This New Breakthrough is Transforming Energy… Four Years Ahead of Schedule

For the next several days I’ll be in private meetings addressing where energy sector finance is moving amid the continuing Brexit aftershocks, huge shifts in foreign exchange rates, an acute U.S. oil and gas company debt crisis, and the rebalancing of the crude oil market.

The way energy working capital is obtained will be changing significantly. Some of this I addressed in Tuesday’s issue. But the next steps are likely to telegraph how energy insiders intend to make money over the next several years.

And make no mistake: The people around my table are the movers and shakers of what’s coming. That means we will have more to talk about shortly.

But today I want to show you an even more urgent advance in energy financing that’s unfolding right now. This one has “breakthrough” written all over it…

This is Europe’s Largest Windpower Project Ever

Wind power has made some impressive advances over the past several years. These have included major reductions in operating costs and even grid parity (matching costs of production from coal and natural gas-fired plants) in many regions.

Nonetheless, opposition has remained when it comes to environmental impact. True, as a renewable source of natural power, wind has none of the problems associated with fossil fuel extraction or usage.

But many see the large land-based footprints as eyesores and threats to migrating birds. Both of these have led to increasing interest in moving wind generation offshore.

The downside has been a spike in construction costs as measured by project cost per megawatt hour (MWh) of power produced.

Numerous reports yesterday indicate that may be changing. Danish giant Dong Energy (available for public trading after a recent IPO but for now listed only on the Copenhagen exchange under the symbol DENERG) just won a bid to build two 700 MW wind farms located 22 kilometers (just under 14 miles) offshore from the Dutch province of Zeeland.

Dong is already the world’s leading developer of offshore wind power and the award was for the first of five Borssele projects. The initial project will provide about a million households with electricity, while the entire five-project 3,500 MW approach will allow The Netherlands to reach its goal of 16% sustainable energy within ten years.

The Dong project will be the largest in Europe thus far. At the moment, London Array is the biggest offshore wind installation, at 630 MW. The average facility comes in at slightly under 338 MW.

But size isn’t the only thing that makes Dong’s new Borssele project so special…

Dong’s Facility Will Provide Lowest-Cost Wind Power – Four Years Ahead of Schedule

Instead, what makes it truly important is the expected construction costs. At €72.70 ($94.5 million at current exchange rates) per MWh it will be by far the cheapest offshore project ever, easily eclipsing the lowest to date – a €103 per MWh operation set by Sweden’s Vattenfall in 2015.

Even figuring in transmission cables and the link-up to onshore grids, Dong will still be coming in at only €87 per MWh. The company itself had originally put costs at closer to €100.

In a Financial Times comment, the company’s head of wind power, Samuel Leupold, noted that, “We are reaching a critical industry milestone more than three years ahead of time. This demonstrates the great potential of offshore wind.”

You see, Dong had earlier said it would break the €100 threshold only in 2020. While the company’s efficiency standards came into play in reducing construction costs, the project has also benefited from the low cost of steel and the availability of discounted offshore installation vessels thanks to a glut caused by the decline in oil prices.

All told, in a stark departure from normal energy projects, Dong’s project at Borssele is coming in at €2.7 billion below budget, will generate up to 22.5% more electricity than planned, and come on line in 2023-2025.

But rather than being the culmination of a process, this is actually a harbinger of things to come…

Offshore Wind Power Won’t Stay Confined to Europe

Last month, European energy companies, including German majors RWE AG (RWEOY) and E.ON SE (EONGY) had committed to bringing down the cost of offshore wind farms to meet those of natural gas and coal-powered generating plants.

The rise of grid parity considerations means that the mainland of Europe has entered into a discussion that had so far been reserved only for wind and solar in the U.S., and solar in the Middle East and the Mediterranean.

Now interest is building rapidly. The bidding round for the project won by Dong had 38 competitors. Meanwhile, the tender for the second Borssele wind farm (Borssele Wind Farm Sites III and IV) will be closed in the last week of September 2016.

Subsequently, beginning in 2017, development of Dutch offshore wind capacity will move off the coast of the South Holland and North Holland provinces.

And that’s not the only thing in the Dutch energy sector likely to be copied elsewhere…

Better Energy  Regulations are Showing the Way Forward

Moving forward, the Dutch government’s successful model for public/private coordination in offshore development is also likely to be mirrored elsewhere. The Dutch government regulates all conditions for the construction of the wind farms – exact location; local consents; and connection to the grid – providing an operating grant to the producer.

The producer receives financial compensation for the renewable energy it generates. In the subsidy and permit tenders the lowest bid will be awarded. That company will receive a permit to build and operate the wind farm and is granted the associated subsidy. This makes the construction of the wind farms cheaper.

Previously, companies had to receive consents before they could compete for the grant and had to install the export cables to shore themselves. Now TenneT, the Dutch transmission system operator, takes care of the offshore grid connections.

The success of this model means we’re going to be seeing more offshore wind capacity entering both the global energy balance… and the finance meetings surrounding what shape the ongoing energy mix will assume.

Stay tuned for more from these meetings soon.

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