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Offshore Wind Prospects: Asia Eyes Opportunity

In European offshore, all eyes are on the prize. And with just under 4 GW of installed capacity, the continent has got a mountain to climb if it's to increase that figure ten-fold in only seven and a half years.

However, it’s not just within Europe where offshore wind energy ambitions are running high. In China, there’s a similar appetite for growth. Although the country has already achieved a whopping 62 GW of installed onshore wind capacity, it has yet to really take to the water with wind.

Currently the People’s Republic has two early stage projects in the water, with Donghai Bridge development having entered operations in 2010 and with the 131 MW Longyuan Rudong Intertidal project due to begin commercial operations later this year.

When the blades started spinning at the Shanghai Donghai Bridge farm just over 12 months ago, it was the first project of its kind outside of Europe. But the Global Wind Energy Council (GWEC) reports that the project only takes China’s total offshore installed capacity to some 258 MW – this is relatively small change for a country that has demonstrated such onshore operational strength.

And that’s not all. With the second round of bidding for offshore concession projects due to have taken place in the next couple of months, but now widely expected to be delayed, evidently there’s trouble afoot.

In the ports along the coastline, Chinese domestic businesses have made it clear that they see little progress for offshore wind within the local market and little incentive to try. As a result, many manufacturers are sticking to what they know best – namely, winning large-scale orders from the West and exporting their equipment to overseas markets.

That keeps manufacturing output high and leaves little spare capacity for an emerging local market, but all the while it also means making the 5 GW by 2015 target seem more elusive.

There are, however, a couple of significant developments that might just help to bring this hiatus to an end. In doing so, these developments would undoubtedly change the dynamics of the international wind power market once again.

The first is the wider appetite for offshore wind energy within the region. South Korea has already set some impressive targets to help bolster its offshore growth and has developed a shrewd ability to forge strategic commercial partnerships with the West. Take, for instance, the speed with which both Samsung and Hyundai set up manufacturing facilities back in 2010, and how they then rapidly forged commercial relationships with western manufacturers, developers and suppliers.

And then there’s the appetite within the local South Korean market itself, which practically didn’t exist before 2000. Despite this – and despite a complex governmental incentives policy that has only recently been significantly enhanced – there’s now almost 400 MW installed, coupled with a national government commitment to spend up to US$9 billion to develop a 2.5 GW offshore wind farm by 2019.

For the South Korean government, of course, this ambition provides the impetus to compete with China and the US on the international manufacturing and energy stage, while for the local conglomerates, it spells a new market and fresh growth.

South Korea is far from alone. Japan, too, is keen to dip its toe in the water, with offshore renewable energy widely expected to play an increasing role in its future energy mix.

Indeed, with the appetite for Japanese nuclear expansion now firmly off the agenda, there’s a renewed sense of urgency to not just identify but to invest in and better understand alternative energy prospects. And for the energy hungry Japanese, this is an issue of growing national importance.

There’s already talk of an elaborate system of interconnectors hooking Japan up to the South Korean mainland and, while the concept might at first seem politically challenging, if new energy sources fail to reach fruition there remain precious few alternatives for the country to supply its energy needs.

It’s just one of the reasons why the Japanese are pursuing early stage plans for a series of fixed and floating wind farm initiatives located around the coast. And it’s why in Europe, we’ve seen the likes of Marubeni purchase a 49.9% stake in Gunfleet Sands, as well as in offshore wind servicing business, SeaJacks.

Then there’s India. As recent events have made clear, the Indian power market is clearly far from stable. A situation that’s attributable in part to a long term under investment in infrastructure, matched only by a similarly significant governmental lethargy and lack of political will.

However, despite the local energy malaise, by contrast the Indian wind power market has flourished. With the likes of RRB Energy making a big play on capitalising on its rights to manufacture and distribute the old Vestas V27 and V47 units, the manufacturing sector has simply grown and grown.

Small turbines – that are easy to manufacture, ship and install – have been well received by local developers pushing power to the cities. The result is that at best estimates, the Asian powerhouse has in excess of 1.3 GW in operation. That’s no mean feat and it’s enabled the domestic market to clock up some impressive operational track records. A useful barometer for any savvy overseas developer.

Evidently then, with onshore on the up, the appetite for Asian offshore is only set to grow.

So what of the second development? A growing challenge that strikes right at the heart of the debate. Namely, the complex relationship between Asian ambition and future finance and investment in the international wind energy sector.

Armed with competitive finance packages, that undercut European rates and help manufacturers get turbines in the water, Asia shows much promise. China in particular has the potential to quickly boost its offshore European market share, learn lessons and thereby reduce its domestic development phase.

For the European developer, Asian interests therefore present both an opportunity and a threat.

In a market keen to cut costs, cheap debt certainly helps. While utilising relatively unproven and untested turbines – in European waters – is naturally high risk.

It is of course, the classic capitalistic risk/reward dynamic. And it’s a scenario that the Chinese manufacturers already recognise and understand, all too well.

European developers, with a mindset for margins, are always keen to chase a good deal and with this in mind, provided the financial terms and the product itself are sufficiently compelling, then there’s good chance that someone will bite.

Before the controversy surrounding alleged intellectual property theft, Sinovel had secured a long-term partnership deal with Mainstream Renewable Power whereby the world’s second largest turbine supplier would kit out over a 1000 MW of European projects in the next five years. And although the deal’s on hold, its initial attractiveness was predicated on favourable long-term financial incentives and builds on the existing desire to establish stronger East-West commercial ties.

Or, similarly, take Gamesa’s expanding manufacturing base in India that has enabled the European outfit to diversify its market share, drive down costs and increase its overall operational capacity and production output.

Both deals have proved to offer significant commercial advantage, while at the same time cashing in on the more immediate marginal gains associated with the overall cost of manufacture and supply.

This, coupled with the potential to extend these relationships in the future, ultimately paves the way for more complex sales packages and longer-term financial lending incentives.

Yes, right now the vast majority of these agreements are simply about supply. And, yes, there’s still substantial market scepticism about the durability and quality of the kit. However, in this regard incremental gains are being made all the time.

What’s more, within the offshore space in particular – where there’s a focus on cutting cost to within £100 (US$160) per MWh – up front unit costs are just one part of the story.

Factor in the operation and maintenance challenge, the ready supply of parts and the cost implications of turbine down time and repair delays and suddenly the relationship between manufacturer and developer becomes imperative.

As the Asian appetite for offshore wind heats up, establishing long-term partnerships with European developers is therefore not simply about shifting stock. And it’s not about capitalising on the ability to offer preferential financial packages and incentives either.

Rather, it’s about learning lessons, understanding all the necessary details of the process and then combining this with a first class technology and manufacturing expertise to achieve local economic gain.

The Asian economies might not yet have the political will to warrant a fully fledged push into offshore but make no mistake, if and when the time is right, then don’t expect the likes of the Chinese to play second fiddle for long.

Just as European developers have begun to cautiously embrace all that Asia has to offer, let’s not forget that the desire for energy security is by no means territory-specific.

Adam Barber is the publisher of A Word About Wind.

Lead image: Offshore wind via Shutterstock

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