Iberdrola: Fighting the challenges in developing offshore wind

Despite announcing a substantial divestment programme, which included selling off several onshore wind farms, Spanish energy giant Iberdrola is still believed to be the world’s largest wind energy developer, with an operating portfolio of more than 13,830MW.

In 2012, Iberdrola chairman Ignacio Galán, announced that its onshore wind assets in ‘non-core’ countries and other businesses would be sold as part of the divestment programme, which represented approximately €2 billion over 2012-2014, as the company concentrated on strengthening its balance sheet and reducing debt.

In the renewables business, several small wind farms with high maintenance costs were sold off as were those in countries where increasing Iberdrola’s market share and gaining economies of scale proved very expensive to get, such as France, Germany and Poland.

Under the plan, Iberdrola sold 32 wind farms in France in a transaction valued at €350 million and seven operating wind farms in Germany. In 2013, the company went on to sell its 75% stake in Iberdrola Renewables Polska, a holding which had €203 million worth of wind power assets in Poland.

Overall, divestments between 2012 and January 2014 have already reached €1.3 billion, representing more than 65% of the target, while the Group’s investments in Spain have moderated and the programme for onshore wind has been completed. The company’s wind investment policy is now focused on the Atlantic area, the UK, US and Brazil as well as in relevant offshore projects in France, Germany and the UK.

On the offshore side, Iberdrola recently announced that it had decided to call a halt to its ambitious development plans at Argyll Array but this is not related to the divestment plan, as Jonathan Cole, Managing Director Global Offshore Wind at Iberdrola explains.

He says that wind energy – both on and offshore – remains a key focus, adding: “We are still very committed to offshore wind and to developing large projects.”

Argyll Array ‘on hold indefinitely’

The decision to pull out of Argyll Array was not due to the strategic divestment plan, he stresses but a project-specific decision based on technical and environmental considerations.

Located off the western coast of Scotland near the island of Tiree, Argyll Array had been identified as a site with a potential capacity of up to 1,800MW. Rights had been awarded to ScottishPower Renewables, a subsidiary of Iberdrola, after a successful bid in the Scottish Territorial Waters offshore wind leasing round.

But having completed two years of environmental and technical studies, Iberdrola had been faced with a number of hurdles, which couldn’t be overcome at this time, he says. Mr Cole explains the company’s decision in more detail. “First of all we always consider whether there is a good wind resource and Argyll Array was excellent in this respect, identified as one of the windiest in the world.”

However, following the two years environmental analyses, the company discovered that the seabed was far harder than expected, with volcanic rock that is extremely hard to penetrate. Surprisingly, huge numbers of protected basking sharks were also discovered, where it was not unusual to see dozens together.

Different foundations to what are typically available in the market were also required. “These had to be suitable for rough seas and it was deemed impossible to get piles into the rock, they would have to be drilled which is very risky and expensive.”

“Conventionally, monopiles are fixed into the seabed or jackets are installed on smaller piles. Foundations could sit on seabed and not be driven in, but we don’t think there is anything at the scale we require. We are talking about an offshore foundation able to sit in rough seas, holding moving turbines with high masts of 100m above the sea.

This is not as ‘simple’ as an offshore platform; they have to support dynamic loads. We don’t think anything is available at the scale we need.”

Not only that, suitable installation vessels are also not there yet, he adds. “These vessels have to handle rough seas and very high wind speeds. If we look at the operating capability of these vessels, they would not be operating enough days of the year, making it unviable.”

“The industry is making progress on that aspect, with larger vessels that can be longer out at sea in much rougher seas but it is not there yet.”

“Overall we felt that the current installation methods and foundations needed probably won’t happen in the short term therefore decided to put the project on hold indefinitely.”

New technology not arrived as quickly as expected

He admitted that just a few years ago Iberdrola’s thinking was very different. “We thought that over the course of the decade there would be a much faster rate of deployment in Germany and the UK and that new technology would have come along in the time frame for the development of the Argyll Array. The rate of deployment has not been as we expected since 2010 and new technology has not come as quickly as expected.” He also points out that Iberdrola is not the only company to have pulled out of major offshore projects recently.

“I think we did what a responsible developer should do. We looked into reducing the size of the project, changing the technology or equipment but on balance we concluded that the nature of the changes was too significant.”

Despite this decision Mr Cole stresses that offshore wind is still very important to the company’s strategic growth plans. “We have a strong portfolio.”

