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Natural Gas Stands To Win As Offshore Wind Takes A Hit

Natural Gas Stands To Win As Offshore Wind Takes A Hit

The ongoing commoditization of offshore…

Orsted Threatens To Abandon U.S. Offshore Wind Projects

Orsted Threatens To Abandon U.S. Offshore Wind Projects

Orsted, the world's largest offshore…

Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Big Oil Is Dead Set On Exploiting The Wind Power Boom

Lately, the solar sector has been hogging the renewable energy limelight, and for good reason. Experts such as the International Energy Agency (IEA) have predicted that solar energy will lead to a surge in renewable power supply in the next decade, with IEA Executive Director Fatih Birol tipping solar to become the “new king of the world’s electricity markets”.

But make no mistake about it: Wind energy will play an equally critical role in the shift to clean energy, with the IEA saying that wind and solar will make up a staggering 80% of the electric energy market by the end of the decade.

Wind power is not only the easiest to tap and most efficient renewable fuel for electricity generation. Still, it is also one of the lowest carbon emitters. Offshore wind, in particular, has been enjoying its moment in the sun, with investments quadrupling to $35 billion in the first half of 2020, representing the most growth by any energy sector during the Covid-19 crisis.

Not surprisingly, Big Oil has been one of the investors making a mad dash into offshore wind.

As per a Reuters report, Europe’s top oil firms, including Total SA (NYSE:TOT), BP Inc. (NYSE:BP), and Royal Dutch Shell (NYSE:RDS.A) are looking to quickly ramp up their renewable power portfolios and lower their reliance on oil and gas to satisfy governments and investors are among the leading investors in offshore wind.

Indeed, governments worldwide are expected to offer a record of more than 30 gigawatts (GW) in tenders for offshore wind sites and capacity this year alone. For perspective, that is almost as much as the total existing UK wind capacity of 35 GW. Related: Investors Rush To Oil Stocks Despite ESG Push

But some experts are now warning that Big Oil’s love affair with offshore wind could come with undesirable consequences, especially for the consumer.

High option fees

Deep-pocketed oil majors are increasingly willing--and able--to part with huge sums of money to gain a foothold in the offshore wind market, even though margins there are much smaller than their legacy oil and gas businesses. 

A good case in point is a leasing round held by the Crown Estate earlier this year for seabed options around the coast of England, Wales, and Northern Ireland whereby BP and German utility EnBW paid around 1 billion pounds ($1.38 billion) to secure two offshore sites representing 3 GW.

Interestingly, traditional offshore wind developers, Orsted, Iberdrola, and SSE were all unsuccessful in the leasing round.

But, perhaps, the biggest revelation: Zero option fees were paid at the last previous Crown Estate offshore round that was held more than a decade ago.

High energy costs

Obviously, option fees are a huge cost component that adds to the overall cost of onshore wind development.

In fact, Mark Lewis, Chief Sustainability Strategist at BNP Paribas, has estimated that the Crown Estate option fee could add as much as 35% to project development costs, at today’s building costs.

The worst part: The consumer could end up bearing the brunt of it all.

Someone is going to have to pay and it’s probably, at least in part, the consumer,Duncan Clark, Orsted’s UK head, has warned.

The high fees now threaten to erode the massive cost reductions the wind sector has realized over the past decade and helped it to become cost-competitive with fossil fuels.

Related Video: The Conditions Are Ripe for A Second Shale Boom

Ali Lloyd, Senior Principal, Renewables, AFRY Management, has estimated that the option fees could increase the levelized cost of energy (LCOE) of an electricity generation project as a measure of the total lifetime cost of energy, by 4-8%.


Source: AFRY Management 

On a brighter note, Lloyd notes that the developers could end up paying the increased cost since many of the winning bidders are relatively new entrants into the UK offshore wind development sector and might be willing to accept lower returns as they look to gain a foothold into the industry.

In other words, we will probably have to wait a bit before we can accurately tell who is paying these massive costs.

By Alex Kimani for Oilprice.com

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