New fleet of wind vessels on horizon as green goals boost investment case

Lofty offshore wind capacity targets are bolstering the investment case for the vessels that transport and install turbines out at sea, but a shortfall in this crucial part of the supply chain is here to stay.

In the European Union, developers are tasked with scaling up a 16-GW industry to 60 GW by 2030 and 300 GW by mid-century. The U.K. aims to quadruple its installed fleet to 50 GW by 2030, while the U.S. is working to establish a 30-GW market by the end of the decade from almost nothing today.

To facilitate this ambitious build-out, a new generation of dedicated wind vessels is on the horizon. Analysts at S&P Global Commodity Insights expect more than 20 new ships to enter the European and U.S. markets in the coming years. Many more are being built to serve China's booming offshore wind fleet.

While the pipeline is welcome news for wind developers, there is still expected to be an overall shortage of vessels capable of installing the latest generations of supersized offshore wind turbines. The industry is now reaching for a 16-MW turbine; just 10 years ago the standard size of machines was 3 MW.

"The existing fleet of [installation vessels] is now reaching the technical limit of its design capabilities," said Jostein Thue, head of the offshore wind segment of industrial ABB Ltd.'s marine and ports division.

Offshoot of oil and gas sector

Much of Europe's vessel fleet came to offshore wind from the oil and gas sector, and crane and loading design is not tailored to the installation of objects such as wind turbines, which are long, thin and heavy, according to Mark Rae, director of research and analysis at Commodity Insights.

"They can do the job, but they're not designed for it," Rae said in an interview.

Jobs for oil and gas projects also pay better rates for ship owners than those for wind installations. As the energy crisis turns more focus on home-produced fossil fuels again, particularly in the North Sea, that puts wind developers on the back foot.

"Offshore wind developers have had the luxury of usage of oil and gas assets over the last few years," said Jon Inge Buli, general manager of technical sales for offshore energy at Finnish industrial giant Wärtsilä Oyj Abp. "Oil and gas is [now] reclaiming assets and paying better rates," particularly for light construction vessels or cable layers.

Floating offshore wind, usually billed as an easier installation task, will also grapple with an undersupply of anchor handler tug boats, according to Buli.

"It's still clear that there's an undersupply of [vessels] from 2027 onwards," Buli said in an interview.

With the structural undersupply in mind, developers with a large portfolio of wind projects up for construction are now increasingly weighing long-term deals with ship owners.

RWE AG recently signed a long-term deal with vessel company ZITON A/S covering operations and maintenance for European projects, a move the utility said would reduce price uncertainty in a tight market.

US market remains challenging

The supply chain faces an even bigger challenge in the U.S., a nascent market that is targeting a capacity of 30 GW by 2030.

"The U.S. is definitely a huge bottleneck," Rae said. Under the Jones Act, a U.S. maritime law, only U.S.-flagged vessels are able to operate out of the country's ports, and there is not yet a vessel capable of installing offshore wind turbines in the market.

The only Jones Act-compliant installation vessel under order is the Charybdis, being built by a consortium led by Virginia-headquartered utility Dominion Energy Inc. It is expected to start operations in late 2023 and will be crewed by U.S. mariners. Danish developer Ørsted A/S has booked the ship to install its Revolution Wind and Sunrise Wind projects, two of the country's first major offshore wind farms.

Those without access to this ship, such as Iberdrola SA subsidiary Avangrid Inc., which is building the Vineyard offshore wind farm, will be using feeder vessels as a workaround. Such wind farms will be installed by non-U.S. ships that do not enter ports, supplied with the equipment via smaller ships.

This is more expensive and logistically challenging, Rae said. The concept moves tasks normally done onshore out to sea, making the construction process more reliant on calm weather conditions.

"The Jones Act does make it more difficult," Miguel Stilwell d'Andrade, CEO of European renewables group EDP Renováveis SA, said at a March 2 news conference in London, adding that Europe will be better prepared to scale its supply chain because the market is more mature.

"I think supply chains will adjust over time. ... I don't see any bottleneck that can't be solved in the medium term," Stilwell d'Andrade said.

EDP Renováveis and its partner Engie SA, via their Ocean Winds joint venture, have won offshore wind auctions in Massachusetts, New York and California, none of which are set for construction until the later part of the 2020s. "Given the timeline for development in the U.S., we'll have other players ahead of us" to ramp up the supply chain, EDP Renováveis CFO Rui Teixeira said.

Financial risk

An unrelenting push for bigger turbines is also causing investment uncertainty in the market for wind installation ships.

"Are we going to 20-MW [turbines] and do we want to build for that?" Buli said. "Some of the owners that have now built may take a pause."

While strong demand forecasts have encouraged more investment in recent years, the market still bears substantial financial risk.

"These large vessels are very, very expensive, and the payback time is much longer than the outlook of projects we have at the moment," said Jaap de Jong, director of operations at Dutch vessel operator Van Oord NV.

Inflation has also driven up the average cost of building an offshore wind installer from between €300 million and €350 million a couple of years ago to about €400 million now, according to Buli.

To secure financing, vessels need to demonstrate an order intake with developers long before construction starts. Offshore wind installers are also good candidates for green lending, making cost of capital more affordable.

Ship owner Jan De Nul NV partly covered the cost of its Voltaire and Les Alizés offshore wind vessels with a €300 million green loan from a consortium of five banks. As a condition for the loan, the bank consortium requires detailed tracking information on the vessels' activity.

A combination of high utilization rates for existing ships and a forecast boom in offshore wind projects should encourage more investment in this space, according to Thue.

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