OFFSHORE WIND
2 Procurement UNCHARTED TERRITORY D
Given that offshore wind projects are expensive, entering unchartered territory at a time when uncertainty over subsidies and competition for funds has never been more fierce is a major concern, especially when you consider the level of technical and commercial risk associated with projects of this scale. As with all major capital expenditure programmes, unless risks are identified and managed in an appropriate manner, cost overruns and failure to deliver will prove inevitable.
EXPERIENCE
However, whilst this is a journey into the unknown, there are lessons from previous projects that can be applied when building the next wave of offshore wind assets. Four areas that the industry needs to focus on in order to mitigate the inherent level of risk involved include:
1 Contracts
Often risk is not properly allocated or managed during the delivery of projects as there is inadequate understanding of material issues and their impact at the contracting stage. This results in delays and programme extensions, as well as variations (and in turn disputes), project underperformance and escalation of costs. Flexible forms of contract are required to deal with unquantifiable issues such as inclement weather conditions which will allow active management of issues and avoid a scenario where companies have to reengineer the contract once such problems arise
Traditional forms of contracting, together with the high costs associated with offshore wind projects, make protection through concepts like liquidated damages, toothless. Moreover, the supply chain for Round 3 projects is at its infancy and as such, there is a need for a more collaborative approach to the procurement process whereby the capacity and quality of the supply chain is encouraged to develop at the right pace and risk is shared between operators and contractors. Unless this happens, contractors may find themselves with no option but to walk away, which could impede the progress that can be made to the detriment of the industry’s development and its ability to secure funds across competing technologies. The development of a supply chain through contractual vertical integration and a longer term programme approach can provide confidence to manufacturers and also enable specific KPIs and incentives to be set at each stage of the programme
3 Interface collaboration On a broader macro-level, this also raises the case for greater cross-industry collaboration to ensure that individual operators avoid the same pitfalls and can learn from the success of their competitors. This would need to be co- ordinated by independent bodies under governmental guidance to ensure that operators, manufacturers and designers are all suitably incentivised to lead the way. By sharing expertise, the industry would be better placed to overcome the myriad of challenges it faces ahead of the Round 3 new-build projects and to secure the investment it requires to fund these schemes
4 Project Delivery If the right contracts and asset management plans are in place the focus can then shift to delivery. Once again success will lie in the ability to manage risk and ensure that problems are quickly resolved before they are allowed to derail a project. A risk management framework that considers the full life-cycle of the project is vital and should form the backbone of the overall governance strategy. Consistency in the back-end operations in areas like financing and reporting is also important especially where stakeholders require clear evidence that the project is being delivered on time and to budget
INVESTMENT, DELIVERY AND GLOBAL OPPORTUNITIES
Whilst the reality may be that the UK will not hit its climate change commitments without significant investment in renewable energy sources, the current economic constraints and the level of investment required mean that investors will not bankroll projects, particularly if they are perceived as risky ventures. To help assuage investor concerns and silence the sceptics, the industry needs to present a robust business case that outlines how it will mitigate the level of risk from the initial contract stage right through to project delivery when electricity begins to hit the grid.
In short, the offshore wind industry needs to demonstrate that it can deliver the step change required for Round 3. And if it can get this right, it will not only bring environmental benefits to the UK, but it will also open up lucrative commercial opportunities to export this expertise across the globe at a premium price.
Isabella Boira-Segarra EC Harris
www.echarris.com
www.windenergynetwork.co.uk
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