Gusts of change: How effective policy is catalysing a booming offshore wind sector. March 2017

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Philip Hensley
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1 Gusts of change: How effective policy is catalysing a booming offshore wind sector March 2017

Study Overview This study presents a comparative analysis of approaches to offshore wind development internationally Policy & Regulation: Which policy and regulatory frameworks have been most

2 Study Overview This study presents a comparative analysis of approaches to offshore wind development internationally Policy & Regulation: Which policy and regulatory frameworks have been most effective in catalysing growth? How can policymakers effectively balance the risk profile for developers and consumers? Industry Structures: How and why have industry structures evolved over time? What can policymakers do to support the development of robust industry structures? Project Risk Management: How can developers manage risk throughout the project lifecycle? Which developer models and strategies have been most successful? Delivered by: 2

3 Study Overview Key Findings Offshore wind is on the cusp of sharp growth and marked cost reduction Industry is entering a market maturation phase in Europe, while emerging markets will face greater challenges in developing robust industry structures Offshore wind development has been underpinned by supportive policy frameworks in leading markets Two emergent policy trends are evident: 1. Competitive auctions 2. Centralised development models These policy trends are having a material impact on the risk profile for developers Capacity constrained auctions necessitate greater government de-risking, particularly in the development stage Continued policy support and industry collaboration will be critical to maintaining cost reduction and expanding offshore wind to new markets 3

Decarbonisation: Clean, renewable source of

system benefits: High load factors (40-50%)

Considerable cost reduction achieved and

in Europe within next decade Local economic

4 State of the Industry Offshore wind can achieve several government objectives Decarbonisation: Clean, renewable source of electricity Highly scalable Energy security & system benefits: High load factors (40-50%) Flexible generation Costs to consumers: Considerable cost reduction achieved and further expected Expected to be subsidy free in Europe within next decade Local economic benefits: Align with industrial strategy Job creation & safeguarding 4

5 Annual Installed Capacity (MW) Cumulative Installed Capacity (MW) State of the Industry Offshore wind is a rapidly maturing energy technology, with deployment set to almost triple from 2015 to ,000 6,000 5,000 4,000 3,000 2, : 12.2 GW 2016: 14.4 GW 2020: 36.2 GW Operational Pipeline 40,000 35,000 30,000 25,000 20,000 15,000 10,000 Market growth historically concentrated in Europe Several emerging markets beginning to scale up 1, ,000 0 Growth beyond 2020 contingent on policy support Global (Cumulative) United Kingdom Germany Netherlands Denmark Belgium China Other Source: 4coffshore, WindEurope, Carbon Trust analysis Notes: Pipeline reflects central deployment scenario 5

6 LCOE ( /MWh) State of the Industry Cost reduction targets have been exceeded ahead of schedule 0 Forecast Actuals Targets TCE-1: Slow progression* TCE-3: Supply chain efficiency CRMF (UK average)** Industry 2020 target TCE-2: Technology acceleration TCE-4: Rapid progression EUR auction tenders (average)*** Industry 2025 target * The Crown Estate (TCE) Cost Reduction Pathways (2011) ** Cost Reduction Monitoring Framework (2017) *** Includes grid connection and site development costs for NL and DK projects (uplift of 14/MWh). It should be noted that many of the actual projects reaching FID have not yet been built. Considerable cost reduction achieved since 2010 ~60% LCOE reduction from 2010 to 2018 (FID year) Introduction of competitive auctions has accelerated cost reduction in Europe Costs expected to be higher in emerging offshore wind markets 6

7 Ave. WTG rating (MW) State of the Industry Cost reduction has been driven by several factors, but underpinned by supportive policy frameworks Scale effects Project size; cumulative capacity Technology innovation Larger turbines; foundations; electrical systems Competition Auctions; supply chain Learning-by-doing Experience; maturity Financing Bankable asset class; lower cost of capital Market economics Low oil & steel prices; low cost finance Site de-risking Site data, consent, permits Site conditions Shallow water depth, near to shore, wind speeds Latest market trends: Largest turbine: 9 MW (MHI-Vestas) Largest project: 1,200 MW (Hornsea, UK) Ave. turbine rating (annual) Ave. turbine rating (cumulative) 7

