Matt Hodson & Michael Warner
Floating Offshore Wind (FLOW) is on the cusp of industrialisation in the UK, with recent existing and upcoming leasing exceeding 28GW (including 19GW via ScotWind, 5GW via INTOG and 4.5GW via the Crown Estate Celtic Sea leasing programmes). This equates to over 1,300 turbines which will need to be installed at an average rate of two a week (within six-month weather windows) for at least five years from the start of construction, and foundations produced across the year at a rate of one a week. The Offshore Wind Accelerator Task Force industrialisation roadmap has deduced that the UK will need around 11 coastal locations with industrial capacity (7 ports for wind turbine integration and storage, 2 locations for steel assembly and 2 for serial concrete manufacture). This is additional capacity to what exists today, and it is estimated that £4bn will be needed to meet the demand. This investment needs to flow now if the port and other FLOW coastal infrastructure capacity is to be ready for the later 2020’s.
However, despite individual ports and coastal facilities developing masterplans in response to the FLOW pipeline and the launch of the Floating Offshore Wind Manufacturing Investment Scheme (FLOWMIS), there are limited capital investments being made. This is concerning as improved coastal infrastructure in the regions bordering the wind resource areas is critical to the success of FLOW as an industry.
To gain a better understanding of why this is case, and to consider possible solutions, Celtic Sea Power and the Centre for Local Content Innovation brought together a range of experienced industry representatives for a frank, roundtable conversation. This article summarises the outcomes of those discussions which took place in late September 2023.
It was universally recognised that many of the issues related to port infrastructure requirements for FLOW (and Offshore Wind more generally) are global in nature, with very similar conversations taking place in other parts of the world. However, looking at the challenge through the prism of the £4bn of early investment needed to deliver the UK’s FLOW ambition (with the Celtic Sea providing a useful case study) it was clear that there was a certain uniqueness to some of the perceived challenges.
Complexity of UK Port Ownership
The diversity of port ownership and commercial models in UK ports is a unique challenge, particularly within the context of large-scale strategic investment delivering multi-port solutions servicing industrial scale FLOW. UK Ports are fragmented profit seeking entities, and include both Private, Trust & Municipal with each model taking a different approach to financial risk. Having an effectively private and fragmented industry makes it more difficult to have central government strategies in the way countries with publicly owned ports can deliver on public priorities.
It was considered at the workshop that privatization of UK ports in the 1980’s has in part generated risk-adverse ownership structures of some Celtic Sea ports, with owners (especially Trust Ports who have no government backing as lender-of-last-resort) reluctant to take on the uncertainties of raising finance for large upfront investments to expand FLOW facilities. Port owners fear creating ‘White Elephants’ – large scale port expansions against which revenues fail to materialize. The challenge is how to incentivize such owners to move away from long-standing safe business models, built on low-risk income sources, eg leasing fees, service charges, berth fees, cargo dues and pilotage and mooring fees.
As such it was recognised that individual ports don’t necessarily own the challenge of FLOW port capacity. They have existing customers to service and the opportunity to choose between market opportunities that may be less speculative and provide more reliable if less beneficial returns.
Lack of Future Revenue Certainty
The discussion circled back to this point several times. In general terms, the feeling was that there was affordable capital on offer, however the risk profile remained too high for infrastructure owners due to a lack of future revenue certainty at the time that the investment would be made.
Port investments have always been on the risky side, with high upfront costs incurred before the first vessel has berthed (and revenues flow). Known business models, including accurate forecasts of vessel numbers, space requirements etc, are more investable and currently there is a lack of secure long-term pipeline visibility of FLOW projects for 2030 and beyond.
It was noted that from recent Government speeches, political priorities for Net Zero targets appeared to be softening, and therefore skepticism from port operators about Government commitment is understandable. The well publicised lack of offshore wind bids in the recent CfD Auction Round 5 (AR5), and the perception that the UK is massively overcomplicating any support mechanisms (in comparison with other jurisdictions including Germany and US), led to the question: Is the UK still a believable market?
Demand Risk & who carries it?
It was widely recognised that port infrastructure investment is essential and, moreover, early Development Expenditure (DEVEX – feasibility studies, business case preparation, investor meetings, engineering, consenting etc.) is urgently required now if FLOW targets are going to be met. However, there was debate around how the demand risks associated with a lack of revenue certainty should be dealt with.
It was interesting to consider whether demand risk could be mitigated through commercial mechanisms alone. For example, long-term Terminal Concessions or Oil & Gas style vertical integration strategies. Certainly, it was noted that a developer’s project contracting strategy will be significant in determining the scale of potential port usage and increasing confidence in the investment case.
