In Part One (here), we examined how BP paid 65 per cent more than its nearest rival to scoop two leases for new windfarms off England and Wales, paying the Queen hundreds of millions of pounds a year for options on pieces of seabed where the turbines will be installed. The offshore wind market is sizzling and everyone wants a piece of the action.
The English and Welsh awards won't be the last this year. The seabed auction there was organised by the Crown Estate, which for historical reasons owns and manages the seabed around England, Wales and Northern Ireland on behalf of the Queen. She hands 75 per cent of the proceeds to the British government, but does keep a quarter to assist in running her household. So, BP's largesse may pay for more gilding for the carriages of state, racehorses, and corgi food.
In Scotland, the seabed rights are held by Crown Estate Scotland, which is a public corporation paying all its profits to devolved Scottish government. Crown Estate Scotland is also holding an ongoing auction for fifteen blocks of seabed for windfarms with a combined capacity of up to 10 GW. This map shows the proposed locations.
This auction has now been delayed following the unexpectedly high bids in England and Wales. The large premiums in the English and Welsh auction took the Scottish government by surprise. The Scottish auction is now expected to close later in the year, and will provide further evidence of the large investments needed to make the shift to renewables (see here).
"The unprecedented outcome of The Crown Estate Round 4 process [in England and Wales] has, overnight, changed the market dynamics around offshore wind leasing, and could have significant implications for offshore wind development in Scotland,"Amanda Bryan, Chair of Crown Estate Scotland, said (here). "It is only right that we consider the implications of this new situation in relation to ScotWind Leasing."
Ms Bryan clearly hopes to clean up on behalf of the Crown.
Alon Carmel, a senior director at FTI Consulting, which advises offshore wind bidders (how does one get such a job exactly?), said the English and Welsh bids marked a "seismic shift" for the industry. Analysts at Barclays told the Financial Times (here) that the "huge step up" in up-front costs would "put up barriers" for other utilities and smaller oil and gas companies looking to diversify into offshore wind.
Potentially, it also means higher costs for British consumers who will be buying the electricity produced by BP and the other winners.
The option rights BP has agreed to pay off England and Wales appear to work out as £1,100 (US$1,540) per kilowatt. With 8,760 hours in a year and, typically for offshore wind, 50 per cent availability, that's £1,100 divided by 4,380, or about 25 pence (35 US cents) per kWh for one year or 2.5p (3.5 US cents) per kWh over ten years. Current UK electricity prices are around 14 pence (19.6 US cents) per kWh, so this represents a large price hike (here).
These increased bidding costs potentially reverse the downward cost trend that has locked the European wind industry in a virtuous circle, as bigger turbines and better installation efficiency drove down unit costs. Now we see auctions driving up costs and more technical complexity impinging. Recently, Vattenfall announced it would be fitting toilets in all its wind turbines, part of a technical creep which is certain to further raise technical complexity and overall turbine costs (here).
It is not just me warning that a bubble is forming. When the results of the English and Welsh auction were announced, Total's CEO Patrick Pouyanné spoke out in an interview with the Financial Times. He warned explicitly "there is a bubble" in the offshore wind sector. He observed that valuations that are often up to 25 times earnings, which he viewed as "just crazy today".
"When we come, we don't pay too much," the Total boss said, in what the newspaper described as "a thinly veiled swipe at BP."
"I will not buy," Pouyanné continued, "but I think I would not be surprised to see one of my European peers spending money… A banker came to me [about another deal] and said, 'If you don't buy it, BP will buy it'. I said, 'OK, but at this price, why should I buy that? Explain it to me.'"
It remains to be seen how resolute Total will be if it is repeatedly outbid on wind farm leases by BP or others and falls behind its competitors in achieving its renewables targets. Indeed , the company says on its website (here) that it is targeting a renewable power generation capacity of 35 GW by 2025 "thanks to the expertise of our affiliates Total Solar, Total Eren, Total Quadran and SunPower."
Interestingly, the Total chief executive said there was an alarming lack of debate among politicians and environmentalists over how much the shift to renewables will actually cost consumers, especially if their cars as well as their homes will be powered from the grid. The English auction marked a turning point in the move from government subsidies for the offshore wind industry, to a revenue neutral position recently, to now collecting large upfront fees from windfarm developers.
