Booming offshore wind sector offers asset owners a wider range of choices.
Last week’s ScotWind offshore wind leasing auction saw successful bids from both oil and gas majors and large power utilities, but the increased scale of the sector could also propel it beyond the reach of niche asset managers.
The auction will more than treble the current and planned energy generation capacity of Scotland’s offshore wind farms, which stands at around 10 GW, most of which from projects still under construction.
The large leases announced last week require international coordination and significant levels of investment. SSE subsidiary SSE Renewables, one of the big winners in the auction, said it would partner with Japanese conglomerate Marubeni and Danish fund manager Copenhagen Infrastructure Partners (CIP) to develop one of the world’s largest floating offshore windfarms. CIP has opened a global floating offshore wind competence centre in Edinburgh.
Crown Estate Scotland selected 17 offshore wind projects. The auction initially aimed to procure at least 10 GW of offshore wind, but the chosen proposals have a total capacity of 24,826 MW. The current total operational UK offshore wind capacity is the largest globally at more than 10 GW, representing 29% of global capacity in 2020.
The successful bidders include Shell, BP, Ocean Winds, Vattenfall, SSE Renewables, Falck Renewables, DEME, BayWa, Northland Power, Magnora Offshore Wind, and Offshore Wind Power, a joint venture between Macquarie’s Green Investment Group (GIG), TotalEnergies and RIDG.
Ten projects – more than half – will use floating wind technology, and one involves installing both floating and fixed foundations. The biggest proposed project is a 3 GW floating wind by Iberdrola’s Scottish Power Renewables.
Wind power fundamentals
“[This] is the latest attempt by the oil and gas majors to participate in a sustainable future but with their traditional means: concentrate on super large deals and accept higher risk,” said Michael Ebner, Head of Sustainable Infrastructure at KGAL Investment Management.
Their increased investment in wind power could be a turning point for oil and gas firms’ transitions to low-carbon business models. Last year, Shell published its Energy Transition Strategy, which split opinion, with many investors and NGOs saying it did not do enough to decarbonise the firm’s operations.
“We are seeing oil majors investing across the renewable value chain as they seek to improve their green credentials,” said Peter Bolton, Investment Director, Renewable Energy at Gresham House. Nevertheless, established investors in the sector would retain a sizeable proportion of the market, he added.
“The capital markets are forcing oil and gas companies to adjust their existing business models,” said Ebner.
Simonetta Spavieri, Engagement Analyst at Royal London Asset Management, said wind power was an “easy win” for oil and gas companies, arguing they should focus their resources on increasingly established renewable energy sources instead of still-unproven technologies such as carbon capture utilisation storage (CCUS).
Electricity generation from wind power in the UK has increased by 715% from 2009 to 2020, according to the Office for National Statistics (ONS). Turnover from wind energy was nearly £6 billion in 2019 and there were 7,200 full-time equivalent employees in the industry in the same year. As of 2020, wind power accounted for 24% of the UK’s total electricity generation compared to 48% in Denmark.
Choice of investment strategies
The increased size of the Scottish and UK offshore wind power sector could see more investors investigating it. The different market participants across the supply chain – listed utilities, energy firms, component manufacturers and newer dedicated green energy firms – have pros and cons for investors.
“All offer different risk exposure,” said Ebner. “A manufacturer is exposed to insolvency risk and should therefore offer higher returns, whereas a utility business goes the other way, with the downside of a diverse exposure not only to sustainable and renewables business.”
Bolton said smaller investment firms often focus on funding individual projects – rather than specific companies and their management teams – typically when consented and ready-to-build. This phase of investment is comparatively de-risked.
As wind capacity grows, the size of its investment partners could also grow. Previously, the industry has been backed by many smaller investment firms with strong levels of specialist expertise.
“Niche funds and investors have been successful in funding a large proportion of wind energy in the UK,” said Bolton. “This is linked to the investment requirement per project and the complexity in developing a wind project to reach a fully-consented stage.” He added more large players are now making investments in the sector, particularly in offshore wind.
Spavieri said larger players, whilst not as purely focused on the wind market, could offer power generation firms more expertise and support on wider market challenges such as developing robust net zero plans and supporting the just transition. “Pushing the companies on this could be easier for a larger shareholder than perhaps a more niche player,” she added.
The renewables boom could bring potential changes in employment patterns. Communities based around carbon power generation in Scotland could be at risk in the transition and several investors warned of the risks of environmental concerns being given precedence over social.
The Scottish government said it would address the social impacts of decarbonisation. Scottish First minister, Nicola Sturgeon, said “people working in the oil and gas sector can be confident of opportunities for their future.”
Although doubts remain, partly due to the lingering effects of Scotland’s last deindustrialisation, investors, utilities and academics have outlined plans and strategies for a just transition. Some winners of auction blocks, such as SSE, have published Just Transition plans, which include commitments to retrain workers and protect communities. If negative consequences were felt widely in these communities, Spavieri warned this could damage the favourability of future renewables projects.