind is self-sustaining, government are starting to roll back incentives. Contracts for power generation have been awarded via reverse auction mechanisms, with winning bids implying zero government support.

The early support of European nations have made Europe the runaway leader in offshore wind currently across the value chain. However, China will continue to progress planned targets to boost renewable energy generation and is responsible for most incremental capacity.

The Global Wind Energy Council is forecasting 190GW of total capacity to be installed by 2030 with a levelized cost of energy (LCOE) of $50/MWh. Offshore wind as an industry will only continue to grow in relevance as the tide turns to renewable generation to support rapid economic growth in developing markets.