8 Industry Structures Industry is entering a market maturation phase in Europe, with a robust industry structure in place Developers Financiers/investors Suppliers 8

Industry Structures European countries have benefitted from clustering around the North Sea region Source: 4coffshore Isolated emerging markets will face

9 Industry Structures European countries have benefitted from clustering around the North Sea region Source: 4coffshore Isolated emerging markets will face greater challenges in developing robust industry structures Tailored policy support will be required to develop necessary industry structures 9

10 Policy & Regulation: Overview Six key pillars of policy to support offshore wind development 1. MARKET SCALE & VISIBILITY 2. SITE DEVELOPMENT 3. GRID CONNECTION 4. INCENTIVE MECHANISMS 5. SUPPLY CHAIN DEVELOPMENT 6. INNOVATION SUPPORT Two emergent policy trends: 1. Competitive auctions 2. Centralised development models 10

1: Market Scale & Visibility Market scale and visibility is widely considered the most important policy driver Lack of visibility creates uncertainty and increased risk for developers, suppliers, and

11 1: Market Scale & Visibility Market scale and visibility is widely considered the most important policy driver Lack of visibility creates uncertainty and increased risk for developers, suppliers, and investors Key findings: Need to integrate OSW policy within long-term energy strategy Need to provide visibility over long time horizons Short to medium-term roadmaps can hedge against long-term uncertainty (e.g. NL) Netherlands Offshore Wind Roadmap Roadmap with phased deployment over 5 year period Driven by National Energy Agreement to install 4.45 GW by x 700 MW sites identified, de-risked, and tendered annually Call to increase targets by and beyond 2023 Targets must be supported with appropriate policy levers 11

2: Site Development Centralised development models can de-risk offshore wind projects for developers Key: Green = Government responsibility; Amber = Developer responsibility Response to higher

12 2: Site Development Centralised development models can de-risk offshore wind projects for developers Key: Green = Government responsibility; Amber = Developer responsibility Response to higher allocation risk from competitive auctions Centralised models require considerable internal capacity building Some developers have a preference for greater control of development activities, particularly offshore transmission assets (risk of government inefficiency) Site-specific tendering can also introduce greater portfolio risk 12

3: Grid Connection Grid policy is heavily influenced by local context Deep Hybrid Shallow Super shallow Key: Blue = TSO responsibility; Amber = Developer responsibility Centralised TSO-build (

13 3: Grid Connection Grid policy is heavily influenced by local context Deep Hybrid Shallow Super shallow Key: Blue = TSO responsibility; Amber = Developer responsibility Centralised TSO-build ( shallow charging ) approaches can help with strategic coordination of power transmission to ease onshore grid constraints. More amenable to offshore hubs and interconnection. Decentralised developer-build ( deep charging ) models can result in lower cost point-to-point transmission assets 13

4: Incentive Mechanisms Incentive mechanisms evolve with technology and market maturity Governments take on higher risk in immature stages, shifting risk to developers as the technology matures

14 4: Incentive Mechanisms Incentive mechanisms evolve with technology and market maturity Governments take on higher risk in immature stages, shifting risk to developers as the technology matures Growing technology maturity means that emerging markets are expected to go straight to fixed off-take or competitive auctions Limited market maturity may be a barrier to competitive auctions in more isolated markets 14

