Profitability vs Targets: Have Offshore Wind Developers Changed Focus?

Dan Wiseman (00:23):
Hello, and welcome to another episode of PowerPod. I'm your host, Dan Wiseman, market analyst here at TGS-4C. I'm joined today by another one of our analysts, Jason Benchapongwimon, and we're going to talk a little bit about our MOR release, our Market Overview Report, which we release quarterly here at TGS-4C. We're going to cover a couple of the topics that we go over in the report. Obviously, there's still a sense of urgency around energy security across the globe. We've seen conversations around the security of Chinese turbine blades. We've also seen a number of events with developers pulling out of contracts and pulling out of markets or trying to pull out of markets all across the markets globally. So, welcome, Jason. It's nice to have you on again to speak with us.

Jason Benchapongwimon (01:17):
Thank you. Thank you for having me, Dan. I love being here.

Dan Wiseman (01:21):
So let's get right into it. quite a lot to cover with this report, for sure and as I mentioned previously, we have a number of developers who are looking to walk away from certain projects in certain areas. I know this has affected my markets in the US quite a lot. We saw TotalEnergies take a massive buyout for their projects quite a little time ago, but we've recently seen Invenergy as well surrender four leases, two of them which were kind of fresh bids as well. There was no maturity to them at all. And we're seeing it across the globe as well. We've seen Total have issues with Germany. Obviously, they brought into zero-subsidy bids, and now they're finding that maybe that's not the best of idea, and Germany are a very reluctant to let that them pull out. So, what do you feel is that it’s causing developers to kind of have these second thoughts about their interest in offshore wind in certain markets?

Jason Benchapongwimon (02:37):
I think it's sort of a realignment of their ambitions. I think that increasingly what we're seeing across large-scale developers in the offshore wind scene is a shift in required return on investment. I would like to coin the term "12 is the new 10." 12% returns on investments are now favored over the previously preferred 10%. So, we look at Total trying to back out of leases which were awarded under zero subsidy or sort of what market conditions were a bit, preferable, and they they're not making the cut, so to speak, on their sort of investment plans.

Dan Wiseman (03:22):
So, would you say that we're kind of entering a new phase of offshore wind where profitability of offshore wind farms matters more than deployment targets?

Jason Benchapongwimon (03:32):
Yeah, I think that profitability is affecting developers much more than their deployment targets. We're seeing the short-term their short-term pipelines be financially invested in with no sort of plan to develop long-term pipelines as of right now. We're seeing site and site offtake auctions seemingly failing in the past couple of years where offtake auctions where developers secure subsidies for their projects being much more successful in the on the global stage. Where previously countries and politics and governments were leading the offshore wind conversation. Now, it's two voices sort of leading this conversation. It's government and developers, hand in hand, where they can reach profitable sorts of agreements between the two of them. We see it with Germany and the Netherlands where previously their zero-subsidy model is being adjusted such that Germany, and the Netherlands will offer CFDs to developers for their offshore wind sites starting from next year. And this sort of marks a shift for offshore wind with sort of the golden years of 20 2020 onwards up to 2022 with developers sort of paying for the privilege to build in these countries.

Dan Wiseman (05:07):
And I mean, it it's all come very political, of course, and like you said, you know, there was the golden era where we had developers who were paying for the privilege of building their offshore wind because it was such a profitable business, but maybe we're seeing in this different time that overheads really matter. We've seen it in numerous markets where again, over in my markets in the US, we've seen developers pull out of PPA agreements because they weren't offering them enough to kind of cover the costs that they had.

I mean, we've had massive inflation over the last couple of years, a lot of these more I guess mature in the planning phase of projects have been around since kind of maybe pre-COVID. And we've all seen the knock-on effect of prices of steel and major components increase since COVID times, and we're obviously getting to a point where you can't afford to build a wind farm for nothing, and these CFDs are necessary to keep them going.

And it'll be interesting to see the stance that that Germany would take because obviously they are very reluctant to give the leases back. They want Total to keep them, and hopefully they can make some sort of agreement or reach some arrangement to kind of keep them in the market because these are a massive areas that they don't want to lose, especially as Total seems to be really kind of clamping down on how big their offshore portfolio is, having lost the two big projects over in the States.

