The days when any sort of wind power needed a subsidy to be commercially viable may soon be over. In one country, they already are.
Three weeks ago, the U.K. launched a third auction in five years aimed at bolstering the share of green energy sources in its electricity supply. The government was offering so-called Contracts for Differences to providers of renewable energy, part of the U.K.’s plan to be carbon-neutral by 2050.
The winning bidders were the prospective operators of a new generation of offshore wind farms that will match nuclear power plants in their generating capacity, powering not thousands, but millions of homes, all developed without subsidies. Though not scheduled to come online until 2023, the projects point to a wholesale reinvention of much of today’s energy sector, as companies that cut their teeth in the world of offshore oil and gas morph into specialists in offshore wind electricity. The transformation has huge consequences for tens of thousands of employees and investors.
Not bad for the industry, which just 10 years ago was considered—more than anything—an ultra-expensive form of green virtue-signaling.
New generation
When the U.K. started offering CfDs in 2014, prices for offshore wind were so high—an average of over 117 pounds per megawatt-hour—that the technology nearly died of political embarrassment. (The CfDs are a sort of spread bet in which the government guarantees a minimum price to the power generator, but with the proviso that if average wholesale prices turn out to be lower, the power company has to refund the difference.) But prices halved in the next round of bidding in 2017 to 57.50 pounds/MWh. The average winning price at September’s auction was 40.63 pounds/MWh. British wholesale power has exceeded that price—on average—for only 15 months out of the last nine and a half years, according to figures from regulator Ofgem. Offshore wind is now as likely to shave customers’ energy bills as to add to them.
This is all due ultimately to one thing: scale. The auction winners were three gigantic sites on the Dogger Bank—a large sandbank about the size of New Jersey 60 miles off the east coast of England—which will house wind farms capable of generating 1,200 megawatts of electricity, each one pumping out as much as the giant nuclear reactors and coal-fired stations that have provided “baseload” (i.e. constant, 24/7) power to previous generations of consumers.
To generate that, the joint operators of two of the three sites will be using General Electric’s new 12-megawatt Haliade-X turbines. These monsters—100 of which will be needed for each farm—are the biggest wind turbines ever built, with a tower taller than any building in London’s Canary Wharf financial district, sweeping an area the size of seven football fields with blades 107 meters (351 feet) long.
Today’s larger turbines require lower wind speeds than earlier versions to generate power, reducing the problem of intermittency. According to GE, the Haliade-X’s capacity factor, which measures actual energy produced relative to the maximum notional amount it would produce if operated constantly at full output, is 63%. Not only is that more than double what first-generation turbines could manage back in 2013, it’s more than coal-powered stations in the U.S. have averaged in any of the six years since, according to data from the U.S. Energy Information Administration.
That new step up in scale means the technology is more commercially-viable; in turn, banks are less squeamish about financing it. Six years ago, loan rates for offshore wind projects used to be priced at 3.25% over benchmark interest rates. As banks became more comfortable with the risks, that spread came down to only 1.65% last year, according to industry body WindEurope.
‘Welcomed with open arms’
These developments are catalyzing a profound shift in the energy industry itself. Equinor, the majority state-owned Norwegian company that won two of the three Dogger Bank licenses in a joint venture with U.K.-based utility SSE, started out life as Statoil, synonymous with the exploitation of the North Sea’s oil and gas reserves. But as Audun Martinsen, an analyst with consultant Rystad Energy in Oslo, points out, the Dogger Bank project will be as big as anything Equinor is doing in oil and gas in the next seven years. Its expected investment bill of over $11 billion, in fact, makes it the sixth largest offshore project of any kind in the world.
That’s the sort of money that will give a new lease on life to the legions of companies that service the legacy oil and gas giants: those that construct the towers’ foundations or lay cables or ferry the companies’ workers to and from sites. And it comes at a time when offshore oil and gas—a traditionally expensive form of production—is being squeezed hard by a battle for market share between cheap and easy-to-reach OPEC oil (especially from Saudi Arabia and Iraq) and an increasingly efficient U.S. shale sector that breaks even at ever-lower crude prices.
“The influx of offshore wind contracts worth billions of dollars will be welcomed with open arms by marine contractors,” Martinsen said in a research note. “Many anticipate challenging times ahead given the uncertain outlook for offshore oil and gas developments.”
As for Equinor, it is doing with wind what it did in oil: leveraging its North Sea experience further afield. That makes sense, since it expects the renewable market to grow at 10% a year through 2040, whereas global oil demand is growing by a pallid 1%.
Equinor already bagged the rights to develop an 800-megawatt wind farm off the coast of New York earlier this year, and last week it signed a memorandum of understanding with China Power International Holding, to develop offshore wind in China and Europe.
Analysts at investment bank Kepler Chevreux estimate that the cash flows from Equinor’s wind portfolio are worth 24 kroner a share, or 14% of its total current $62 billion market capitalization.
“We believe that there is material upside in the Equinor share price at the moment, which for once does not depend on oil or natural gas prices,” Kepler analysts said last week. “What’s there not to like?”
