UK Offshore Wind Development – Monopoly or Minesweeper?

Published in September 2024

Offshore wind in the UK has gone from Monopoly to Minesweeper. Developers are contending with big delivery risks right now, and the successes of Round 4 and ScotWind seem a long time ago. In this article, Everoze Partner Graeme Wilson explains three big mines developers are trying to avoid – all with limited time and information.

For the past few years, we at Everoze has been firmly plugged into the UK offshore wind development market, working with developers to win leases and CfDs, and helping investors take stakes in projects.

I’ve been reflecting recently with the team on the changes we’ve seen and how developer attitudes and the industry as a whole has changed. We think the best way to sum this up is to say that the industry’s mindset has shifted, and what may have started out a little like a game of Monopoly has now turned into Minesweeper.

Monopoly

The best way to win at Monopoly is to buy every property you land on.

Why do that?

Well, even if you never actually plan to build some hotels on those properties, you can always sell your assets to someone else. That’s a good strategy in Monopoly because it’s a closed market, and everyone in the game has the same objectives – make lots of money, run everyone else into the ground and get it finished before tea.

In 2021, the UK offshore wind market was a bit like Monopoly.

In my opinion, the first objective for many Round 4 and ScotWind competitors was just to get a lease. Because (like Monopoly), even if you couldn’t (or chose not to) develop your seabed, the market was hot enough at that point that someone else would (and they’d pay you a good amount for the trouble).

This strategy isn’t just unique to the UK, we’ve seen big fees committed to elsewhere like in Germany, and the USA. But in the UK, the development risk is so much higher than in Europe. The upcoming Celtic Sea round will be no different.

Going into this upcoming auction, I see that there are, by my count, roughly 72 GWs of projects that need to somehow work their way through to CfD. A big chunk of these are in Scotland. These projects have been leased through a combination of auctions – Round 3, Round 4, Extensions, ScotWind and INTOG. For simplicity, I’ve also included the Celtic Sea auction areas in the graph below – these are included within the 33 GW of floating projects.

So what now, then?

With the Celtic Sea auction gearing up, the delivery risk for these Projects has increased substantially since 2021. Developers are playing a different game now. They are being forced to make decisions with lots of uncertainty and risk. One false step (even if made using all information available to the developer and with the best intentions) could prove critical.

Developers stopped playing Monopoly long ago. Now they’re playing Minesweeper.

Minesweeper

We don’t know where the mines are, and we aren’t sure how many there are. But we do know there are mines somewhere… so what are they? Well, there are almost too many to cover here, but there are certainly three big ones.

First of all, Consent

Scottish projects, in particular, are vulnerable to consent delay or even refusal. We’ll return to this in a moment, but delay could be even worse than refusal.

There has been a race for the past three years to get ahead in the consenting process, and to do that, developers need specialists, vessels, ecologists, engineers, geologists and a bit of luck. The developers are racing firstly because the regulators have never processed consent applications of this volume before and may be resource-constrained (experienced professionals are a limiting factor for regulators as well). Delays are expected as a natural consequence. Secondly, if they are at the end of the queue, there is a risk that projects may have consent refused or have strenuous planning conditions placed on them.

Onshore, the story is slightly different. Projects have only recently had their points of connection confirmed, courtesy of the completion of the HND-FUE. This uncertainty may have influenced some site investigation campaigns – adding additional cost and time.

Projects also face the challenge of local onshore consenting, which will be increasingly difficult as, in parallel to the backlog of offshore wind being developed (with its onshore substations), the supporting electrical infrastructure is also being built or upgraded at the same time. Local consenting could, therefore, lead to delays for a number of projects while Net-Zero and planning gear up to be themes of the 2029 UK election.

This gets us onto Grid

Developers are being asked to commit to project delivery timescales so that electrical infrastructure can be built in time. The dates being offered by the TSO (system manager) are based on the developer’s place in the connection queue. A queue the developers do not have visibility of. Scottish projects, in particular, are at risk of hitting a mine here due to the sheer volume of projects and weak interconnection between generation in Scotland and demand in England.

If the developer fails to meet the TSO connection timeline, they could lose their queue position and have to pay for extra reinforcement work before they are allowed to connect. Fail to deliver the project at all and a huge fee applies.

But… if the TO (the party who does work under instruction from the TSO) fails to meet those timescales, that could either be a) OK for a developer because it affords them more time to finish should they be struggling to meet their own timelines (although revenues will be delayed) or b) very bad if the project is built and ready to export as the developer loses revenues through no fault of their own.

The risks to the TO are minimal, and developers are at the mercy of their ability to deliver their projects on time. Developers need to ask themselves whether they think the dates being offered are achievable and what that means for their schedule.

If a Developer were to request a delay to their offered date (perhaps because they can’t deliver in time or they don’t think the TO will), they will lose their queue position and risk a connection date several years in the future (another delay). But if they refuse their date and others (their offshore wind competitors and other generation or battery projects) refuse theirs too, they may only get a short delay that might suit them better.

Developers are firmly in Minesweeper territory right now – they are working with incomplete information and are up against the clock.

So why could delay be the worst thing that could happen to a project?

CfD Merit Order

We don’t know what the next five years of Labour government will bring, but it’s unlikely all 72 GWs of projects will work their way through the CfD system.

Right now, developers need to know who their CfD competitors will be. This is because even if they somehow get through consenting and grid obstacles, they could well find themselves in an allocation round with competitors who have objectively better sites. This leads to a risk of delay, which can be terminal in such a competitive market.

Developers ideally want to land in a pot they know they can win. Crucially, the value and certainty of CfD are what the value of these projects will be based on. This is important to help developers recycle capital and attract investors.

If developers do not understand merit order, it is possible that projects could find themselves missing out on an allocation round and then unable to compete at all going forward. There are projects that may think, based on merit order analysis, that they have one shot at this. If they blow it, they are totally uncompetitive thereafter – their Minesweeper timer has gone off, and in the process, they’ve burnt through millions of pounds of DevEx with no hope of selling the seabed to another party. Game Over.

And that’s the risk and unfairness with UK offshore wind. Developers can be super careful, weigh up every move and use all available information at their disposal and either hit a mine or run out of time.

No get out of jail free cards

There are many other mines out there (supply chain, REMA, SiR’s, Great British Energy, etc) and there will no doubt be many more to come. Developers in the UK have unenviable jobs right now, navigating the toughest development market in the world.

Investors, meanwhile, need also to adopt this Minesweeper mindset. There are good investments out there, but all the Projects in the CfD backlog come with the risk of attrition. It will be very interesting to see how these projects progress through consenting and grid over the next couple of years, as well as how and when their owners choose to divest.

Regardless of whether you are a developer, investor or lender, I’m afraid we at Everoze don’t have any “get out of jail free cards”, but in our role as an integrator with broad experience in offshore wind development, we can help you identify, avoid and defuse mines.

Thanks to Daniel Bacon and Coni Caskie for fact-checking this…