Offshore wind and moving from concept to reality. Eddie asks how do we make things happen, Scotland

Speech: “Offshore Wind in Scotland: From Concept to Reality” by Dr. Eddie O’Connor. Aberdeen, 28 January 2014.

Mr. Chairman, Ladies and Gentleman,

Looking around this auditorium I can well believe that this is the largest ever Offshore Wind and Supply Chain Conference held in Scotland.  The organisers are to be congratulated on a magnificent achievement, which augers well for the future of our industry.

The conference brochure describes 2013 as having been a highly exciting year for offshore wind and anticipates the industry is poised to take off.

It’s against this background that I have asked to speak on the theme of “Moving from Concept to Reality” or, put another way, how do we make things happen?

In particular, how do we get the east coast projects consented, financed, built and commissioned on time and within budget?

This is a big question, which I propose to answer under three headings:

Institutional capacity;

Route to market; and

Industrial policy.

Institutional Capacity

I begin with institutional capacity because it determines the speed and the manner in which things get done.

My company’s experience in developing renewable energy across the world is that countries differ greatly in terms of the quality of the people who staff their institutions and the efficiency with which the institutions take and implement decisions.

Some of the differences arise from cultural factors, such as the attitude of society to business, others from the education and training of bureaucrats and a number from the importance political leaders attach to the challenge of climate change.

It seems to me there is no uniform standard of performance across the globe in either policy formation or implementation.

But I have the feeling that while Scotland is top class at devising policy and setting ambitious targets for renewable energy it is not so good at implementation and sometimes even  falls short of the standards experienced elsewhere.

One area that confirms this suspicion is the consenting process for offshore wind farms.

The fact that none of the five east coast projects have yet been consented indicates that something is amiss, either in the ability of politicians to reconcile competing interests or in the capacity of bureaucrats to manage the planning process.   Or, in both.

Competing interests are an unavoidable reality in any democracy and the on-going business of public authorities is to work out which ones should take priority.  Yet setting priorities is not always done with sufficient clarity, or courage for that matter, and failure to do so only leads to confusion in the planning process and unpredictability in its decisions.

Now nothing inhibits development more than uncertainty about public policy objectives and inconsistency in the way they are pursued; yet, unfortunately, we have an abundance of both at present.

It is also true that nothing inhibits development as much as unwarranted delays in public decision-making.  After all, time is money; delays add to risk and the higher the risk the higher the cost of funds to finance projects.

This is all very familiar to you but not, I suspect, to the bureaucratic and political systems which may be excused somewhat on the grounds they have too few resources at hand and too many demands on their time.

In that case, I believe it is essential we take steps to get more of their attention and persuade them to eliminate delay by sequencing the planning process in accordance with clear timelines and by staffing the various institutions involved with enough people of the right calibre to ensure the process works as intended.

As business people, we understand that the quantity and quality of human resources are critical to the success of any project but I suspect that neither is up to requirement when it comes to the public management of offshore wind.

After all, the development of 4GW of wind in the seas off the east coast will be one of the biggest engineering projects ever undertaken in Scotland, with far more to come in the decades ahead not only in the North Sea but in the more challenging waters off the Atlantic.  This is an unprecedented challenge that requires the public sector to commit a level of resources way beyond the normal experience, but that commitment hasn’t been made yet.

On the other hand, I believe the private sector has put the appropriate level of resources in place and that as a result there is a mismatch in capacity between the two sectors.

If Scotland wants to deliver on the immediate target of five wind farms being built by 2020 then effective project management  demands that the public and private components match each other in quantity and quality, in efficiency and effectiveness and in determination and dedication.

The two wings, public and private, must be in harmony with each other. Otherwise the bird won’t fly.

For that reason, I believe the public wing of the project management has to be strengthened in terms of resources, imbued with a greater sense of urgency and buttressed by a stronger determination to get things done.

We have got to get to the point pretty quickly where it’s clear that from the perspective of public policy that the welfare of human beings takes precedence over other species, that the rights of the community are superior to those of sectional interests and that the planning process is to be protected from ambushes by the powerful and the rich.

You know that there is insufficient clarity on these matters and that if left unattended then next year’s conference will open in a far less optimistic mood than it is doing today.

On the other hand, if these challenges are met during the coming twelve months then the institutional capacity of the public sector will be made fit for the purpose and we can move more confidently from “Concept to Reality”.