Notwithstanding commercial mitigation, the project finance specialists agreed that such speculative risk shouldn’t be project financed but should be equity financed. Although there is appetite in the private finance market to take risks in FLOW-related infrastructure projects, non-recourse project finance is not a viable option until there is much more secure revenue certainty. This reality could be a problem for both private and trust ports.
The conclusion reached by the roundtable was that demand risk for early investment in FLOW ports and other coastal facilities seems unlikely to be carried by the private sector without government taking a material stake. In the absence of a government FLOW port revenue support scheme, and with such a lengthy period (estimate to be circa five years) between Financial Investment Decision (FID) for the proposed investment activity and the securing of subsequent FLOW work orders, government-backed equity seems the most realistic financing solution. It was noted that the two primary investment principles for UK Infrastructure Bank finance are that it must support achieving Net Zero and/or bring benefits to deprived economic areas. Notably, both investment criteria play to the inherent strengths of FLOW port and coastal facilities in the Celtic Sea (Wales/South-West) region.
No set requirement for standardisation, or convergence around main parameters.
Importantly, there was evidence provided at the workshop countering the received wisdom that one of the key obstacles to early investment in FLOW port infrastructure is uncertainty over the choice of design for FLOW substructures and turbines.
The counter case was made that 80% of design options would likely be accommodated within the parameters of port/coastal facility expansions because of commonalities in the core requirements of different designs for manufacture, final assembly, wet/dry storage, integration, and because of the physical constraints of Celtic Sea regional ports.
It was proposed that if ports could raise the finance, then they could essentially ‘max-out’ their capacity with regards to the key physical parameters of laydown area, quayside length, berthing depth, navigation channel width and depth and crane tonnage. At the same time, it was also noted that turbine size is unlikely to continue to grow at the rate that it has because of the lack of availability of installation vessels.
With these parameters limiting the scope for design, developers would be incentivized to ‘design-to-local’. Given the commercial imperative of geographic proximity to project sites for storage, final assembly, marshalling and integration, and given the above maxed-out capacities of available regional ports and coastal facilities, developers would elect to design their FLOW platforms to ‘fit’ these local limitations, ie to ‘design-to-local’. Will this be sufficient to make Port Infrastructure a “no regrets investment”?
If infrastructure owners can mitigate demand risk, will this also mitigate “white elephant risk”? Are they building the right infrastructure now for the right solution that the market needs in ten years’ time?
Pace and scale of Government interventions
The discussion included debate around what the UK’s policy is or should be towards deployment versus local content. There was a view that, from a supply chain perspective, the value is in fabrication, and this will drive UK Green Gain.
The roundtable raised the importance of alignment of policy instruments across Whitehall to incentivize investment in FLOW port and coastal infrastructure. Such alignment would give confidence to financing institutions, in that they would have line of sight of how developers could navigate a low-risk pathway across the timeline from lease award, through planning Development Consent Orders to Contracts for Difference. For example, incentives for FLOW port infrastructure using the Social Value model criteria in lease option award, need to be aligned with the scoring criteria for port infrastructure in subsequent CfD Supply Chain Plans
Interestingly, there was a feeling that Port investors are not looking for absolute revenue certainty, it’s a degree of certainty and longevity of certainty. Although the degree of certainty required varies across differing ownership models, the principle remains the same. Stable policy is crucial here.
It was generally agreed that the missing piece is UK coherence. Is there a UK wide masterplan? Do we have a believable build out strategy for UK supply chain capacity to meet FLOW demand? Who owns the problem with Ports?
As previously discussed, ports are a diverse set of independent commercial entities whilst, in Government, the challenge is split across several departments including DESNZ (Offshore Wind), DFT (Ports), DBT (Export/ Trade) with limited coherence.
It begs the question, does the strategic infrastructure challenge need to be owned by someone who is not specific to any entity? In parallel, how do we get the Celtic Sea Port community to be more collaborative and present the regional vision with cohesion and single voice?
FLOWMIS (Floating Offshore Wind Manufacturing Scheme)
The currently live competition for £160m of support for capital port projects leading to 10m deep quays for FLOW integration was discussed. There was a feeling that the results of this competition could provide guidance on where “policy” funds might be best deployed to meet strategically important priorities. However, most workshop participants concluded that the slow rate of FLOWMIS roll out, its competitive structure generating one or two winners most likely in different regions of the UK, and the low levels of funding budget, all limit the role the scheme can play in leveraging FLOW coastal infrastructure in the Celtic Sea region.
It was also suggested that FLOWMIS Is not the only market indicator. It was noted that a port in Scotland had attracted a significant private equity investment and, therefore, hasn’t applied to FLOWMIS. Private Equity is interested in shovel-ready projects such as these. The question was asked, could £160m of DEVEX (as opposed to CAPEX – Capital Expenditure) spread evenly across interested ports move us forward with a wider range of strategic shovel-ready projects?
So, what are the solutions?