15 Strike price equivalent ( /MWh) 4: Incentive Mechanisms Competitive auctions are driving down the cost of offshore wind in Europe Walney (UK) Beatrice (UK) East Anglia 1 (UK) Horns Rev III (DK) Competitive auctions Borssele I&II (NL) Vesterhav Syd & Nord (DK) Kriegers Flak (DK) Borssele III&IV (NL) Project by FID year Borssele III&IV Landmark low strike price: 54.5/MWh (exc. grid co) ~ 68.5/MWh (inc. grid co) 54% lower than the strike price cap ( 120/MWh) Saving 4.7bn over project lifetime Only expected to be subsidised for first 7 years of operation No subsidies for remaining 18 years Incentive mechanism design (no price ceiling) enables developer to benefit from high future wholesale prices Offshore wind is on track to be fully integrated into the market on a competitive basis in some European countries within the next decade N.B. Includes grid connection and site development costs for NL and DK projects (uplift of 14/MWh). It should be noted that many of the actual projects reaching FID have not yet been built. 15

16 Risk Management Competitive auctions and centralised development models have materially changed the risk profile and scope for developers Project risk category Allocation risk Price risk Development risk Funding risk Net impact Drivers of increased risk High competition for capacity constrained auctions. Uncertainty over timing and size of future auction rounds. Competitive auctions create strike price uncertainty. Wholesale price uncertainty. Commodity price volatility. Increase in project size requires greater number of funders per project. Drivers of decreased risk Trend of regulators assuming part or majority of the development scope. Increasing trust by funders viewing offshore wind as a bankable asset class. New and more diverse range of investors attracted to the market. Sites conditions become more Learning-by-doing. challenging (deeper waters, Greater trust in contractor further offshore). capabilities. Technical risk Limited track record of ageing Greater availability and assets and new technology. competition of contractors. Price compression puts pressure on suppliers. 16

5: Supply Chain Supply chain policy must balance increasing local content with delivering low costs to consumers Suppliers need long-term visibility and certainty of market scale Local content

17 5: Supply Chain Supply chain policy must balance increasing local content with delivering low costs to consumers Suppliers need long-term visibility and certainty of market scale Local content requirements can support domestic industrial policy, but are likely to be a barrier to cost reduction and may conflict with State Aid regulations Bottom-up initiatives to improve supplier competitiveness (e.g. infrastructure investment; business & innovation support) may be more effective in balancing government objectives to reduce costs and maximise local economic benefit Isolated emerging markets will face greater supply chain challenges than in Europe 17

6: Innovation Innovation is critical to delivering cost reduction and building supply chain capability Balance of support required across technology readiness levels (TRL) Forging links between

18 6: Innovation Innovation is critical to delivering cost reduction and building supply chain capability Balance of support required across technology readiness levels (TRL) Forging links between industry and academia can maximise market penetration of new technologies Greater information and data sharing can accelerate technology innovation Technology concepts Technology market-ready 18

19 Policy & Regulation Five overarching principles should be embedded within offshore wind policy and regulatory frameworks Stability: Market confidence Lack of policy change Clear, transparent legal framework Market scale & visibility Site development Visibility: Market scale Auction allocation Timeline for consent/permitting Innovation support Grid connection Collaboration: Research & development Supply chain Interconnection Supply chain support Incentive mechanisms Flexibility: Consent envelope Milestone delivery Supply chain (local content) Coordination Coordination: Government departments clear responsibilities & shared objectives Stakeholders early engagement & consultation 19

20 Study Overview Key Findings Offshore wind is on the cusp of sharp growth and marked cost reduction Industry is entering a market maturation phase in Europe, while emerging markets will face greater challenges in developing robust industry structures Offshore wind development has been underpinned by supportive policy frameworks in leading markets Two emergent policy trends are evident: 1. Competitive auctions 2. Centralised development models These policy trends are having a material impact on the risk profile for developers Capacity constrained auctions necessitate greater government de-risking, particularly in the development stage Continued policy support and industry collaboration will be critical to maintaining cost reduction and expanding offshore wind to new markets 20

21 THANK YOU! For additional information on RETD Online: Contact:

22 BACK-UP SLIDES Study Overview Offshore Wind: State of the Industry Policy & Regulation Industry Structures Risk Management 22

