Energy analysis: Scott McCallum, partner at Shepherd and Wedderburn LLP, discusses the background to the government’s recently announced Offshore Wind Sector Deal (the Sector Deal) and assesses the commitments it makes, what it means for the UK offshore sector, and its likely impact.
Offshore Wind Sector Deal - building sustainability
New offshore wind sector deal is a ‘welcome step’ for the industry, LNB News 07/03/2019 117
The Department for Business, Energy and Industrial Strategy has published a new policy paper on the sector deal between the government and the offshore wind industry. This deal builds on the UK’s global leadership in offshore wind, maximising the advantages for UK industry from the global shift to clean growth.
What is the Sector Deal and why has it been introduced?
The UK government has established an industrial strategy with an overall objective of building a Britain ‘fit for the future’. A key component of the UK government’s industrial strategy is the creation of partnerships between the government and industry on sector-specific issues. The government points to the successes of the Auto Council and the Office for Life Sciences in demonstrating the gains that can be made to productivity, employment, innovation and skills through a joined-up focus on sector-specific barriers and opportunities. The government wants to build on these successes—extending them to other parts of the economy—most recently in the form of the Sector Deal.
This much anticipated Sector Deal was announced on 7 March 2019 (see Claire Perry, Minister of State for Energy and Clean Growth’s written statement to Parliament). The government believes that the global shift to clean growth offers a big opportunity for the UK. The UK already boasts the largest installed capacity of offshore wind (by some margin) and costs have fallen much faster than most anticipated. Offshore wind would therefore seem to offer a good foundation for the UK’s global clean growth ambitions.
While the UK has a march on others in terms of offshore wind deployment, other world markets are striving to catch up (and many have more established supply chain representatives).
It is hoped by the government and industry alike that, by putting a clear package of processes and commitments in place in the form of this Sector Deal:
- long-term confidence can be fostered
- efficiencies, technological advancements and cost savings can be captured
- offshore wind generation can grow substantially around UK waters
- the ‘domestic’ supply chain can increase productivity and competitiveness on a global stage
What are the key commitments made by industry and the government? Is there anything missing from these that should have been addressed?
The Sector Deal is made up of a series of targets and aspirations, underpinned by a series of corresponding investment and/or policy commitments.
Where commitments are made by the sector, it seems that the primary responsibility for delivering (and funding) these will sit with the company members of the Offshore Wind Industry Council (an existing government-industry body). The details of these governance arrangements are likely to become clearer in the coming months.
The key components of the Sector Deal include:
- delivery of up to 30GW of offshore wind around UK waters by 2030 and key commitments to help achieve this aim, which include:
- the government’s commitment to run regular (every two years) contracts for difference (CfD) auctions (the mechanism for supporting low-carbon generation) through the 2020s. With a pot of £557m, the government hopes that this commitment to regular auctions (which was first announced in 2018) will provide more long-term visibility to businesses than any other world market and thereby maintain and enhance the UK’s position as the ‘anchor market for offshore wind’
- a commitment by the government to work with the sector and other stakeholders to overcome strategic deployment hurdles—such as aviation and radar, onshore and offshore transmission, cumulative environmental and other sea user issues. While there are limited details on what is proposed here, the recognition of the need to investigate ways to claw back headroom and identify sustainable development opportunities is again key to maintaining market confidence in the upcoming Crown Estate and Crown Estate Scotland offshore wind seabed licensing rounds
- a focus on innovation including a commitment by the sector to establish a System Management and Optimisation Task Group to explore innovative solutions to support grid integration. Again, details on how this initiative will be taken forward are scant, however, there is a clear recognition of the need to find a viable storage solution—to balance variability in demand and supply. Success here will likely be key in establishing just how big a UK market share offshore wind can command by 2030 and beyond (and just how big a market share it can command globally)
- significant growth in the UK supply chain by 2030—including an increase in UK content to 60%0 (including increases in the capital expenditure phase) and an ambition of increasing exports five-fold to £2.6bn. The Sector Deal estimates that deploying up to 30GW in the UK by 2030 could support 27,000 jobs. The potential prize here is therefore very large—with the opportunity focussed on regional clusters largely around coastal communities. The tools proposed to advance these objectives include:
