Episode 5 – Understanding the Portfolio Review Process – WindLogix Offshore Wind Podcast

Hui Min Foong   0:14
Welcome to episode 5 of Westwood Global Energy Group’s WindLogix Offshore Wind Podcast. Today we have a special episode featuring my colleague Peter Lloyd-Williams. Peter has just returned from the Global Offshore Wind event in Manchester, where he presented a white paper titled, “Going Through Changes: Understanding the Portfolio Review Process.”
The white paper dives into the portfolio review processes developers are going through as they optimise their offshore wind portfolios in response to changing market conditions. Hello, Peter, and welcome to today’s special episode.

Peter Lloyd-Williams   0:56
Hi everyone, happy to be here and talk about our new white paper.

Hui Min Foong   1:01
Thanks, Peter. To kick things off, you were just at Global Offshore Wind, one of the major global events for this industry. For our listeners, and perhaps for those who were unable to attend, could you give us a broad overview of how the event was, what kinds of topics were being discussed, or any general view on market sentiment?

Peter Lloyd-Williams   1:25
Yeah, of course, Hui Min. It was a great event, as always, with lots of interesting talks, panel sessions, and of course, good conversations taking place around that. I think the sort of sentiment that you get depends a lot on where you sit in the value chain and really what you’re looking to provide. Certainly, there was a lot of focus on delivery this year, the sort of literal nuts and bolts of building out projects under construction. And for companies which primarily operate in project delivery, there’s a lot of work going on, particularly in Europe. And that’s particularly the case for companies providing electrical equipment, so cables, inverters and so on, which are dealing with heightened demand more generally, not just from offshore wind, but from other sectors such as AI, broader electrification.
But for those companies which are a bit more focused on frontier markets, prospecting potential new development areas, the situation is a little bit more difficult. A lot of the focus is on developing what’s already there rather than pushing the boundaries of the market.

Hui Min Foong   2:24
That’s really interesting to hear about the difference in sentiment depending on where you are along the value chain. And as the focus shifts from discovery to delivery, really focusing on existing projects rather than necessarily exploring new ones, it makes sense that industry players further down the supply chain will be keeping especially busy.
In my own coverage of Asia-Pacific markets, I’ve seen similar sentiments where some projects have been cancelled and the focus is now on delivering the projects that do remain. That said, at the same time, new offshore wind auctions are also being held to strengthen the future pipeline and this demonstrates the long-term commitments from the respective governments. Now, with the focus on getting projects delivered, this ties in very nicely with your latest white paper topic. Could you share a brief overview of what the white paper is about and what readers can expect to learn from it?

Peter Lloyd-Williams   3:23
Of course, the white paper is called “Going Through Changes: Understanding the Portfolio Review Process.” The paper focuses on the way a developer might review its portfolio of projects and how it decides which projects to keep progressing when resources are a bit more constrained, hence the title about changes and portfolio review.
We put the paper together primarily for those in the supply chain and government to help them get an understanding of how these sorts of decisions are approached, what factors are important, and so on. Ultimately, the hope is to support the most efficient targeting of business development and marketing resource, really.

Part of the reason we started looking at this was the sheer number of cancellations we’ve seen in recent years. Over 100 projects of some sort were cancelled last year, although not all of those will be as prominent as others, and I’m sure you would have heard of a few. I’m really thinking about the sheer opportunity cost that stems from that. So if you compare the Westwood forecasts for 2030 operational capacity over the past couple of years, we’re now forecasting 100GW less. That’s 100GW of projects that you could have been marketing to that are no longer going ahead, or at least no longer going ahead on the initially anticipated timeline. And I’m sure a lot of our listeners will have experienced this for themselves in some form or another.

Hui Min Foong   4:46
Yeah, that’s true. And 100GW, that’s not an insignificant sum. And as you said, many of our listeners in the supply chain will have felt the impact directly, whether it’s through delayed or cancelled contracts or shifting timelines. We have indeed seen a notable reset in growth expectations. Instead of the threefold growth by 2030
that was projected in previous years, this has now reduced to a more moderate, but still notable, two-fold growth projection.
Offshore wind is still expanding as an industry, however, the trajectory is now more measured with a stronger focus on execution or delivering the existing pipeline successfully.
And this ties into a core part of the white paper, which is the framework for understanding why projects stall or get cancelled. Peter, you identified four key drivers: technical deliverability, regulatory clarity, financing reality, and supply security premium.
Could you perhaps walk us through each of those in turn and maybe help us understand how they are all interlinked in practice?

