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Offshore Windfarm Plans Shelved by SSE

Proposals for a 1,200-MW offshore wind farm off the U.K. coast have been dropped by developers ScottishPower Renewables.

The Argyll Array has been under development since 2009 but following detailed technical and environmental site studies, ScottishPower Renewables (SPR) has confirmed that they will not be taking forward their lease option to develop the windfarm in the near future.

Citing conditions at the site — particularly the presence of hard rock coupled with a challenging wave regime — as the main issues affecting the project, the company has stated that it may reconsider as offshore wind technology develops in the longer term, but estimates that will not be within the next decade.

There is also a significant presence of basking sharks, which environmental groups continue to study to get a greater understanding of their movements in the area, SPR adds in a statement.

Having evaluated the viability of the project on the basis of these findings, a decision not to progress the project has been taken by both SPR and The Crown Estate.

Commenting on the decision, Jonathan Cole, Head of Offshore Wind at ScottishPower Renewables, said: “We believe it is possible to develop the Argyll Array site, it has the some of the best wind conditions of any offshore zone in the UK.

“However, it is our view that the Argyll Array project is not financially viable in the short term. As cost reductions continue to filter through the offshore wind industry, and as construction techniques and turbine technology continues to improve, we believe that the Argyll Array could become a viable project in the long term.

“The rate of progress in development of foundation and installation technology has been slower than anticipated. The current outlook for offshore wind deployment in the UK suggests this will not significantly improve in the short term. This supports the view that it could take 10-15 years for the required technology improvements to be available for this project.”

Development work on the project will cease with immediate effect.

DONG offshore wind project

Downplaying the significance of the decision, RenewableUK’s Deputy Chief Executive, Maf Smith, observed: “The fact that not all wind farm projects go ahead is a natural part of the development process. Some encounter physical obstacles or financial challenges which mean that they aren’t viable for the time being — although they will be in the future, as cutting-edge wind turbine technology is developing at an astonishing rate.”

Smith continued: “When you take a broad overview, the pipeline of projects is still a healthy one. The current pipeline of projects gives us the potential to have 20 GW of wind energy installed in UK waters — more than five times as much as we have now.”

However, new analysis by Bloomberg New Energy Finance shows that a range of financing risks may still hold back plans for UK offshore wind development through to 2020.

BNEF says it has examined the risks that project developers will face in this relatively new sector, including construction delays, those associated with long-term power purchase agreements (PPAs), and risks associated potentially affecting the price of the electricity produced. Analysis shows that equity returns for investors in offshore wind projects will be between 8 and 12 percent for projects commissioned between 2014 and 2018, depending on the year of commissioning, marginally superior to the returns available under the current Renewable Obligation regime. However, the new analysis also found that the Contract for Difference (CfD) regime poses a number of new risks that may erode those returns in practice, and deter investors.

Development and construction risk under the CfD is mainly related to the uncertainty over budget availability for offshore wind projects under the Levy Control Framework (LCF). Further risk during the development and construction phase arises from potential construction delays or a downsizing of total project capacity.  Key risks in the operational phase are price and liquidity connected to power purchase agreements, “basis risk” (the danger that electricity prices fall below the CfD reference price), “balancing risk” (when actual electricity output does not match forecast output), credit risk posed by the CfD counterparty and supplier obligation, and the risk of further changes in regulations.

Sophia von Waldow, offshore wind analyst for Bloomberg New Energy Finance, said: “The government is anxious to convince investors and banks that it has built a cost-effective incentive system to drive the construction of offshore wind projects in the next few years, enabling the U.K. to maintain its position as the world’s leading market for this technology.

“We are not convinced that it has yet done enough to minimise the complex web of risks that these projects, often in deep water and far from shore, will face. If so, the U.K. may fall short of that 10-GW figure for offshore wind capacity by 2020.”

Despite these concerns there is nonetheless evidence that offshore wind can prove attractive for investors. Earlier this week Denmark’s DONG Energy announced its decision to acquire the Race Bank offshore wind development from Centrica.

Located in the Greater Wash off the east coast and with a total consented capacity of up to 580 MW, the purchase price for the project is £50 million (US$77 million).

Benj Sykes, DONG Energy Wind Power UK Country Manager, noted:  "DONG Energy has committed £4 billion ($6 billion) of investment in the U.K.'s offshore wind market and we are the world leader in this field.

Meanwhile, SPR is also working with DONG on the 389-MW West of Duddon Sands project, currently under construction in the Irish Sea. The windfarm is expected to be in complete by late 2014.

Image: Offshore wind farm, via DONG Energy

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