- implementing recommendations from a recent supply chain review, which identified opportunities and barriers to growth across the offshore wind sector supply chain. This includes, for example, encouraging more access to small and medium-sized enterprises (SMEs) by improving development pipeline visibility and encouraging fair payment practices from the top down
- a sector commitment to establish and fund (up to £250m over the next ten years) a new Offshore Wind Growth Partnership (OWGP). The stated role of the OWGP is the implementation of structured productivity improvement programmes and to work with developers to increase opportunities for the supply chain and to give greater visibility of upcoming market opportunities
- a sector commitment to update its UK content methodology (and transparency) and encourage its UK supply chain to bid for contracts in their worldwide project portfolios
- cooperation and coordination among industry, government and educational institutions to deliver a skilled and experienced workforce (in sufficient numbers). This will include an Offshore Wind Investment in Talent Group established by the sector to identify skills needs across the sector and to develop curricula and accreditations to meet these needs. It will also include the development of an Offshore Energy Passport (recognised outside the UK) to accredit offshore workers and facilitate job-mobility between sectors with transferable skills
- a drive to increase diversity in the workforce
- a sustainable energy source offering value cost to consumers—while the Sector Deal is focused on the period up to 2030 (and the sector commitments to seek to continue to reduce the levelized cost of offshore wind and system costs over that period), it is also clear that this deal is intended to lay the foundations for a sustainable UK industry providing clean, affordable energy and supporting a global supply chain long beyond that horizon. There is a nod to developing plans designed to address future issues which emerge from, for example, life extension, repowering and decommissioning in the late 2020s.
To be effective, the partnership formed in terms of this deal must be sufficiently fleet of foot to refresh and adapt plans to respond to global sector and supply chain competition and to make the most of this opportunity for UK plc and UK consumers.
The topics covered by the Sector Deal are wide ranging. There are no obvious gaps in terms of key objectives, however, across the board the detail still has to be fleshed out. It also remains to be seen whether the 2030 targets and pot of CfD cash made available to encourage delivery of those targets is sufficient to persuade established developers in the UK offshore wind sector (and potentially new entrants) to continue to play in the UK market up to 2030 and beyond. A continuous development pipeline is critical to the realisation of the domestic supply chain ambitions—and must remain the focus. The early reaction to the Sector Deal appears positive.
What are the key milestones coming up for implementation of the Sector Deal?
There is currently limited detail on implementation timescales. The most important next steps will be:
- the upcoming CfD auction scheduled for May 2019
- the establishment of the various implementation bodies (with the Offshore Wind Growth Partnership, the System Management and Optimisation Task Force and the Offshore Wind Investment in Talent Group due to be launched in May 2019)
The first annual review of the Sector Deal is slated for November 2020. It is also noted that once the deal enters the implementation phase, representatives of the Offshore Wind Industry Council are obliged to report to the government on progress at regular intervals.
What does it mean for the UK offshore sector and what do you expect its impact will be?
The growth of the UK offshore wind sector over the last 15–20 years has been remarkable—as has the tumbling cost of developments, driven by sensible government support and ambitious and innovative developer commitment.
The various financial and policy commitments under the Sector Deal have to be developed in some key respects. However, as important as the detail, is the mere existence of a government-industry partnership acknowledging the importance of the offshore wind sector to:
- the UK and global clean growth need
- the development of highly-skilled UK jobs with a huge potential to export those skills
I think this is a step-change in how the sector is viewed by the government and the public at large. It opens the door (and indeed lays down the challenge to achieve) massive further growth over the next ten years and beyond.
We currently sit as a world leader in offshore wind generation. While international competition is mounting, it now feels like, in the form of the Sector Deal, we have all of the components necessary to build out a successful, sustainable sector that will continue to grow its UK market share and international reach for years to come.