Improve the Business Case and Improve Certainty
It was broadly agreed that in the absence of solutions, it will be the UK that loses rather than individual ports and/ or investors. The comment “lack of FLOW pipeline represents an opportunity loss, but not for the banks. If they don’t invest a penny, they don’t lose a penny” resonated with the group. A number of ideas were discussed.
Annual targets and CfD auction rounds have helped and need to continue. However, this needs to be converted into firm pipeline which translates into an industrial requirement. There needs to be a realistic timeframe that is believable. This should de-mystify technology and requests of ports by developers. In turn, consideration of a multi-port portfolio approach bound by a common industrial strategy including parallel narratives around fabrication, assembly, storage, and integration could help mitigate the demand and white elephant risk for individual ports building a business case.
It was discussed that the Carbon Capture, Usage & Storage scheme, which is based on a regulated asset value (RAV) business model across Capital Expenditure (CAPEX) and Operating Expenditure (OPEX), might offer a possible policy approach to FLOW port infrastructure that balances investor risk with fair return. It was also noted that the recent Offshore Wind Champion’s report had suggested that a port revenue support scheme, possibly a capacity market, could have a role to play in improving demand and revenue certainty.
There was also a feeling that it would be better to run a follow-up to FLOWMIS as a DEVEX-only fund, ie smaller grants for feasibility and economic studies, on offer to all applicant regional ports in the UK who pass some minimal pre-qualification hurdles. Such a format for FLOMWIS would enable owners to develop ‘bankable’ business plans with which to approach private investors. Within this, consideration needs to be given around longevity of service of developed infrastructure across the FLOW project lifecycle and diversification of it into other markets for resilience.
Policy, Coherence, Coordination and Collaboration
It was broadly agreed that Ports represent critical infrastructure in the UK. It was asked why are we not treating ports like Offshore Transmission Owners (OFTO) or similar?
To reduce the period of uncertainty for FLOW port investors, questions were asked in the roundtable about how the planning system might be streamlined to reduce the time-lag between lease option award and FLOW ports securing first orders. The proposed reforms to National Significant Infrastructure Projects (NSIP) include consideration of ways to speed up planning Development Consent Orders (DCO) for offshore wind and transmission network expansion. Further, Ports are already one of the 12 designations under NSIPs, but designation was back in 2012 and as such the scope of eligibility may need updating to ensure inclusion of other coastal FLOW infrastructure, such as non-port wet and dry storage and FLOW foundation final assembly.
It was broadly agreed that policy and industrial strategy coordination will be essential. In particular, the Government should be considering policy parity with the EU and USA, at least in the interpretation of the legal room for manoevure if unable to match on scale of subsidies.
Solving the lack of policy coherence could be a cabinet office and/or cross departmental office focused on the problem? Supplementing this, there needs to be a responsible entity delivering practical “unblockers” and driving coordination in the public and private sectors. Could this be a FLOW industrial strategy office covering wind, ports and supply chain, similar to the National Shipbuilding Office (NSO)?
Conclusions
What the discussion confirmed that it is still easier to find challenges than solutions to unlocking the requisite amount of infrastructure investment needed to deliver the additional UK port and coastal capability necessary to deliver on our FLOW ambition. Nothing is simple here!
There are multiple moving parts which need to be properly aligned in order to strengthen the business case and incentivise individual infrastructure owners to make the investment decision.
The award of FLOWMIS funding early next year will drive some investment, but not the full £4bn which is required. That is going to require an entity who “owns” the port investment problem, a multi-port industrial strategy reducing “white elephant” risk, early de-risking to develop a portfolio of shovel ready projects and some form of revenue support to reduce the demand risk associated with Offshore Wind timings.
The good news is that there is an appetite in the finance and investment community to deploy affordable capital into port and coastal infrastructure projects which, in turn, will enhance the UK’s strategic port capability for generations to come. Surely a “no-regrets” investment?
Certainly, a goal worth pursuing.
Acknowledgements
The discussions held during the roundtable were conducted under Chatham House rules, ensuring the privacy and anonymity of participants. For a copy of the notes click here, and/ or for further information regarding our work, please visit www.celticseapower.co.uk and www.clci.org.uk.
Celtic Sea Power Ltd and Centre for Local Content Innovation would like to express our gratitude to the experts from British Ports Association, Burges Salmon, Dept Energy Security & Net Zero, Dept for Business & Trade, Eurus Consulting, Green Giraffe Advisory, Lloyds Bank, Miller Insurance, Office for Investment, Offshore Solutions Group, Renewable Risk Advisors, The Crown Estate, UK Infrastructure Bank and UK Major Ports Group
This roundtable was the second in a series, with the first focussing on risk. More can be found here Industrialized Floating Offshore Wind is risky. An opportunity for the UK? – Celtic Sea Power.
