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Sector Deal: a good deal for all concerned?

Fri 08 Mar 2019

Sector Deal: a good deal for all concerned?
Alun Roberts: “overall, both parties will wish they’d got more but will be happy. And that’s the sign of a good deal”

Alun Roberts* at BVG Associates reflects on the UK’s Sector Deal for offshore wind, what it means for the industry in the UK, and more widely

In examining the UK’s Offshore Wind Sector Deal it is worth first considering what each party – industry and government – would have wanted from the deal.

The government wanted high volume, low carbon electricity with the least cost to the taxpayer, and more UK jobs. The industry wanted volume, market certainty, a competitive supply chain and no restrictive local content mandates.

Overall, both parties will wish they’d got more but will be happy. And that’s the sign of a good deal.

The government will feel that it succeeded in getting the industry to put its hand in its pocket to support cost reduction and local jobs. The industry wanted more than 30 GW as it feels that this is probably the minimum that the government needs. It knows, however, that further cost reduction will render other sectors uncompetitive, with the exception of onshore wind.

A challenge for the Department of Business, Energy & Industrial Strategy (BEIS) was that it had already given clear indications that it will support biennial CfD auctions during the 2020s and industry may have felt government had already played its hand.

With clearing prices in the next auction likely to be only marginally higher than wholesale prices in the mid-2020s, this all but guarantees the volumes the industry is looking for.

BEIS will no doubt cap the volume in each auction but given that it needs low carbon generating capacity to replace coal and the nuclear sector is faltering to put it mildly, it needs offshore wind.

BEIS’s best hope for a good deal rested with the industry’s desire for an increasingly competitive supply chain. It therefore needed to convince industry that UK companies can make a significant contribution to this. Despite beacons of excellence, both parties will have thought UK companies could do better.

The Offshore Wind Growth Partnership is a significant initiative, with up to £250M (US$328M) from industry over 10 years. The government will be justly pleased that it has managed to get financial commitments from the industry for collective actions which have previously been mainly focused on innovation. I would suggest that while the total is significant, it could be better spent over a shorter period.

Businesses across Europe will be gearing up for global demand over the next decade and we may find that the opportunity has been lost 10 years from now.

Both parties have signed up to the target in the Whitmarsh Report for 60% UK content by 2030. Both probably know that it will be difficult to deliver such high content. The deal states that the methodology developed will be revisited to provide greater transparency in reporting, which is extremely positive. Initial proposals for transparency were significantly watered down when the methodology was adopted by all in 2015.

The deal also stresses that increases need to come from greater UK content in capex. My view is that it can only be achieved with significant new UK manufacturing of turbine nacelle and tower components, particularly since UK installation contractors and offshore substation fabricators have contributed less in recent years than they did in the early days of offshore wind.

While capex is the focus, UK content in opex has been given little attention because the data submitted by industry is only at financial investment decision to progress with each project, before any construction and operation starts.

The industry would benefit from more analysis of opex during the early years of operation, particularly for windfarms using service operation vessels. The idea of incorporating exports into the calculations is good but has been floating around for a while. The deal will focus minds on finding a workable solution.

While the Sector Deal headlines will focus on jobs and UK content, it also has significant sections on places, ideas and skills. For places, the deal rightly recognises the value of clustering but this section is short on substance. Perhaps this because there is not an awful lot that can be achieved without new cash.

Some years back, a small number of ‘Cores’ were set up to support clustering. With some exceptions, they didn’t achieve much because there was little money available. We’ll have to wait to see if the Sector Deal can have more impact.

For ideas, the Sector Deal is a bit thin and the creation of a System Management and Optimisation Task Group is not something to set the pulse racing and there’s no clarity on future R&D funding above what has been committed to the ORE Catapult.

The deal’s focus on women and ethnic minorities is welcome and sets targets for the industry and can link the general work being done on STEM careers by developers with the skills requirements of their project pipelines.

There is clearly a lot to do to move the Sector Deal into delivery mode and we will need to see how this unfolds. At this stage, I would like to issue a plea that the government uses the Sector Deal to revamp developer supply chain plan requirements.

Projects entering future CfD rounds should be assessed on how well they are contributing to the Sector Deal’s aims. The current guidance is adequate but it’s not always easy for developers to understand what success looks like. The Sector Deal has much better defined objectives.

Above all, the Sector Deal is important because it dispenses with the perennial mantra of UK Government that it mustn’t pick winners. It knows offshore wind is a winner; it has picked it and told the world.


*Alun Roberts leads projects in supply chain analysis and economics at BVG Associates.

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