Route to Market

The second requirement for getting there is to have a clearly defined route to market, which covers both pricing and grid.

There is no clear route to market at present under either heading.

With regard to pricing, we know that the new Contract for Difference Scheme comes into place in three years’ time and that to cover the resulting hiatus the UK government last year launched the FID-enabling process, or FID-E.

 

As developers, we can use FID-E to bring a project to financial close ahead of the Energy Market Reform timelines and so reduce project risk and thereby increase returns.

In running this process, DECC shortlisted seven offshore projects but only the top four met the affordability criteria under the Levy Control Framework, which funds offshore wind and other low carbon technologies up to 2020.

These four projects will now have a revenue stream.  All of them are in English waters.  The bottom three, which do not qualify, are all in Scottish waters, namely, Neart, Beatrice and Inch Cape.

They have been left in limbo or, at least, with the sort of funding problems that FID-E is designed to overcome.

Now it’s true that unsuccessful projects can apply again in October to get a CFD under the “Enduring Regime” and may receive an award in December – or not, as the case may be.

It is also true that projects believed ready by July this year can apply to OFGEM to qualify under the ROCs scheme, which doesn’t mean of course that they’ll get it.

In short, the pricing regime is in a state of flux due to the policy confusion surrounding Electricity Market Reform in which complexity seems to be preferable to simplicity.

We know that EMR is the responsibility of DECC and that in this matter the Scottish authorities are policy-takers rather than policy-makers, and so are not to blame for the complexity of the pricing regime.

We also know they are doing their best to simplify matters and wish them well in their endeavours.  It is imperative they succeed for there is no greater threat to investor confidence that uncertainty over market pricing and future revenue streams.

But right now that’s where we are. The root cause lies in the triumph of ideology over common sense when applied to the reform of the energy market.  The only criterion for pricing policy should be effectiveness.

If a particular instrument doesn’t advance the progress of the industry then it has no place in the policy portfolio, no matter how attractive it may be to the ideologues.

The current situation is quite intolerable and, as developers, we know what is needed.

We proposed, at the start of the EMR process, that the UK adopt a single, simple Feed In tariff to support renewable generation. The ReFIT is a pretty universal, and well understood, pricing system that would open up a route to market, enable us to forecast revenue streams, bring our projects to financial close in a timely manner and allow us start construction on time.

But that is not what EMR has delivered. Instead, we have the CfD which adds a layer of complexity and risk to the financing and deliverability of projects and the ability of IPPs like mine to find a route to market for their power.

With the time it has taken to deliver EMR, I fear the UK will miss its 2020 climate and energy obligations as result of unnecessary delay.

 

Supergrid

A proper pricing system would shorten the distance between “Concept and Reality’.  So too would progress on the Supergrid.

Many of you will know that I have long advocated the building of a Supergrid in the Northern Seas so that the electricity generated offshore can be collected and then transmitted to the main load centres throughout Britain and Europe.

The Supergrid would be a meshed DC grid using HVDC as the base technology, with supporting innovations, such as the Supernode.

Notwithstanding the many political and bureaucratic obstacles in its path, I believe the building of the Supergrid is inevitable for two reasons.

First, the European Union needs vast quantities of offshore wind to replace fossil fuels and for that to happen an offshore grid is essential.

Second, a Single Electricity Market for the whole of Europe is imperative for reasons of efficiency, competitiveness and security of supply and a Supergrid is imperative as the foundation on which to build interconnection.

The first step towards a Supergrid could be to regard the five offshore projects as a start and plan to have them interconnected rather than being individually connected to the existing grid.  Were that to be done, Scotland could take the lead in building the North Sea Supergrid.

Make no mistake about it, the future of offshore wind lies in the Northern Seas, with the first phase in the North Sea area between Britain, Germany and the Scandinavian countries of Denmark, Sweden and Norway.

It is here that we will build the necessary volume of offshore projects before 2020 to drive down the cost of energy to make offshore wind the most attractive low carbon technology in the 2020s and 2030s. I would like to see this sector working together across the North Sea region to this end. Without collaboration there will not be cost reduction and there will not be interconnection.

Having said that it is immediately obvious that for geographical reasons Scotland is the fulcrum around which the whole system will pivot.  It is also obvious that, for the same geographic reasons, the first phase of the Supergrid is essentially a Nordic project.