2: Site Development Consenting risk can be mitigated with appropriate planning and policy measures Key findings: Spatial planning tools should be used to select best sites with low consenting risk

23 2: Site Development Consenting risk can be mitigated with appropriate planning and policy measures Key findings: Spatial planning tools should be used to select best sites with low consenting risk Consenting regimes need a clear framework with defined timescales Front-ended consultation with affected stakeholders can mitigate consenting challenges One-stop-shop entities to bundle permits can streamline the permitting process Flexibility in the consenting envelope can increase opportunities to integrate technology innovations Site extensions are a cost-effective and low risk means of adding additional capacity Scientific research studies should be undertaken to inform consenting processes/decisions Site extension at Walney (Irish Sea) Source: DONG Energy 23

24 3: Grid Connection Grid policy must balance several trade-offs between the risk profile for government and developers Developer Build & Operation Deep model TSO Build & Operation Shallow/super-shallow model Government Perspective + Lower cost and risk to government + Optimised point-to-point asset minimises costs to consumers + Increased competition stimulates cost reduction - Less control over strategic coordination of grid assets - Challenging to introduce converter platform hubs or interconnection + Strategic coordination of onshore upgrades and offshore hubs + Share assets between multiple wind farms + Standardise substation designs for economies of scale savings - Cost to consumers may be higher if not optimised - Reduced competition can result in higher costs - High cost and risk sitting with TSO to build and manage all offshore assets TSO needs to be suitably capitalised to take on risk - Public ownership exposes consumers to high risk if TSO is liable to pay compensation Developer Perspective + Greater control over the design and construction of the transmission assets + Reduces the risk of unforeseen or uncontrollable connection delays and lost revenue + Ability to demonstrate competitive advantage by optimising assets - Higher cost and construction risk for developer - Additional debt to finance construction + Fewer assets to manage lower risk provided compensation is in place to mitigate risk of downtime + Reduced developer investment, which can lead to lower cost of capital - Higher risk of delays or design inefficiencies from TSO need adequate compensation in place to mitigate - Risk of low incentives for TSO to maintain to a high standard downtime causes lost revenue - Less control over asset design Suitable liability clauses, incentives, and penalties need to be in place to reduce the risk profile for wind farm developers and transmission operators 24

25 4: Incentive Mechanisms Policy makers have a range of options to balance the risk profile when designing incentive mechanisms Allocation: Demand led vs Capacity constrained Mechanism: Feed-in Tariff vs Feed-in Premium (fixed/sliding) Price caps: Floor price / Ceiling price Repayment intensity: Even spread vs Front-end loaded Support cap: Time-based (yrs) vs Power production (load hours) Rate of regression: Fast / Slow Site-neutrality: Adjustment by water depth/distance from shore Price indexation: Inflation adjusted UK Contract for Difference Feed-in Premium. 25 Source: DECC/BEIS

26 4: Incentive Mechanisms Competitive auctions can drive down costs, but need to be designed appropriately to balance the risk of non-delivery Auction cap: Fiscal vs Capacity Technology neutrality: Technology Neutral vs Specific Auction format: Pay-as-bid vs Pay-as-clear Pre-qualification: Yes / No Bid bond: High / Low Trade-off between maximising competition and deterring speculative bids Key findings: Emerging markets should carefully consider when to adopt competitive auction systems depends on domestic capabilities Transitions from fixed-remuneration systems to competitive auctions can introduce higher allocation and price risk and need to be managed carefully 26

27 BACK-UP SLIDES Study Overview Offshore Wind: State of the Industry Policy & Regulation Industry Structures Risk Management 27

