Let’s start on the right foot with today’s editorial… we’re not calling the offshore wind market, suggesting the party’s over – far from it.

More to the point, it would be poor form to hint at sector demise as next week we publish a podcast with a pioneering offshore wind company… and how rude would that be?

But let’s be honest, all is not entirely rosy. Offshore wind farms (OWFs) – fixed foundation and floating offshore wind (FLOW) – these days are not without their issues and cracks are starting to show where flaws were previously less visible.

A quick round-up of recent developments that led to this thesis include the state of Denmark where all is not well given that this week it called a halt to its “open door” policy for OWFs. This resulted in the cancellation of 24 projects that were seeking permits.

Last month (May 2023) we saw the Equinor / TotalEnergies / Shell / ConocoPhillips team ditch a 1GW OWF in Norwegian waters – Trollvind Wind Farm. It was mothballed indefinitely with the sponsors saying the economic environment made it financially and technically infeasible.

In May, we also reported on EDF Renewables stepping in to partner Simply Blue on 2 floating OWFs in Irish waters – Emerald Floating Offshore Wind Farm and Western Star Floating Offshore Wind Farm – after Shell pulled out last autumn.

Shell – making a bit of a habit of this – also pulled out of the consortium delivering the 24MW Groix et Belle-Ile floating OWF off the Brittany coast due to cost blowouts.

And that’s just sticking with a handful of European projects, not so much as glancing at Yunlin in Taiwan which in March we reported as having suffered record losses and requiring fresh capital injections.

However, in the interest of balance, weigh that against offshore wind agendas and we have a winner. The ayes are definitely towards a positive view of the market… with a few awkward stinkers to keep us on our toes.

Could it be simply that hydrogen has stolen the limelight and while everyone’s banging on about an unproven technology, and the reputation of a proven technology is being tarnished by the halo-glare of H2?

Yeah but…

Talking to folk in the market this week, it’s easy to be won over by the overwhelming optimism they share for a sector that is rampant and in ascendancy.

Sponsors love it… but they have concerns about supply chains. Lenders love the ESG credentials (it’s just a bloody wind farm) while the bankers themselves love ticket sizes that guarantee bonuses (and telling their kids they’re saving the planet – obvs).

When it comes to lending, this has always been a capricious issue. From fairly early in – and pre-Covid – European OWFs were securing commercial debt at 130bp over reference.

We reported in March that the Yeu-Noirmoutier and Le Treport offshore wind farms in France priced at 160-170bp over reference for the 20-year, 9-month debt, but sources now suggest this actually came in at closer to 135bp during construction… which is eye-watering.

Sources are saying that Moray West had a 20-30bp uplift on that pricing – putting it in the 155-165bp range – which is still low. And the assumption that they will refinance post construction doesn’t make them nervous in the slightest (they will all be in new jobs by the time that crops up).

As one old chum says: “As far as I’m concerned, it’s all being driven by ESG / sustainability / net zero policies and nothing to do with actual credit risk. I smell some big issues around the corner.”

And that’s kind of where I’m at, nostrils flaring at the corner.

Broadly speaking, it’s all bloody marvellous. Bring it on. But let’s not ignore the elephants in the room… and yes, there’s more than one (it’s a big room after all).

Offshore wind investments – let’s be honest, renewable energy generally – have largely been a function of people piling into the masses of government largesse on offer.

As one UK-based contact points out: “That largesse is a lot less attractive when you can get 10-year risk free – famous last words – UK gilt yields of around 4.5% and rising. So, a lot of the 6-7% yield equity in offshore wind farms is now underwater… no pun intended!”

Many of these OWF assets are saved by being hidden away in private funds and thus from mark-to-market scrutiny… and the recent run up in electricity prices have served as a lifeline. But how long will that last?

In response to a leading question that the bubble was bursting, one industry veteran prefers the imagery of “air slowly escaping” while the smart money pivots away, adding: “Should people who live in glass bubbles really be throwing turbines?”

Another source with an international view of offshore wind says: “Issues in Taiwan highlight a level of complexity that has been thus far swept under the carpet.” The source goes on to ponder: “Can financial sponsors accept this now brutally visible level of construction risk going forward?”

A Singapore-based contact joins in: “From an Asian perspective, the Taiwan wind market is definitely stumbling. There is a fair bit of renegotiation happening on corporate PPAs due to increased costs. Japan continues to progress at Japan's pathetic pace. Vietnam is engendering a lot of excitement with the recent new policy announcements that create a lot of opportunity for nearshore, with plenty of suitable coastline to install.”

Apologies to Japan. We love you… but get the finger out.

Smiling into the wind

The offshore wind sector will always be ruled by positivity – whether Valium or pipeline potential inspired.

As one source who is steeped in renewable energy lore – a household name and one all of you know – says: “The challenge is getting the scale of capital and resources needed. The global scale-up of the industry is taking almost everyone by surprise, without a corresponding investment in the supply chain and capacity building… whether in government, communities or the key players.

“The numbers are staggering and there aren’t sufficient levels of collaboration early enough to drive the levels of investment required. It’s relatively easy and low-cost to secure sites and do the initial development and market entry.

“It is much harder to build supply chains especially locally and then deliver the projects, especially in markets where the infrastructure isn’t ready – such as the US east coast and Australia.”

Broadly speaking, it’s all going to be dandy (pops pill).