This gives Scotland a special role in its development and for that reason the second step, it seems to me, could be for Scotland to take the lead in bringing the North Sea countries together and getting them to commit politically to the construction of the Supergrid.

The engagement of the British and German governments would be essential, of course, as they represent not only two of the most influential member states in the EU but also its two largest electricity markets.

The support of the European Commission and Parliament would be equally essential if the Supergrid is to be designated as an infrastructural project of common interest under the “Connecting Europe Facility”, given that completing the Single Energy Market is to be regarded as a common EU priority.

This would fit well with the policy of the Scottish government which rightly regards wind resources as the basis for a major export industry to the rest of the UK and EU.  The Supergrid would make that physically possible and concrete steps towards its construction would greatly enhance business interest in offshore wind and attract the necessary investment to complete the projects already begun and to commence the next wave of development.

Let me summarise as follows.   Clear sight of the route to market is a basic requirement for business confidence.

At present, we don’t have full sight of either the financial or physical routes to be followed and, until we do, progress towards a flourishing offshore industry will be hesitant, spasmodic and uneven.

That is why I am suggesting we need strong action on pricing and intelligent foresight on the grid.  If we get both in equal measure then industry will react positively and progress towards a flourishing offshore industry will be confident, coherent and continuous.

Industrial Policy

I indicated at the beginning that industrial policy was the last part of my answer to the question of how do we get from concept to reality.

It is quite clear from the Supply Chain Exhibition paralleling this conference that Scottish industry is alive to the business possibilities of offshore and that the great engineering strengths of this country will be the basis for a new energy sector.

There is little need for me to elaborate any further on what is so self-evident here in Aberdeen, the Energy City of Europe, other than to say the following.

If business is convinced that there is a long-term future in offshore, with clearly established goals, timelines and pricing mechanisms, then investment will flow into the supply chain.  That’s the primary responsibility of the public authorities.

Another pertinent task is for them to provide the infrastructure that will make industrial development possible, such as custom built ports, a labour force with the right skills and the Supergrid I have just examined.

That is why I welcome the publication last year of the UK’s Industrial Strategy for offshore wind, and the creation of the Offshore Wind Programme Board. I am looking forward to the publication of the OWPB’s Annual Report next month, setting out the ways in which it is helping to build supply chain confidence in the sector.

In addition, the Offshore Catapult, newly opened in Glasgow, and the Scottish Offshore Wind Industry Group each have a key role in capturing the economic benefits of this sector for Scotland.

I get the sense that the pieces of the jigsaw are coming together and I also have the feeling this is the right time to do it.  The offshore industry is coming of age, it is becoming mainstream, if I may coin a phrase, and its success is becoming more evident.

The time to make a big push from concept to reality is now and it requires the public authorities to formulate an industrial policy alongside a functioning planning system, sensible pricing mechanisms and the infrastructure that will underpin the electricity market.

Good policy making is a function of institutional capacity.  It requires a particular type of mind, which is most times in short supply.  I think steps should be taken now to beef up the institutional capacity to think through what is required for the green industrial revolution, in which offshore wind will play a decisive and central role.

Conclusion

I have no doubt as to what the future holds.  The global economy will have to be transformed.  The levels of CO2 emissions will have to be reduced to 80% of their 1990 levels.  A low carbon economy lies ahead.

Neither have I any doubt that zero carbon power generation is a key component in the transformation to the low carbon regime.

Nor do I have any doubt that offshore wind will be central to clean electricity generation.  In Europe, it will provide somewhere between a million and a million and a half MWs of power, which will be generated in the seas surrounding this country.

In that context, building 4,000MWs is not a big deal.  But since it is the first 4,000MWs to be built, it has significance out of all proportions to its size.  It is a big deal in its own right.

It is the first step in moving from the concept I have just outlined to the reality yet to be created.

As always in life, first steps are important.  A good beginning, they say, is half the work.

So I have proposed that we:

–               Enhance our institutional capacity;

–               Establish a clear route to market; and

–               Develop an appropriate industrial policy.

I hope that what I have said under each heading has made sense to you and that it will attract the attention of policy-makers, particularly here in Scotland.

I wish the conference all the success it so clearly deserves and I hope you draw great benefit from its deliberations.

Thank-you for listening.

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