28 Industry Structures Industry is entering a market maturation phase in Europe, with a robust industry structure in place Developers Two main developer models exist: Utility Developers and IPP Developers Utilities have relied on balance sheet, whereas IPPs have used project finance Utilities appear to have benefitted most from the move to auctions Financiers/investors Project finance funding of offshore wind projects can be considered as a mainstream option The liquidity of the market has increased over the last years There is a risk that established debt and equity investors may struggle to sell-down and divest Suppliers Most offshore wind projects have relied on a small number of WTG models available in the market Competition has improved and the overall supply chain is more robust than a few years ago 28

29 Industry Structures Industry has entered market maturation phase in established markets The industry is entering a market maturation phase in key established markets (the UK and Germany); The market has been comprised of two distinct models: the utility and independent power producer developer (IPP) models; Developer models have evolved, with growing use of project finance by utility developers, and a trend towards development consortia; IPPs have been successful in the past, but may struggle in auctions; Predictions of capital constraints have not borne out, due to slower pace of development and increasing trust by funders in the industry s capabilities; Emerging markets with onshore wind and oil & gas industries are well positioned. Lack of vessels could present potential bottlenecks. 29

30 Industry Structures The market has been comprised of two distinct models: the utility and independent power producer (IPP) developer models Development Utility-Developer Model aspect Size of Large, 100s of staff working on projects. development team Large teams create communications challenges Risk tolerance Scheduling Relatively high and mitigated through use of a large owner management team Perform tasks in parallel/limited float between packages for a shorter construction timeframe Level of innovation Typically tolerant of new technologies which may lead to cost reduction or performance enhancement # construction contracts Construction contract terms Relatively large, often 10s of main contracts used Utilities more willing to accept certain contractual risks such as weather downtime sharing. IPP-Developer Model Small, typically using 10s of staff. Better communication but struggle with resource when material issues occur Relatively low, driven by external financing requirements Conservative schedule with greater float between contractual packages Preference for more proven technology to reduce risk Typically 2 to 6 More conservative contracting approaches, with limited sources of cost over-runs preferred O&M strategy Often looking to take over O&M within 2 to Long term O&M contracts with turbine 5 years and build an O&M business suppliers and have typically procured 15 year terms. O&M contract Utilities provide fixed or variable cost O&M Fixed price, availability warranty backed terms agreements after expiry of WTG O&M contracts with WTG suppliers standard agreement 30

31 Industry Structures Market is dominated by utility developers in UK and DK However, IPP-developers have been successful in most markets, and particularly strong in Belgium and the Netherlands. The United Kingdom The United Kingdom 31% 4% 7% 3% % 19% 13% 13% 53% Germany 12% 4.1 8% 8% 4% 5% 6% 4% IPPs, 31% Iberdrola, 4% 42% Trianel, 7% Denmark Netherlands % 1.1 8% 4% SSE, 3% Vattenfall, 10% DONG, 19% Eon, 13% Germany 3% Innogy, 13% 97% DONG GW Belgium 84% 16% RWE Innogy Eon 0.7 Vattenfall DONG RWE Innogy Eon Vattenfall SSE Trianel Iberdrola IPPs DONG, 12% Stadtwerke München Source: Mott MacDonald analysis, based on Wind Europe, 2016 Innogy, 8% 31 Eon, 8%

32 Industry Structures Of the European auctions, 92% of awarded project capacity was won owned by utility-developers WPD 4% EDPR 7% Caisse des Depots 2% GDF Suez 8% Enbridge 11% EDF 11% Dong 12% RES 2% Vattenfall 24% Iberdrola 19% Source: Mott MacDonald analysis based on published auction results covering European offshore wind tender awards between 2012 and 11/2016 in the UK, France, Denmark and Netherlands RES and WPD are only IPPdevelopers successful in recent auctions They were successful in French bidding rounds, in consortia with utility developers The early auctions indicate that the new regime favours utilitydevelopers and that IPPdevelopers may need to rely on collaboration Utilities and IPPs appear to have an appetite for collaboration 32