Baltic Sea

Although activity has slipped back in the UK market, the company’s business plan regarding offshore wind is still on track, he asserts.
“We originally contemplated both the North Sea and Baltic Sea and due to the grid connections we decided to focus on the Baltic. We will need to wait and see whether this proves to have been a sensible decision.”

The major differences between the two areas is the grid connection, with the Baltic being HVAC and the North Sea, HVDC. “HVDC seems to have had much longer lead times and this is reflected in the time it takes to get the grid connections.”

He comments on whether he believes that this is still a significant bottleneck. “With HVDC, there was a significant number of connections required in a similar time frame and the sums of money needed to be invested in the grid connection were immense. The supply chain had to act far more quickly than it was geared up to do. But Germany particularly has been working its way through the problems and has changed the grid regulations to prevent a similar issue arriving.”

“Additionally, I think how we interact with the regulators has improved. Once a project had satisfied criteria then the onus was on the transmission system operator to deliver in the applicable grid date. This worked fine when there was a small number of projects but when there was a run of projects, it was an impossible burden.”

Industry moved to longer term planning

The German regulations mean that now the industry has moved to a longer term planning process, he adds. “We have a good idea about what is coming up under a 10-year plan and this is refreshed annually so the industry can intelligently plan and design a network. This is entirely sensible.”

“Currently, we are sitting between the new and old regime but once the new regime is in place, we can all move on again. For HVDC lead times are getting shorter and shorter and it is getting better from a regulatory and from the supply side.”

“We can now see visibility in the market and the opportunities and suppliers can make the investment to meet demand. Undoubtedly the big issue is giving that visibility. We have to have a long-term signal to the market to address the issues. For us, in the UK and Germany there is a reasonable degree of visibility about the volume of projects and the tariffs.”

Better visibility – easier to make decisions

However, he stresses, there is ‘no question’ there will be less opportunities than the industry had been talking about. “It is less than the industry wanted to get but as developers we have to accept that and look at delivering the best projects that are available in our portfolios.”

The industry has – like Iberdrola – be committed to reducing costs. “I don’t think I am overstating it when I say that 30% of costs of offshore wind have to be taken out over the next 10 years in order to be viable.”

30% of costs have to come out

“Otherwise we will struggle compared to other electricity generation technology. There is no magical solution, costs have to be cut across the entire supply chain but there is every reason to believe we can do it.”

“We have to be economic and keep reducing costs. Projects will come forward over the next 6-7 years – probably with reducing tariffs – but this is a signal from the government that it is giving an opportunity for the next 6-7 years to develop the industry, and we have to use the opportunity wisely and reduce costs. If we can’t do this as an industry we will have a problem.”

Iberdrola is committed to reducing costs, he emphasises. “We see there being four key drivers. Firstly, we have to pick the right project in the first place. There is a tough choice to be made about what projects we should develop. Picking the right project in the first place sounds obvious but it isn’t always done!

Secondly, to drive costs down we have to make quite bold technical choices – newer, larger, more efficient turbines. And there I am talking about 7-8MW and rotors larger than 150 metres, which are more efficient in terms of energy output.

Thirdly, we need significant volumes of projects to achieve economies of scale and industrialisation to get more efficient and reduce costs. And fourthly, we need to increase competition and encourage new entrants to the market. We should open up the market to drive competition, as this will have a huge role to play in achieving significant cost reduction.”

Scale up and industrialisation

Of the projects anticipated, they are going to be cheaper, he stresses. “We are well on the way for a 30% reduction. Projects of 2018 will be significantly less expensive than projects in 2013.
“With the industry moving into deeper water and rougher seas, it is the expectation that it gets more expensive, so the challenge of achieving cost reduction is a formidable one. Tariff setting is also crucially important – the tariffs cannot be too low otherwise the industry won’t invest but they also can’t be too high, otherwise there is no incentive to cut costs.”

Mr Cole continues, saying it is with regret that the biggest challenge in the last 12 months has been the mixed signals from governments in key markets and uncertainty about how regulations will be developed and when they will be developed. “This has led to uncertainty for those in the supply chain and developers.”

“However, the situation has improved and it looks like the offshore wind industry has come through this period, particularly in the UK and Germany. We are making good progress now on the regulatory side, but the biggest challenge ahead has to be cost reduction. And we taking this very seriously.”

Helen Hill