This is critical as the move to battery-powered electric vehicles will see the high petrol tax revenues for government in Europe collapse when Teslas and Leafs become dominant on the roads. The UK government typically collects £27 billion (nearly US$38 billion) a year from fuel duty tax receipts (here) – a huge revenue shortfall that will need to be made up elsewhere. Other European governments are similarly dependent on taxes on internal combustion engine vehicles and their fuel, which many have now pledged to phase out, to combat climate change.
"We have to face the reality that there is something wrong in the political debate," Pouyanné told the Financial Times. "People think it's renewable so it should be free."
Investors are hungry for renewables, however, and companies are desperate to be included in green indices of investments to receive their funds. Just as demand for seabed for windfarms has surged, so too has demand for shares in renewables companies. Global funds linked to environmental, social and governance (ESG) principles took in nearly US$350 billion of new investments in 2020, compared with just US$165 billion in 2019, according to data from Morningstar.
"I think we're 100 per cent in a green bubble," said Gordon Johnson, chief executive of GLJ Research. "Pretty much every solar company I cover, their numbers got worse and the stock, like, tripled… This is not normal."
As a result, every company wants to be part of the ESG bubble and to rebrand themselves as green, especially oil and gas service companies perceived to be "dirty" and reeling from the shock of 2020's oil price collapse.
Last week FPSO specialist BW Offshore announced it was investing €60 million (US$72.7 million) in French engineering company Ideol to create "a global integrated floating offshore wind company" (release here). This news wonderfully over-shadowed other grim news in the release that two FPSO crew members had perished in an accident off the Ivory Coast, and that BW Offshore experienced a loss for the fourth quarter of 2020, after taking impairment charges of US$59.6 million on the FPSOs BW Athena, BW Cidade de São Vicente and Espoir Ivoirien.
"The company is expecting a more challenging market for redeployments of mature FPSOs going forward and is therefore also considering recycling of some of these units in lay-up," it announced.
BW will now become the "strategic owner" of Ideol and create a new entity, BW Ideol, in conjunction with Ideol's shareholders and employees in France. BW said it will also provide a convertible shareholder loan of up to €10 million (US$12.2 million) to finance BW Ideol's development plans and working capital requirements through 2021.
For whilst Ideol has managed to build some "demonstration units" of its floating turbines off France and Japan, it doesn't actually appear to have any turbines on order for clients with wind farms under construction.
But no matter. BW declared that BW Ideol will seek a listing to trade its shares on the Euronext Growth Oslo exchange by the end of March, like SeaBird Exploration and its subsea minerals play (here). Naturally! When billions of dollars of investor dollars are chasing ESG stocks, a staid FPSO company, like Swire Pacific with Cadeler, and Scorpio with Eneti before it, needs a new wind-based pitch. There's a gold rush in wind today, and BW Offshore doesn't intend to miss out.
Nor does rival FPSO operator SBM, which has also announced on its website (here) that "SBM Offshore has been selected by EDF Renewables to provide its proprietary floating wind solution (supporting eight MW wind turbines) for a pilot project to be installed in the Mediterranean Sea."
SBM noted that the project is subject, "to achieving committed financing, which would result in a contract to include engineering, procurement, construction and installation services for three floating systems to be installed offshore France." But in the current market I doubt that raising cash will be a problem for SBM. Green is gold.
Who is going to benefit from this arms race? Guess? One of the BW Offshore investor slides (slide 15 here) reported that BW Offshore has formed an unlikely partnership with the American utility Invenergy, "dedicated to tendering for offshore wind acreage in the ScotWind leasing round." Them and every major utility and oil and gas company in Western Europe and beyond.
I don't know what the Queen will spend all the extra money on… but I do know that the next offshore Scottish wind farm leases will be expensive for the bidders, very expensive. Enjoy your windfarm windfall, Ma'am.
Background reading
The Economist has an excellent article here on the frenzy the rise of the offshore wind industry has unexpectedly had on balsa wood production in Ecuador, setting off a scramble to find balsa trees to chop down in the tropical forests of Latin America and sell to turbine manufacturers.