Peter Lloyd-Williams   5:54
Of course. So we identified four buckets of factors when preparing the white paper. Although given the nature of these things, there’s quite a lot of overlap between them. And really what we were focusing on was producing a framework rather than trying to capture and catalogue every reason why a project may experience difficulties.
The first factor we identified, as you mentioned, was technical deliverability. This one’s pretty straightforward. Some sites are easier to develop than others. You might have a favourable seabed, better suited wind conditions, shallower water depths, that sort of thing. Naturally, developers gravitate towards developing these sites first. You go for the lowest hanging fruit first, so to speak.
The second was regulatory clarity, which is really about the amount of confidence you have in the regulatory authority of the country where you’re operating. Are procedural requirements that you have to meet clear, are the standards consistent or do they change over time? Are the decisions, when they are taken, often the subject of challenge and how long does that take? In a way, development is a sort of an act of cooperation between regulator and developer, so there needs to be confidence in the relationship between the two.
The third is, as you said, financing reality. Developing offshore wind is obviously a capital-intensive business and you need access to capital and therefore you need to align your expectations with your capital backers. The most obvious example is probably the fate of offshore wind in many of the oil and gas developers portfolios.
So while the offshore market was buoyant, costs were low and support was high, shareholders were generally okay with oil and gas companies establishing positions in offshore wind, even though those projects tended to have lower returns than the oil and gas investments that they were accustomed to. When sentiment began to turn in offshore wind, however, it became a lot more difficult to justify staying in those lower return projects when it was taking money away from investments that were perhaps more familiar to stakeholders and more profitable, certainly. That’s one situation. Another one is potentially a frontier market where you have a joint venture between a large international developer and a smaller local partner. The local partner may be doing a lot of the heavy lifting locally, of course, but if the large international partner pulls out, then it’s going to need to find a new partner to keep going and keep providing funding for development.

The fourth really is supply security premium. And that’s basically how much the country in question puts support behind offshore wind, as there isn’t really anywhere in the world where offshore wind is fully bankable on merchant price alone, although you argue that’s true about many other forms of generation as well. Strong support here can have some effect of compensating for weaker fundamentals, although value for money for the taxpayer is obviously another question. It doesn’t have to be a CfD or a feed-in tariff, it could be a tax credit or similar, some other way, providing meaningful financial support for a project.

Hui Min Foong   9:00
Thanks, Peter, for going through the four factors. I think that makes it a lot clearer and easier to understand for listeners. And again, these are not so much of distinct factors. They have overlaps, and more importantly, they can be viewed collectively as an overall framework. So that general framework is really the key focus here.
What is interesting is you then make the connexion back to using that framework to assess project economics. Ultimately, developers will need to meet their respective required rates of return to decide to proceed with a project. So Peter, could you elaborate on how our listeners should view this framework?

Peter Lloyd-Williams   9:41
Yeah, so ultimately the factors we discussed are drivers of value, but they don’t resolve the question of whether the value that you’re producing is sufficient for your developer and your stakeholder. Every developer will set its own return requirements, and these will reflect the sort of “corporate personality” of the company in question.
a publicly traded transmission operator, a pension fund backed development vehicle, and say a private equity backed development vehicle, are likely to pursue returns in different ways, over different time scales and seeking different things, for example. Different companies can also take a different view of the particular drivers as well.
One company may see floating wind as an existential question, while another might see it as a sort of a costly time sink where they don’t want to be spending development resource. One company may have little experience working in a certain jurisdiction, unless they may see those particular projects there as more likely to be stranded and projects that they’d be more inclined to shed, while another may well be experienced there and be able to take advantage of synergies when developing the project, maybe bringing costs out and making things a bit easier on that front. And it’s these sorts of differences which are one of the things that make project M&A possible between developers.

Hui Min Foong   10:59
Yeah, the idea of a “corporate personality” is an interesting one. And it is helpful to recognise the range of different developer types and how they may have different priorities or strengths or different approaches to moving a project forward. As you mentioned, those differences are sometimes what creates opportunities in the market, especially in project M&A, where one developer may see opportunity where another might not.
Of course, you also go into specific detail in the white paper itself, highlighting individual examples of corporate investors and how they differ, as well as specific offshore wind projects and how the factors we mentioned earlier may apply.
The full white paper is available for download on our website, and I would encourage listeners to take a look if you would like to learn more.

So we’ve talked about market sentiment, drivers behind project delays and cancellations, and different developer strategies. To wrap things up, what is one key takeaway that you’d like listeners to keep with them after our discussion today?

Peter Lloyd-Williams   12:04
I think it would be the importance of centering commercial viability in whatever you’re doing, whether you’re a developer, in the supply chain or a regulator trying to get a market going in your particular jurisdiction, really ensuring that that commercial viability is the centre of everything, which will ultimately be the driver of things in the long term and will hopefully prevent you running into too many unforeseen and difficult issues.

Hui Min Foong   12:31
Thanks, Peter. That’s a clear takeaway and a good reminder for all of us. Yes, commercial viability is ultimately the bottom line in most of these projects. Thanks again for sharing key insights from your latest white paper. As mentioned, the full white paper, “Going Through Changes: Understanding the Portfolio Review Process”,
is available for download from our website, westwoodenergy.com. So do look for it there if you are interested to dive into this topic further.
That’s all for today’s episode. Thank you all for listening and do get in touch if you would like to discuss offshore wind topics with the team or learn more about our publications. Do join us in the next episode.

Copyright and Reproduction

This website contains material which is owned by or licensed to Westwood Global Energy Group. This material includes, but is not limited to, the design, layout, look, appearance and graphics. You may not modify, reproduce or distribute the content, design or layout of the Website, or individual sections of the content, design or layout of the Website, without our express prior written permission. For media enquiries, please contact [email protected]