33 Industry Structures Both developer models have evolved in recent years due to financial pressure, larger project sizes and shift to auctions Developer Utility-Developer IPP-Developer Development Consortiums to share and manage risks of increasing project sizes, Cost pressure led to the adoption technologies with shorter track records New entrants and OEMs participating in recent auctions in development roles. Option to partner with utilities as bidder consortium under auction regimes Procurement Financing Operations Using fewer contracts, reflecting greater trust in supply chain. Some offer EPC contracts between the utility and Special Purpose Vehicle (SPV) to attract pre-construction finance. Projects with high levels of construction risk have to offer protection at shareholder level to attract pre-construction finance. Pre-construction finance available from financial institutions with higher level of construction risk appetite. Project-finance being used as alternative to balance-sheet financing. Recycling capital at the date operations commences (investors typically require some insulation from O&M cost downsides). Willing to offer more robust O&M contractual terms to the SPV to attract investment. O&M hubs to serve multiple wind farms. Larger scope/packages for balance of plant O&M. Use of multi-contract strategy, typically 4 6, becoming acceptable Investors becoming comfortable with the SPV taking more risk Move to auction systems may require developers to take more construction risk to remain competitive. Due to lack of capital at the independent developer level, equity and debt financing typically required before construction commences. Finance parties more willing to accept technologies with shorter track records e.g. larger WTGs. Long-term WTG O&M contract preferred, though unclear whether the higher cost will allow developers to remain competitive Developers are becoming experienced at delivering Balance of plant O&M and investors comfortable taking associated risks. 33

34 Annual capacity additions (MW) Industry Structures Market share of project-financing 3,500 3,000 2,500 2,000 1,500 1, Installed capacity (MW) 46% Project financed capacity (MW) 81% 18% 56% 42% 59% 79% 27% e A majority of early offshore wind projects were funded on balance sheet, reflecting the preferences of early investors (i.e. utilitydevelopers) rather than a lack of bank appetite. However, the absolute volume of project financed transactions has grown steadily since Note: Aggregated for Europe Source: Green Giraffe, based on WindEurope data and internal database 34

Industry Structures Project finance funding of offshore wind projects can be considered as a mainstream option Greenfield financings Refinancings Legend BL DE FR NL Q1 2017 Q2 2017 Q3 2017 Q4 2017

35 Industry Structures Project finance funding of offshore wind projects can be considered as a mainstream option Greenfield financings Refinancings Legend BL DE FR NL Q Q Q Q Burbo Bank holdco financing Butendiek UK ongoi ng TBW II TBW I DeBu Global Tech 1 Gemini London Array (CDPQ) Lincs UK CFD winner Borssele 3-4 Northwester Source: Green Giraffe, based on WindEurope data for new installations and internal database for project finance transactions EMF A substantial number of projects are expecting to use that route in the coming months. The availability of project finance (and construction equity) has made it possible for small players to successfully bring projects to financial close and to full operation 35

36 BACK-UP SLIDES Study Overview Offshore Wind: State of the Industry Policy & Regulation Industry Structures Risk Management 36

37 Project risk management Risks are well known, and effective risk management strategies have developed in recent years Collaboration within the industry helps to manage developer risks on largescale projects under auction regimes More successful projects build a strong management team and have fallback plans in place Strong relationships with regulators, executing authorities and third parties lead to more successful projects Continued innovation is required to achieve cost reductions Developers do not require all risks to be mitigated but regulatory frameworks need to ensure risk-reward balance for developers Allocation of grid connection risk to the grid operator by regulators requires effective performance incentives for the grid operator 37

38 Project risk management Value of project increases and risks fall throughout lifecycle (EUR M/MW) 1 Permitting Contracting / Financing Construction Operations Years 1-2 years 2+ years 25 years Permit obtained Start construction Start operation Equity -4 Debt/ Opex Project value Source: Green Giraffe 38