But I think another thing that we look into in this report as well is floating wind. This is one of our floating reports which we do by- biannually, and it's to see the importance of floating because it's becoming more popular with developers. We're seeing more countries and more markets put in place floating targets as well as just offshore wind targets. So, it's a lot of pressure on on floating wind. And I guess the biggest question really is can floating wind deliver on this long-term growth expectations or is it still too early days for it to make a big enough impact?

Jason Benchapongwimon (07:44):

Well, we sort of consider floating wind to be a nascent technology where we see sort of developers plan it and sort of consider it, but it never reaches sort of full culmination commercially. We have dropped our floating forecast this quarter as we continue to sort of adjust all of our forecasts for global capacity. But I think the sort of the larger driver for floating wind is just this cost. So, sort of the argent could be made that the further out wind farm is, the sort of the more energy it can produce due to stronger winds, but what comes with that is sort of more expensive foundation technologies. And until sort of scientific advancements bring the cost base down, floating wind continues to be a black sheep at the actual offshore wind table.

Dan Wiseman (08:35):
Yeah, and I think I think the thing with floating wind specifically, like you said, the cost is very high and that's the one thing that goes against it the most. I mean, we've seen in Italy where Giorgia Meloni comes out and said, "Look, we're happy to do renewables, we've got no problem with rolling out this green initiative, but we can't afford to subsidize floating wind because it is so expensive." And they won't be the only market that takes that attitude because we know it's expensive. It is probably the priciest form of renewables at the moment, and especially for technology that is so very young.

I mean, there's no commercial floating projects. I think France is probably the closest to having anything near that, but the vast majority have a very high percentage of floating wind is all R&D and pilots and prototypes. So, until there's an idea of, this is the floating technology that three quarters of the industry will stick to, it's still kind of a long way away before it becomes the norm. But even saying that, as young as it is, I mean, there are still markets that are heavily invested in floating wind that see it as quite an attractive prospect moving forward, isn't that, right?

Jason Benchapongwimon (10:02):
Yes as I said, France sort of backs it quite a lot. I think they see it as sort of very crucial to their renewable goals. France opened a 5-gigawatt floating offshore wind tender this quarter, and the UK continues to subsidize floating offshore wind in its allocation rounds with separate pots for that to make up for its increased cost. This quarter, we've seen South Korea's offshore wind framework seemingly protect investments in offshore in floating offshore wind more than Japan.

Now South Korea are our third most attractive offshore wind floating market as of June 2026. And I think this sort of tells of where governments want floating wind to go where their coastline requires floating wind if any offshore wind is going to happen at all, and governments are aware because of industry. We, you know, have told them that floating wind is more expensive and it needs greater support and greater sort of care.

Dan Wiseman (11:15):
Yes, and like I said before, markets are still putting floating targets in place, so it's still part of the conversation. I guess it's just a matter of when that conversation is going to be. So, moving on, obviously we've seen a lot of activity worldwide, and we've seen movement in the Asia-Pacific, we've seen a lot of movement in Europe, not so much in the Central and North Americas, a little bit in South America as well, but what countries are creating the most attractive environment for offshore wind investment, would you say?

Jason Benchapongwimon (11:51):
Again, I think it's it'd probably be the low countries, Germany and Netherlands. So, seemingly having gone from a zero-subsidy model to offering CFDs starting next year, I think that shows a lot of experience starting an industry where this sort of subsidized support will build out more offshore wind than previously. Obviously, they have very lofty targets between the two of them, and they recently signed the Hamburg Agreement, which details about 100 gigawatts of offshore wind across the North Sea. We have a white paper on sort of the constraints of—

Dan Wiseman (12:33):
We do. Yes, something else for our subscribers to read whilst they're reading our report. So, Europe, mean outside of China, Europe seems to be leading the way, which wasn't really the case a few years ago. I mean, when we were looking at our global projections, the US was very close, well, no, I wouldn't say close, but they weren't far behind China in terms of their ambition, and we've seen that that drop off under the Trump administration and their very strict views around renewables and offshore wind specifically. So, whilst this is happening, how wide a gap are we going to see Europe make in terms of deployment targets being met, available energy security for various markets? I mean, where is that going to put Europe in in the end, with the US stuck where it is?

