Offshore needs billions to meet green targets

UK Offshore Wind Investment faces a £30bn decade-long capex push to meet EU renewable targets, requiring financing reforms, customer levies, ROCs, and National Grid roles, while pension funds back offshore wind farms like Dogger Bank.

Britain's offshore wind ambitions will face a £10 billion funding gap within five years, energy experts warn, and the government's legally binding 2020 green targets will not be met unless the deficit can be closed.

This comes a day after Energy Minister Chris Huhne revealed government wind plans for a huge expansion of the UK's wind turbines, saying wind power would be an "important part" of meeting the country's energy demands in the future.

A whopping £30 billion of capital investment in offshore wind farms is needed over the coming decade European offshore wind focus if the UK is to produce the 30 per cent of electricity from renewable sources needed to comply with European regulations, according to the report from consultancy PricewaterhouseCoopers PwC.

The number dwarfs current levels of investment, which run at around £8 billion a year for all the utilities and National Grid combined. Given that the average offshore wind farm takes more than three years to construct, the £3 billion annual investment requirement creates a capex exposure of £10 billion by 2015.

"A massive injection of money is needed," Michael Hurley, head of energy at PwC, said. "We need a radical new plan to deal with what is going to be one of the biggest issues facing the Government in the aftermath of the departmental spending review [this autumn]."

The problem is that the money cannot come from the cash-strapped government. And with just £2 billion of capital, the coalition government's planned Green Investment Bank will neither have sufficient funds to solve the problem nor have the remit to solve the problems in the design of the market.

Trickier still, the risks associated with offshore wind farms – both in terms of the construction process, including a lack of construction ships, and the unpredictable power price – are putting off the companies that might build them, and the financiers that might help them raise the money.

"The real issue is the ramp-up required to meet the 2020 target toward mainstream renewable power is very, very significant," Mr Hurley said. "Business as usual simply will not work."

There are a variety of options available to the Government to help spur investment in offshore wind, says PwC. The simplest – already adopted in parts of the United States – is to add a flat levy to customer bills, to be spelled out separately from existing standing and usage charges. It is difficult to estimate the size of such a levy.

A more complex version of the same principle is to put the provision of offshore infrastructure within the existing, regulated estate of National Grid, thus leaving the fundraising to a single corporate entity. But the move is unlikely to prove popular with the company because it would leave it over-exposed to the massive construction risks associated with offshore wind.

Alternatively, the government could approach the problem by raising the returns of the investment, by boosting the number of Renewable Obligations Certificates ROCs – the system already in place to reward green generation – associated with offshore wind, as offshore wind energy continues to scale.

Whatever strategy is pursued has to appeal to utilities and potential financial backers – ideally either pension funds or Individual Savings Account ISA holders, says PwC. "You may have an economic mechanism that works but [you] still have to get someone to finance it," Mr Hurley said. "The key is to make it attractive to pension funds, so it has to be simple."

The offshore wind industry is more bullish. Although Renewable UK supports the call for improved regulation, the lobby group denies that without such changes, the money will not be found and points to an onshore wind boost as evidence. "The sums are huge and the structure of finance deals does not need a whole new approach," Maria McCaffery, the chief executive, said. "But the number of international investors beating a path to our door suggests a healthy level of interest."

There are 253 wind farms already in the UK, and 12 offshore. Mr Huhne identified Dogger Bank in the North Sea as the potential site for an offshore wind project following the largest offshore wind farm licence in the UK.

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