Many Asian countries have ideal conditions for generating electricity from offshore wind turbines. However, before the region can rely on this limitless source of green energy, some obstacles will have to be overcome. MeiYean Lim, AXA XL’s Senior Underwriter for Political Risk-Credit & Bond, has the details.
There is a lot of power in offshore wind. So much so that analysts calculate that offshore wind has the potential to generate more than 18 times current global electricity demand.
However, while the wind resources are there, harnessing it efficiently and safely is a daunting undertaking. Offshore wind projects require massive upfront investments, and there are numerous challenges and risks involved in constructing and operating these facilities in marine environments. Plus, the energy grid needs to be capable of distributing the power produced.
Nonetheless, the amount of energy generated by offshore wind is projected to increase threefold by 2025. While established markets are expected to see continued growth in generation capacity, analysts predict that many countries across the Asia-Pacific region have the potential to become leading producers of energy from offshore wind.
Transitioning to low-carbon energy production
Most Asian countries have relied on nuclear energy and fossil fuels to power their fast-growing economies. Following the Fukushima Daiichi accident and also due to the world’s increasingly urgent need to transition to low-carbon energy production, many countries across Asia now aim for dramatic increases in the percentage of their electricity produced from renewable sources, including offshore wind.
In recent years, China has embarked on an ambitious effort to meet more of its energy needs from wind power. It is now the world leader in wind power with more than one-third of the world’s total installed capacity, followed by the U.S., Germany and India, which collectively generate about as much electricity from wind turbines as China. The remaining one-third is produced in a variety of countries, including many in the European Union.
In developed markets like Japan and South Korea, the volume of installed wind power currently is quite small, even though they have areas with strong, consistent winds and possess significant manufacturing expertise. And in emerging markets like Vietnam, the Philippines, Indonesia and Malaysia, commercial wind operations are still in the planning phase.
However, change is, so to speak … blowing in the wind. Countries across the region are beginning to establish the policies, infrastructure and expertise needed to build and operate wind farms in promising offshore locales. Vietnam, for example, could have around 10-12 gigawatts (GW) from offshore wind online by 2030; that’s about one-third of what is installed today.
Why the emphasis on offshore? In short, turbines sited offshore typically generate more electricity at a steadier rate than their onshore counterparts. In many parts of the world, those factors tend to outweigh offshore wind’s higher construction and operational costs and risks.
Enabling a new industrial sector
All of these countries face the difficult challenge of creating what is essentially a new industrial sector; that is not a simple undertaking that can be accomplished overnight. First and foremost, governmental policies need to be enacted governing the siting and licensing of offshore wind operations. And given current market realities—including the absence of carbon taxes—creating a viable offshore wind industry requires some level of price support at the outset.
These commonly take the form of feed-in tariffs, or FiTs, whereby governments incentivize private investments in renewable energy by offering long-term contracts to producers based on production costs—plus a reasonable return for their investment. Also, the price levels built into these contracts are often adjusted to reflect the overall costs of developing different technologies. For example, offshore wind and solar photovoltaic projects may be awarded a higher per-kWh price compared to a tidal-power facility, based on the current capital costs for constructing and operating the respective operations as well as their expected future generating capacity.
Moreover, feed-in tariffs commonly are “laddered”, meaning they are set at a high level at the beginning to help a country introduce new technologies, like offshore wind, then reduced gradually over time; this can make a critical difference. Although the raw material—whether wind, the sun’s rays or the Earth’s heat—is “free”, ramping up renewable energy production initially is relatively costly while the supply chains, infrastructure, project finance and local expertise are still immature. However, once these elements are established, scale and efficiency gains start to kick in, and the upfront costs and ongoing operating expenses begin to decline.
Note, for instance, that the FiT currently in place in Vietnam is USD 0.098 per kilowatt-hour (kWh). However, this is less than in some other Asian countries; China, by comparison, has an upper limit around USD 0.12 per kWh. There is some speculation, on the other hand, that as the offshore wind industry becomes further established in other Asia countries, Vietnam will have to revisit its tariff levels to remain competitive in a growing market.
Attracting international investors
While financiers have many criteria for assessing potential projects, their judgements ultimately centre on three factors:
• the estimated costs—both construction and operational
• the projected revenues over the lifetime of the operation
• the terms and conditions of the power purchase agreement (PPA) between the lender and the “offtaker”—that’s the entity that agrees to purchase the energy produced by the wind turbines; the PPA plays a vital role in mitigating the various risks associated with offtaker’s ability to live up to its commitments.
However, once a project gets underway, there are myriad ways in which the on-the-ground realities can unfold differently from the business plan. Construction, for example, can take longer than expected and/or prove more costly. Either way, and even with the government’s tariff scheme, the projected revenue stream may well start later than expected or may not be enough to cover the actual construction costs profitably. Also, the natural catastrophe exposures in many parts of the region are not trivial; there is always the possibility that typhoons or seismic events could severely damage, if not destroy, facilities.
Moreover, the financing for offshore wind facilities typically runs for 20 years, and individual projects are owned by special-purpose vehicles having few, if any, other assets. Thus, lenders need to be comfortable participating in ventures with long risk horizons and limited collateral.
Given these factors—an untested industry sector, the natural catastrophe exposures, and ownership by special-purpose vehicles—credit insurance is, not surprisingly, a prerequisite for international investors. In addition to helping mitigate against possible loan defaults, credit insurance enables lenders to:
• Manage in-country risks;
• Achieve a better rate-of-return; and
• Establish a competitive advantage by supporting higher lending limits.
Moreover, the availability of credit insurance from established re/insurance markets like AXA XL—which has strong experience insuring project finance, offshore wind turbines and the region’s natural catastrophe exposures—is a critical consideration for leading renewable-energy investors looking to expand their portfolios into new territories.
Notwithstanding the severe challenges confronting the global economy currently, the winds will continue to blow, and with proper planning and risk mitigation, more and more of that energy will be transformed into electricity from burgeoning offshore turbines.
MeiYean Lim is Senior Underwriter for AXA XL’s Global Political Risk, Credit and Bond team. In this role, she develops risk mitigation solutions to help enterprises trade and invest in emerging markets. She joined 色多多视频in 2016 after a career spanning nearly 13 years in trade credit insurance, commodity trading and reinsurance. MeiYean is based in Singapore and can be reached at meiyean.lim@axaxl.com.