Jason Benchapongwimon (13:38):
The EU have a lot of lofty targets for offshore wind, specifically they want 300 gigawatts installed by 2040. I think that they will have to put in legislative action to sort of allow offshore wind to develop more profitably. I think with the US stuck where it is, it seems that the the gap will widen between both Americas in general and Europe.

Dan Wiseman (14:04):
Yeah, of course, I mean, and that's only going to kind of get bigger, that gap between Europe and and the US, and I guess, I mean, looking at the Americas in general, as time goes on. But then we're looking at the next wave of offshore wind, when the Americas might pick back up after a more favorable administration. I know that we've had a handful of elections in South America, and with the elections that have happened and the parties in power, how much of an impact is that going to have on South America now?

Jason Benchapongwimon (14:41):
Realistically, their forecast has been historically low. I think that simply sort of on the back of their supply chain and their sort of their ambitions for offshore wind specifically, they're quite low because they have sort of so many other renewables such as like hydro and onshore wind. But I think that with sort of political shifts in Colombia and Chile, they have sort of made it not so much harder for offshore wind, but a more constrained market where they're less likely to support offshore wind with subsidies compared to say traditional oil and gas infrastructure. But that's to be said that offshore wind could still happen in these countries, but any offshore wind that would occur in South America would be sort of on market terms rather than subsidized, except per- perhaps Brazil with sort of a a different incentive scheme than a CFD. It would more likely be a feed-in tariff or investment support.

Dan Wiseman (15:53):
So, this next wave of offshore wind, what does the growth look like between now and 2040?

Jason Benchapongwimon (16:01):
We yeah, well, we're expecting a sort of large global mobilization of sort of offshore winds capacity exploding from 2030 with sort of manufacturing and vessel supply. We're going to see 483 gigawatts of offshore wind begin construction by the end of 2040, which is increased from our last quarter's forecast, mainly due to an increase in the China forecast to 2040 with a decrease in our European forecast.

Dan Wiseman (16:36):
And with this growth, which companies are best placed to take advantage of this and really make a profit from it?

Jason Benchapongwimon (16:45):
I feel like the OEMs, the turbine manufacturers and the cable suppliers are greatly strained right now as it is. But obviously, they are in the greatest position to sort of service all of that capacity in cable supply and turbine manufacturing. Apart from that, the developers themselves could see a large growth in their revenues from offshore wind. I think that currently they're seeing losses, but this market outlook will continue to grow so that developers are seeing profitability.

Dan Wiseman (17:29):
And I think, I mean, talking about companies that would be able to make the most of it, I think one thing that we talk about quite consistently in our reports are our bottlenecks, especially with the supply chain because obviously, as we said before, inflation has always been an issue when it comes to developers being able to procure contracts for subsidies for offtake. But there's also a massive impact on sourcing the components that they need to build these wind farms. And we've seen it over the last couple of years where the reason maybe companies like Total are no longer interested in going for these zero-subsidy offers is the fact that actually it's costing more and more to build a wind farm than it did a handful of years ago. I mean, steel, for example, we've seen the price of steel rocket over the last maybe year or two, and that brings up the conversation of what can we do to cut those costs? And one country that we've not really mentioned in this episode as of yet is China.

And China is always part of conversations that we have internally here when it comes to markets because we're finding more countries are showing interest in taking advantage of Chinese turbines. Spain have entered talks. We've seen Southern American countries enter talks. Canada is more than willing to have these talks with Chinese manufacturers. How big a part does China and Chinese turbines, and Chinese components have in the growth of offshore wind? How important are they going to be moving forward? Can Europe do it on their own with European manufacturers and American manufacturers?

