Introduction:

    As late as 2014, the UK offshore wind supply chain benefitted from high subsidies1 issued via a non-competitive allocation process. The sector was growing, jobs were being created and companies throughout the supply chain were able to profit. Roll-on five years and the scale of the offshore wind industry has grown beyond expectations and new subsidies are allocated via the UK’s competitive Contracts for Difference (CfD) auctions2, where developers are bidding aggressively to secure 15-year government backed contracts.

    This is all part of the UK Government’s new Offshore Wind Sector Deal3, which outlines the government’s commitment to supporting 1-2 new gigawatts of offshore wind a year through the 2020s. But in return, they want developers to reach 60 per cent local content of total project cost.

    The big question is whether the money funnelled into local SMEs will be enough to bridge the gap from 50 per cent of local content today, to 60 per cent by 2030 and increase the export market fivefold to GBP2.6 billion per annum, as required by the Government’s sector deal?

    At an HSBC hosted roundtable at the Bloomberg New Energy Forum, (BNEF), London, the discussion amongst industry experts suggested that the low prices are not currently leading to local jobs, and at current CfD prices it’s unlikely that a bigger UK supply chain will emerge. If so, the sector deal target of 60 per cent of total project costs spent in the UK, will not be achieved.

    Participants at the roundtable voiced concerns that even without localisation requirements, it is difficult enough for established suppliers, to "make the prices work". With margins being squeezed, the suppliers do not have "value to play with" and "do not have the freedom to localise". Turbines are getting more reliable, more digital and are increasingly monitored (and will eventually be maintained) by autonomous equipment, all of which reduce human interference. In future, therefore, it is likely that less reliance can be placed on op-ex for local content.

    It’s also worth noting that the above dynamics reflect the situation for fixed bottom installations. However, recently we’ve seen growing attention being paid towards new technologies such as floating offshore platforms. With the high growth experienced for fixed installations, perhaps we’re going to see a similar trajectory for new technologies. Could this be represent the next chapter of UK growth across the value chain?

    Comprehensive government strategy needed?

    Taiwan and France are examples of offshore wind markets that have mandated local job creation with strict local content rules. In Taiwan, this means high value manufacturing jobs will come to the country, but at a cost. It remains to be seen if this new supply chain is competitive enough to become an export hub, or fade once the domestic market peters out – a prominent risk for any government hoping to force the establishment of a local supply chain.

    France also paid a high price to localise turbine manufacturing, with a considerable length of time before any projects came to fruition. However, since the original project allocation rounds, the latest tender was competitive (i.e. Dunkirk offshore project) and secured a tariff close to grid parity. They also now have some domestic manufacturing by virtue of GE’s acquisition of Alstom which led to GE Renewables unit being based in France and the new Haliade X offshore wind turbine is being produced in St Nazaire and installed into EDF’s next project nearby.

    In the discussion, it was considered that the “UK has taken a far more gentle approach”. This has created a low cost of energy for offshore wind, however to date, this has only required minimal new jobs, despite the target of creating more. Part of the problem could be physical: The UK is short of available land, close to ports, for the tier 1 manufacturing facilities which would be required for turbines, foundations, cables, substations and the rest of the likely supply chain.

    Conclusion

    So if the current Sector deal isn’t the answer, are we looking for a different government-led industrial strategy to ensure the benefits of the (Just) Transition to clean energy are fully shared? For international manufacturers, offshore wind is just one business unit in an array of offshore business that across a portfolio can ride any peaks and troughs, while the UK, especially in Scotland, relies predominantly on offshore wind only.

    Is it time to change this strategy to embrace a broader opportunity? Our conversations certainly suggest it could be and with the increasingly influential role that climate is playing in government policy, more change seems a likely option.

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