First published in Quoted Cleantech, August 2010. Copyright Cleantech Investor Ltd. 2010  

By Jon Mainwaring

PwC report says investment gap threatens 2020 target

Offshore wind is an industry that a number of countries around the world hope will play a significant role in paving the way towards a low-carbon economy. The attractions are obvious. Offshore wind is a non-fossil fuel source of energy that does not use valuable real estate, nor does it ’blight’ the views of the countryside or annoy residents of neighbouring homes since offshore wind farms are located off the coast. In fact, they are sometimes located many miles away from the coast and so do not even spoil the view of the sea.

Although Denmark currently has the world’s largest wind farm, in the long term it seems that much larger countries – such as the US, Canada, Germany and the UK – will embrace offshore wind as an important component in their mix of energy sources.

But while several countries around the world now appear to be keen on offshore wind energy, they have differing approaches to funding it.

Late last month, Germany’s Government announced a debt guarantee deal to secure the funding of ten large wind turbine projects in the North and Baltic Seas. The country hopes to build 10GW of offshore wind farm capacity during the next decade, and 25GW over the next 20 years.

But in the UK, where offshore wind forms a key role in the country’s renewable energy strategy, a funding gap will mean the UK missing its 2020 renewable energy targets unless a huge leap in offshore wind capacity investment is achieved, according to accountancy firm PricewaterhouseCoopers.

In order to meet the UK’s 30% renewable generation target by 2020, around half of the additional 27GW required will have to come from offshore wind. This, according to PwC, means that offshore wind is playing a “make or break” role in the UK’s renewable energy strategy. However, last year less than half the annual roll out rate of 1.1GW needed to meet the 2020 target was achieved.

The firm says that developers will face a peak cumulative funding need of up to £10 billion per annum to achieve the annual roll out rate, but the problem is the scarcity of pre-construction finance. According to Michael Hurley, global energy and utilities advisory leader at PwC, the UK needs to dismantle barriers to investment by creating mechanisms to either limit the risk associated with the construction phase or to improve short term returns, without unduly pushing excess costs on to the consumer. “If the construction and technology risks could be underwritten or transferred, this would open up offshore wind to pension and life company investors,” he says.

Among PwC’s other proposals are the introduction of additional Renewable Obligation Certificates for a limited period, as well as the creation of ISA bonds or equity funds. Both of these would increase short term returns, attracting private equity houses, hedge funds and individual investors in return for accepting the risks associated with the construction phase.

Whether PwC’s proposals are taken on board or not, it seems that something needs to be done to ensure that the UK’s offshore wind programme is a success. Large renewable energy businesses like Spain’s Iberdrola Renovables (see below) and utilities like Scottish and Southern Energy are counting on offshore wind to play a key role in their own business strategies. In addition, plenty of smaller companies, both directly involved in the construction of offshore wind farms and indirectly involved through activities such as providing logistics to these farms, are taking a bet that offshore wind in the UK will be a success. From their point of view, the UK must not fail when it comes to offshore wind.