LIVERPOOL,
England — When engineers faced resistance from residents in Denmark
over plans to build wind turbines on the Nordic country’s flat farmland,
they found a better locale: the sea. The offshore wind farm, the
world’s first, had just 11 turbines and could power about 3,000 homes.
That project now looks like a minnow compared with the whales that sprawl for miles across the seas of Northern Europe.
Off
this venerable British port city, a Danish company, Dong Energy, is
installing 32 turbines that stretch 600 feet high. Each turbine produces
more power than that first facility.
It
is precisely the size, both of the projects and the profits they can
bring, that has grabbed the attention of financial institutions, money
managers and private equity funds, like the investment bank Goldman
Sachs, as well as wealthy individuals like the owner of the Danish
toymaker Lego. As the technology has improved and demand for renewable
energy has risen, costs have fallen.
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And
offshore wind, once a fringe investment, with limited scope and reliant
on government subsidies, is moving into the mainstream. Europe, too,
looks all the more attractive, as the United States under President
Trump rethinks its stance on renewables.
“If
you had polled infrastructure investors five years ago, only a few
would have been looking at offshore wind,” said Suzanne Buchta, the Bank
of America Merrill Lynch global co-head of green bonds.
Now, she said, they “are a little more comfortable.”
Offshore
wind has several advantages over land-based renewable energy, whether
wind or solar. Turbines can be deployed at sea with fewer complaints
than on land, where they are often condemned as eyesores.
But
the technology had been expensive and heavily dependent on government
subsidies, leaving investors wary. That is now changing.
Turbines
today are bigger, produce much more electricity and are deployed on
much larger sites than in the past. The result is more clean power and
extra revenue.
The
number of major players has also expanded, creating more competition. A
joint venture of Vestas, the Danish turbine maker, and Mitsubishi Heavy
Industries of Japan, is now competing with Siemens, which had long
dominated the market for building offshore turbines. Others, like the
American giant General Electric and Chinese manufacturers, are also
jumping into the game.
“For
us competition is great,” said Benj Sykes, Britain country manager for
Dong. “It drives innovation. It drives performance. It also drives
cost.”
Companies
are developing specialized vessels and improving installation
techniques (taking a cue from the oil industry), cutting construction
timetables. Dong and its competitors are learning to better cope with
the bad weather, corrosive saltwater and scouring currents that increase
costs.
The
first offshore wind facility, Vindeby, began generating electricity in
1991. Frank A. Olsen, the Danish executive who led its construction,
recalls that it was built using a barge with a crane mounted on a truck.
Dong’s Burbo Bank Extension off Liverpool is far more advanced. In the
distance, a ship lays electric cable, while a small fleet of other
vessels about 80 feet long bobbed on the swell as maintenance crews
finished their work.
All
of those factors in concert have helped push costs down. Dong says its
anticipated costs of electricity generation have halved. As recently as
2014, they were 156 euros, or $166, per megawatt-hour, a wholesale unit
of electricity, on a British project. By last year, they had fallen to
€78 per megawatt-hour on a series of wind farms off the Netherlands.
Those
falling prices have raised hopes that offshore wind can soon compete
with conventional power sources like natural gas and, eventually, do
without subsidies.
Offshore is “on the cusp of a new world,” said Samuel Leupold, Dong’s executive vice president for wind.
The
industry is not without challenges. Governments have been cutting
financial support for clean power in a bid to balance their budgets,
while President Trump’s administration seems likely, based on his
promises during his election campaign, to forcefully support fossil
fuels.
Planned
mega-projects that will dwarf the Burbo Bank Extension will test
whether investors still see renewables as an attractive investment and
whether Europe will retain a leadership role when it comes to green
energy in the Trump era.
For now, offshore wind is a relatively small industry, albeit one that is growing fast.
It currently accounts for less than a tenth of installations of new wind capacity around the world.
But
investment in the industry nearly tripled in the five years to 2015,
according to Michael Gulbrandtsen, an analyst at the Danish consulting
firm Make. Offshore wind has become a significant force around Britain,
Denmark, Germany and the Netherlands, where shallow and breezy waters
provide ideal conditions for offshore wind. Experts say parts of North America and China also have potential.
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Offshore
wind “has been an area of great interest to us,” said Carol Gould, the
head of power and renewables for Europe at MUFG, a Japanese bank that is
backing a separate giant wind farm off Britain, among other projects.
With
interest rates in the Western world at historic lows, investors have
been attracted by offshore wind’s higher returns. And, with projects
that have lifetimes of 15 years or more, those returns are long-lasting
as well.
PensionDanmark,
a Danish pension provider, has invested more than €1.6 billion in
equity stakes in offshore wind projects and expects returns of 6 percent
to 9 percent, said Torben Moger Pedersen, the chief executive.
Those rewards reflect the substantial risks.
Basically,
they are investing in power plants and face myriad potential issues:
storms, construction problems, severed power cables, fluctuations in
electricity prices and even the chance that governments may not honor
promises. Four years ago, the discovery of tons of unexploded munitions
along a cable route led to costly delays for a German offshore wind
farm.
For
a company like Dong, which builds and in many cases operates the wind
farms, the risks are amplified. Unlike investors, who are a step removed
from the process, it also expects higher returns.
The
company could earn about 12 percent from the Burbo Bank Extension,
according to Deepa Venkateswaran, an analyst at Bernstein Research in
London. The estimates are based on projections of Dong’s construction
and operating costs, as well as the revenue it will gain from selling
the electricity. The company declined to comment on the profitability of
individual projects.
Dong, whose name is an acronym of Danish Oil and Natural Gas, has managed to attract a wide range of top investors.
Goldman
Sachs holds a large stake in the company itself, but several other
companies, individuals and funds have taken stakes in its many projects
and more are in the works — a giant new facility off the English coast
known as Hornsea 1 will dwarf the Burbo Bank Extension.
Dong
sold 25 percent stakes in the Burbo Bank Extension to PKA, a Danish
pension fund, and Kirkbi, the investment vehicle of the Kristiansen
family, which owns Lego.
Its
other facilities have obtained cash from the likes of E.On of Germany
and Centrica of Britain. Masdar, the clean energy company owned by
oil-rich Abu Dhabi, and the Japanese trading house Marubeni have also
committed money.
The increasing variety of investors looking to join is a major shift from a quarter-century ago.
“Offshore
makes sense as the next frontier,” said Jonathan Levy, head of policy
and strategy for Vision Ridge Partners, an investment firm based in
Colorado.
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