39 Project risk management Offshore Wind Development Risks Risk category Risks Potential impacts Allocation risk Risk of securing rights to develop, construct and/or operate an offshore wind site and to obtain revenue support Development risks Wind resource and/or energy yield lower than expected Environmental risks Secure permitting Ground risk Grid connection Securing tariff Adverse change of regulatory framework Funding risks Risk of not finding enough funders Risks of delay in funders approval Cost of funding greater than expected Construction risk Weather risk Interface risks Availability of contractors and equipment New technologies Health and safety risks Quality risks Operation risk Weather and accessibility risk Major intervention risk Lead time risk for major spares and logistics equipment Availability of specialist O&M personnel Health and safety risks Quality risks Introduces uncertainty and challenges in retaining and growing capabilities Loss of development expenditures (potentially EUR 10s of millions) in case of project cancellation Delays Lower developer margin Reduction / loss of tariff due to delays Cost overrun Delay of construction contractors Delay of grid connection works Project cancellation / suspension Performance / energy yield below expectations Operating cost greater than budgeted 39

40 Project risk management Developers need to make effective use of risk mitigation tools Risk mitigation tool Design out Pass on to third parties Contingency Insurance Objective Example Cost impact on developers Eliminate risks by development of safe designs or avoidance of risk through technology selection. Pass risks on to parties that in control of and have the capabilities of managing the risk Allow for a contingency budget for risks that cannot be mitigated with above strategies Take out insurance for risks that cannot be mitigated with above strategies E.g. Revision of design standards for foundations to mitigate grouted connection failure in monopiles. E.g. pass on P50 weather risk to construction contractors E.g. include construction contingency for known and unknown unknown such as residual interface risk E.g include float for delays in schedule of works between the works of different construction contracts E.g. insurance for public liability or unforeseen loss, Low High Source: Mott MacDonald 40

41 Project risk management Risks develop over the lifecycle of the project Allocation risks Risk of obtaining the right to develop, construct, operate and receive revenue incentive Development risk high risk, geotechnical studies, only high risk appetite, risk of cancellation Funding risk - relatively risky as a project prior to FC/FID remain virtual and can be subject to cancellation Construction risks - projects become valued on the basis of their future cash flows, discounted at rate of return expected by the investors. Given the amounts required, and the lower risk profile, new investors get involved at this point. Operation risks - At completion a project is fully operational and starts generating cash flow. This phase typically lasts for 20 to 25 years. With construction done, the project is further de-risked and can attract yet-morerisk-adverse investors, with a lower cost of capital. 41

42 Project risk management The introduction of auctions has materially changed the risk profile and scope of developers Project risk category Allocation risk Price risk Developme nt risk Funding risk Net impact Drivers of increased risk High competition for capacity constrained auctions. Uncertainty over timing and size of future auction rounds. Competitive auctions create strike price uncertainty. Wholesale price uncertainty. Commodity price volatility. Increase in project size requires greater number of funders per project. Sites conditions become more challenging (deeper waters, further offshore). Limited track record of ageing assets and new technology. Drivers of decreased risk Trend of regulators assuming part or majority of the development scope. Increasing trust by funders viewing offshore wind as a bankable asset class. New and more diverse range of investors attract to the market. Learning-by-doing. Greater trust in contractor capabilities. Greater availability and competition of contractors. Technical risk Price compression puts pressure Source: on suppliers. Mott MacDonald 42

43 Conclusions and recommendations Recommendations for industry Embrace collaboration within the industry to manage developer risks on large-scale projects under auction regimes Build a strong management team and have fall-back plans in place Build strong relationships with regulators, executing authorities, and third parties Continue to innovate Communicate the successes and benefits of the industry more effectively to the public Increase openness and develop culture of information sharing 43

44 THANK YOU! For additional information on RETD Online: Contact:

The development of offshore wind - The case of Denmark

9 February 2017 The development of offshore wind - The case of Denmark Camilla Holbech, Deputy Manager Danish Wind Industry Association Zooming in on the Danish wind industry More than 30,000 employees