Jason Benchapongwimon (19:35):
Well, I think it's a tough conversation to have with European developers and European governments. But China is a great way to sort of reduce the base cost of offshore wind. And I think that China's market share in offshore wind turbines in Europe is only at 1%, I think right now. But most of, if not all of sort of the raw minerals can be sourced back to China. I think China makes up 30% of semiconductors in all in all of Europe. And I think that China’s sort of influence on technology and their ability to sort of reduce costs would make it impossible to ignore for a lot of developers. Although the EU is placing sort of legislative action against Chinese intervention sort of out of protection of domestic supplies and domestic manufacturers. I think they've now the most recent sort of action was the EU will not subsidize any projects that use Chinese turbines, I think.

Dan Wiseman (20:47):
Yeah, which, you know, sounds kind of insane on the face of it. Obviously, there's always security concerns. There's been a lot of talk about kind of cyber security when it comes to Chinese products, but you know, there are markets that that use Chinese turbines. I mean, there are wind farms in in Italy, offshore wind farms, that use Chinese turbines that have reported no issues. You know, when you've got active Chinese turbines in in European waters that aren't reporting any issues, maybe you need to kind of relax those legislations and those regulations, especially up in markets like Canada, for example.

East coast Canada, which is making their first foray into offshore wind, obviously can benefit from using Europe as a manufacturer because le- logistically, it's not that difficult. But when you're looking at British Columbia on the west coast, sourcing anything from Europe would be an absolute nightmare. You're going to be paying through the through the nose for shipping costs, whereas China, which is just across the pond, is such a much sensible a much more sensible option to have. So, do you feel that given time and given an opportunity to kind of prove themselves as reliable manufacturers in places like Spain or in places like South America, do you feel that Europe would be better suited to maybe relax the legislations they have, and allow offshore wind to grow at a quicker pace but using some Chinese components?

Jason Benchapongwimon (22:36):
I feel like sort of the easiest step would be to have Chinese manufacturing bases in Europe. I mean, we see that the UK have barred Ming Yang from setting up their factory in Scotland. And I think that that may have been a misstep for future offshore wind turbine manufacturing. The European lead of Ming Yang will still seek to supply turbines to the UK. It will just find another manufacturing base somewhere in Europe. So, it seems to me that that may be the the greatest step in sort of achieving this sort of this integration of Chinese manufacturing into Europe.

Dan Wiseman (23:14):
Yeah, I and I agree. I mean, there are some lofty targets that are being set by the EU specifically to reach these goals. And whilst we're seeing more developers starting to second-guess their commitment to offshore wind because the price isn't right anymore, we need to look at what they can do to reduce those costs and bring those costs down. So, moving away from what can be a debate, I think we can probably sit here for a good couple of hours, and we probably, and I think we have kind of in the office sat for a couple of hours and debated the China question. But is there anything else in our report that you feel we've missed out, anything that you want to kind of raise and talk about?

Jason Benchapongwimon (24:02):
I think we sort of look at financial investment decisions for across offshore wind, especially in 2026. I feel like our internal forecast is always constantly changing, and so we're quite at a low now with sort of looking at our indicators. We're now at 8.8 gigawatts of offshore wind set to financially reach final investment decision in 2026. And I feel like that's a good place for where the market is now, with sort of a subdued market outlook paired with the delays from 2022 and 2023, bringing projects to now sort of move forward with their development.

Dan Wiseman (24:46):
So, it looks very much that developers are still interested. And I think that's kind of a running theme of what we talk about in this this report for this quarter, is that although there are a lot of headwinds with offshore wind in various markets, a lot of financial issues through subsidies, a lot of bottlenecks in supply chains issues, there is still interest, and developers are still looking to push forward. And I think we see that when you just read through the news, and developer news stories and press releases, that you know there is still an interest. It's just finding who has the lasting power keep going through and kind of make an issue of developing offshore wind and becoming that developer. I think that wraps it up for this episode. Thank you again, Jason, for joining me and talking ad nauseam about our report, stuff that we talk about in the office. It's nice to kind of get this down on record for other people to hear it.

Jason Benchapongwimon (25:52):
Thank you for having me.

Dan Wiseman (25:53):
Not a problem at all. And thank you for listening, as always. Our Market Overview Reports are available to our subscribers on our website, as is that white paper about the Hamburg Declaration. So, do feel free to log on, download, and give those a read. I promise you won't regret it. So, join us next time, where I'm sure we will have plenty more to talk about here at TGS-4C.