By Ian Irvine, SqurrEnergy, UK
Offshore wind farm developments offer large scale deployment of high capacity factor wind power plants. Until Q7, a 120 MW project that will be located 25 km off the Dutch coast and comprise 60 Vestas V80 wind turbines, the previous 900 MW of Europe’s commercial offshore wind farm developments were typically constructed by energy utilities willing and able to underwrite the technical and financial risks associated with the transition from onshore to offshore developments.
“If the wind farm operator has no offshore experience the preference would be to formally engage an offshore partner to mitigate associated risk”
However, October last year heralded a new era for offshore wind farm development as a €383 million ($529 million) investment in the Q7 project made it the first non-recourse financed offshore wind farm. A crucial factor in facilitating this change was the robust economic, environmental, legal and technical due diligence performed by a range of specialist consultancies that included SgurrEnergy.
SgurrEnergy has worked closely with some of the world’s largest utilities, developers and financial institutions on onshore and offshore wind energy projects that amount to over 14 500 MW. Clearly the challenges posed by the marine environment and the added complexity of waves and sea currents requires a different approach and skill set compared to onshore wind developments. However, the expertise gained on projects such as Scottish Power’s Whitelee project in Scotland, which at 322 MW has the scale of commercial offshore developments, has been a useful reference for development of the technical know-how needed to implement large scale offshore wind projects.
The various issues that have been encountered while undertaking offshore wind farm due diligence will be used to illustrate the general process of risk identification, quantification and mitigation, which is based on the company’s considerable experience of design, implementation and maintenance of renewable energy projects. Note that the process outlined below is notionally transferable to any renewable energy technology.
PRE-Project Due Diligence
The key risks associated with offshore wind farm development, like any renewable energy development, are those up to the point of full power export and those that occur during the operational life of the project. The former risks affect programme and capital expenditure during the construction period, which is nominally one to two years. The latter risk set could prevail for the life of a project, affecting project revenues and financial returns.
Risks before Full Power Export and their Mitigation
A starting point is an assessment of the capability and experience of the project developer with a view to quantifying and mitigating risk. For example, with regard to the financial strength of the developer it is important to establish that it has access to sufficient funds to meet additional, unforeseen costs. This will minimize the risk of bankruptcy that has occurred on some European offshore developments. It is also preferable that the turbine supplier is able to underwrite its liabilities. This has been demonstrated by Vestas at Horns Rev, where each of the 80 V80 nacelles were removed, refurbished and replaced at Vestas’ expense, an exercise that could have bankrupted a smaller turbine manufacturer.
The fundamental differences between onshore and offshore wind farm developments make it crucial for the project developer to present a team or consortium that has the relevant experience to take on the offshore implementation risk. For example, for Q7 Van Oord, an offshore dredging and marine contractor worked with Vestas to mitigate the offshore implementation risk. Where a project sponsor does not have all of the technical skills required to execute an offshore wind farm development, this risk can be mitigated by the appointment of appropriate technical support to ensure the overall project is technically and contractually sound.
As offshore wind farm construction costs have the potential to escalate, for example because of bad weather, all risks affecting capital expenditure must be quantified and assigned probabilities of occurrence such that a robust contingency budget can be developed.
The construction programme must show that the availability of offshore vessels – for piling, transporting foundations and cranes – which are large enough to install the wind turbines has been considered and is realistic. Due consideration must also be given to weather risk in the programme. Also, analysis of threshold wind speeds and wave heights that would result in suspension of construction activities must be modelled and the potential impact to cost and programme determined.
Site characterization is crucially important with regard to risk mitigation, as is a detailed understanding of prevailing weather, typical ambient atmospheric conditions, sea state and currents. Failure to fully understand the behaviour of wind, wave and currents at the site could lead to very long and very costly construction delays. Part of this characterization is site investigation aimed at removing the risk of unwanted surprises on or below the seabed. Fully understanding the environmental character of the site could reduce costly, unexpected downtime should construction operations have to be suspended to accommodate seasonal migrations of birds, sea mammals or fish.
Contract structure is crucial to risk mitigation, with the most expensive, least risky contract structure being engineer, procure and construct (EPC). However, there is a problem here in that there is a limited number of turbine manufacturers and contractors that have the desire or required level of offshore experience, making the current EPC market for offshore wind farms uncompetitive. The lower-cost, multi-contract route will result in increased risk because of management of interfaces and liabilities. Regarding mitigation, the sensible option is to take a partnership approach and involve the contractors at the design stage to promote ownership of risks among partnership members.
To avoid lengthy contractual or insurance disputes regarding issues such as liquidated damages or whether an event is insurable, it is recommended that on-site measurement of wind and wave conditions is undertaken during construction (and throughout the project lifetime for that matter), in addition to the site characterization phase, such that an agreed formula is the arbiter in such disputes and is in place prior to contract signature.
