The global economy is undergoing an energy transition that promises to put clean renewable energy sources front and centre by the end of the decade. Current market trends point to an opportunity for investors in offshore wind projects and associated shipping assets. This article proposes key reasons for considering joint ventures and investment in this sector.
Offshore wind is taking off
Governments around the world are no strangers to the future potential of wind power. Jurisdiction-specific incentives have cropped up worldwide, encouraging investment into offshore wind. For example, in the US, the Biden administration has set ambitious goals for offshore wind output, and has labelled shallow waters between Long Island and New Jersey as ‘Wind Energy Areas’, portions of the continental shelf considered most suitable to commercial wind energy and leased for this purpose.
The momentum has continued elsewhere with Denmark committing to increasing their wind energy capacity fivefold by 2030, and G7 countries agreeing to reach net zero emissions in the shipping industry by 2050 with increased use of offshore renewable energy as a key driving force.
Technology that enables building and maintaining offshore wind turbines and vessels is also now more widely available to serve wind projects. Recent advancements include an infrastructure of offshore charging stations for electric and hybrid vessels and there is more to come. While these technical advancements will support increased fuel efficiency in the offshore lifecycle, there still exists a strong demand for more offshore service vessels.
Vessel demand is on the up
An increase in offshore wind projects means an increase in the number of vessels required to service those projects. Leading shipbrokers have recently called for a boost in the supply of vessels for creating offshore wind farms – namely wind turbine installation vessels (WTIVs), cable lay vessels (CLVs), and commissioning service operation vessels (CSOVs). Whilst shipowners and yards have been able to command higher prices for vessels as a result of the supply shortage, the increased demand means potential bottlenecks to offshore wind projects until more suitable vessels are built.
More than sheer numbers, technological advancements in the components used to create offshore wind farms have meant that existing vessels are no longer fit for purpose, for example in terms of being capable of transporting bigger and bigger blades. Having enough (and suitable) vessels available quickly enough to meet the needs of existing or planned offshore wind projects is likely to become a challenge for the market. Additional investment will be needed to enable the offshore fleet to keep up with the pace of growth in the field.
To fill the gap, it has been suggested that that at least 200 new vessels will need to be built to meet demand in the current decade, and experts predict that the market will see an injection of $26 billion in the coming years from investors. This presents a remarkable investment opportunity, both for investors already involved in shipping, and new entrants keen to get involved in sustainable energy projects, to whom commercial shipping has not previously been attractive.
Wind doesn’t come cheap
The sheer scale of offshore wind projects requires specialist knowhow within the sector combined with a massive injection of capital. More often than not, market participants have more of one than the other, so becomes more attracting to join up with a partner, rather than going it alone.
By way of example, reportedly the creation of blades for wind turbines in a factory that produces 100 blades per year currently requires a workforce of up to 500 people and costs around US$250 million. Once the blades have been built, the acquisition cost of a single WTIV capable of installing blades to 100 wind turbines per year could require around US$500 million in further investment. It will also be necessary to consider additional costs of training and hiring of specialist crew to run the turbines and run the vessels on a daily basis.
However, even though the high upfront cost may act as a barrier to new entrants, it is evident from the current market demand for offshore wind that projects can bring a considerable return on investment. Economic returns aside, investors will also create value in the coastal communities closest to the offshore wind site – examples include a highly skilled workforce and decarbonisation.
The heavy price tag can be lightened through strategic joint ventures between energy and shipping players on the one hand offering specialist knowhow, and private equity and other investors on the other hand stumping up the cash. The likely growth in the market combined with significant barriers to entry are likely to make joint ventures a particularly attractive proposition for breaking into and maintaining presence in the market.
As with any joint venture (JV), there are a number of key factors to consider before embarking on an offshore wind transaction.
- Operational risks and commercial due diligence – similar to shipping, offshore wind projects come with unique challenges, ranging from environmental to regulatory, as well as usual shipping risks. Parties will want to consider and discuss all relevant risks at an early stage, and constructively scrutinise the benefits and objectives of the partnership with a view to consider how to mitigate various risks. This will go hand in hand with assessing the financial implications of the JV.
- Jurisdictional considerations – depending on the scope of the JV and the associated investment, parties should take time to consider what the most appropriate jurisdiction is for the JV company (and any subsidiaries), as well as any vessels operating within the JV structure. Local laws and regulations may require the use of certain flags or jurisdictions for owning companies, and finding this out at an early stage will ensure the transaction runs more smoothly. Tax considerations will, of course, also be relevant here.
- Timeframe and exit – both parties should communicate and understand how long the other party is likely to commit. Funds and other financial entities are likely to be looking at short- to medium-term investments, whereas wind projects can be long-term and an energy company may look to stay and re-invest in the project for the long term. It is key to understand from the outset when (and how) a potential exit may take place. While the exit provisions are particularly of interest to investors, they are also relevant where a minority owner may wish to exit following a deadlock, and takes its specialist knowledge with it, leaving the investor holding the proverbial bag.
- Control – it is salient to know the level of control/ownership that each party is looking for in the JV. Parties should consider wider commercial factors as well through involving advisors in tax, insurance and competition, and agree on clear control provisions in terms of day-to-day management of the project, as well as more substantial matters such as asset acquisition/disposal and obtaining additional financing, which are often classed as reserved matters requiring both parties’ consent.