Constrained component sub-suppliers and turbine manufacturer production capacity limits are creating turbine supply problems. To mitigate this risk wind turbine suppliers could be approached to engage in framework agreements or joint ventures. Framework agreements are favoured by utilities, and joint ventures have been employed by smaller developers to ensure long-term supply into an onshore wind farm development pipeline.
All construction and environmental permits and governmental regulatory and statutory requirements must be reviewed to establish whether these are appropriate and modifiable. Any onerous obligations in such documents and legislation, for example suspending construction for state or commercial reasons, must be well understood and the cost and programme impact quantified. Environmental risks that might affect the construction cost and programme must be identified and quantified, and resulting constraints covered accordingly with appropriate contingencies. Once such risks are defined, appropriate mitigation can be applied. Clearly this risk category can be mitigated by undertaking a thorough and detailed environmental assessment, and engaging with stakeholders and government agencies from the inception of the project.
Risks after Full Power Export and their Mitigation
Essentially the same risk headings exist before and after full power export. However, the individual risks are quite different in character.
Regarding the background of the proposed wind farm operators, it is important to ascertain whether their experience is based on wind only or whether it also includes offshore engineering. If the operator does not have offshore experience the preference would be to formally engage an offshore partner to mitigate the associated risk. A detailed review of the operation and maintenance strategy must be conducted to establish whether the strategy is likely to ensure availability warranties and production targets will be met. For example, is the wind farm access profile realistic considering vessel choice and weather windows? Is a workable condition monitoring system in place to enable tight control of maintenance scheduling?
Failure to adequately characterize the potential wind farm site could result in an unacceptable underperformance risk. This underperformance risk can be mitigated by measuring atmospheric and sea conditions at the site rather than inferring them from remote measurements. Understanding and quantifying the risks the site-specific environment could pose with regard to turbine performance, corrosion protection performance, maintenance access, turbine availability and grid availability is essential to enable the impact on energy production and revenue to be determined.
To mitigate the risks posed by the environment it is essential that candidate wind turbines are shown to be fit for purpose for operation on the site within the specified wind farm layout. Site-specific certification of the candidate technology to offshore wind farm design codes and manufacture to ISO 9001 are useful mitigants. However, it is worth noting that unless site conditions are properly characterized it will not be possible to achieve site-specific certification.
Warranties, guarantees and insurance are the main mitigating factors regarding operational risk mitigation and it is crucial that a robust “power station” performance guarantee that can actually be enforced contractually is specified. It is also important to specify an availability warranty that deals in a fair and equitable manner with downtime attributed to technical availability of the turbine, failure to access the turbine because of the weather and grid or substation outages. Note that continued measurement of ambient wind, wave and current conditions will be required to deal with issues under these headings in a conclusive manner.
A robust financial model that takes due recognition of all of the risks affecting revenue and project profitability must be in place. In addition to many of the factors described above that will affect revenue, support mechanisms, such as power price subsidies, must be modelled over the project lifetime to establish that repayment of debt will be stable and variations or step changes in such state subsidies have been allowed for in the financial model. Similarly, any operational constraints resulting from permitting, such as shut down during bird migrations or military exercises, must also be modelled to take account of the resulting reduced energy production and impact on revenue.
The above discussion gives an overview of the technical due diligence process required in relation to an offshore wind farm development. It is believed that identifying, quantifying and mitigating the risks discussed, and others that will undoubtedly arise on a project-specific basis, will enable the technical elements of due diligence to be closed to the satisfaction of prospective lenders. Modification of this process to other renewable energy technologies is achievable, albeit with the support of a consultancy.
Europe has a 2030 industry target for offshore wind farm deployment of 150 GW capable of delivering 965 TWh of electricity and able to meet at least 23 per cent of the projected electricity demand at 2030 (www.ewea.org). To exploit this considerable resource it is likely that larger turbines than the so far commercially deployed 2 MW and 3 MW units will be situated farther from shore in larger, power station rated facilities. The offshore market is gearing up for this future potential, with Siemens offering a 3.6 MW turbine and REpower a 5 MW unit on a commercial basis. Other leading turbine suppliers are expected to follow.
REPower’s 5M turbine
The financing deal for Thornton Bank, the second project-financed offshore wind farm, closed in May with a committed investment of €154 million. Thornton Bank offshore wind farm will be composed of six REpower 5M wind turbines and is expected to be operational before winter 2008. This site is located some 29 km from Zeebrugge, off the Belgian coast. All going well, the project will form phase one of a future 300 MW offshore development. SgurrEnergy provided due diligence services to this project.
A number of issues described in the due diligence process discussion come together on this project. The owner-developer is a consortium of companies that possesses an appropriate mix of skill and experience. The project will be constructed by REpower and Seawind under separate construction contracts, and the technology risk was mitigated by a 10-year warranty, operations and maintenance contract from REpower. Projects like this and those proposed around Europe amount to thousands of megawatts of installed capacity and will make a significant contribution to the European Union’s renewables target for 2020 that 20 per cent of the continent’s power generation will come from renewable sources. The development of such projects also makes the industry aspiration described above a tangible one.