Ep45 Offshore wind in 2023 and beyond, ft Mark Hutchison, GWEC

The world’s offshore wind installed capacity reached 117 gigawatts in 2023, up 50% over 2022. It is projected to reach 320 GW by 2030. We discuss with Asia energy markets veteran Mark Hutchinson the recently released Global Wind Report 2024 by Global Wind Energy Council. We have a quick review of 2023, focus on a couple of the key take aways, share some thoughts on some key Asia Pacific offshore wind markets, discuss the state of capital investments and financing, and finally look beyond 2024.

ABOUT MARK. Mark Hutchinson has over three decades of energy sector experience, including over 25 years consulting and research experience in Asia. He has expertise in strategic advice, finance, M&A, contract negotiations and due diligence in the power and renewables, and the oil and gas sectors. He is the chair of the Southeast Asia Task Force for the Global Wind Energy Council. Mark works with the GWEC members in Asia and globally to represent the wind industry in policy and regulatory discussions across the region. GWEC convenes both in-person and virtual meetings with key stakeholders, providing fact-based analysis and guidance to help shape policies that affect the wind industry.

FEEDBACK: Email Host | HOST, PRODUCTION, ARTWORK: Joseph Jacobelli | MUSIC: Ep0-29 The Open Goldberg Variations, Kimiko Ishizaka Ep30-50 Orchestra Gli Armonici – Tomaso Albinoni, Op.07, Concerto 04 per archi in Sol - III. Allegro. | Ep51 – Brandenburg Concerto No. 4 in G, Movement I (Allegro), BWV 1049 Kevin MacLeod. Licensed under Creative Commons: By Attribution 4.0 License

Transcript

NOTE: You must not solely on this transcript as it automatically generated and may contain errors, only rely on the actual recording.

 Welcome to the Asia Climate Finance podcast, where our host and his guest discuss and evaluate climate business and climate finance issues and trends.  Please support us by liking and subscribing to the podcast.  Also, please note the disclaimers at the end of the show.  Here is your host, investor analyst and author Joseph Jacobelli. 

Hello and welcome to the 45th  episode of the Asia Climate Finance podcast.  Now the world's offshore wind in store capacity reached 117 gigawatts in 2023, up 50% over 2022, and it's projected to reach a massive 320 gigawatts per 2030.  Our guest is Mark Hutchison  an Asia Energy Markets veteran. And in my opinion, one of our region's thought leaders,  Mark is the director for the Asia Pacific region at the Global Wind Energy Council, an industry led organization. 

In our brief discussion,  we first partly look at the latest annual industry review issued by the Council in mid April.  We first quickly reviewed the offshore wind markets in 2023.  We discussed a couple of the key takeaways, as well as some thoughts on some of the key Asia Pacific offshore wind markets. 

Then I also asked Mark about the state of capital investments and financing.  Finally, we wrap up the conversation with a look at the markets in 2024 and beyond.  Enjoy the show. Hello and welcome to episode 45  of the Asia Climate Finance podcast. As mentioned today, our guest is Mark Hutchison already introduced him earlier.

Hello, Mark. How are you today? Very good. 

Thanks, Joseph. 

Well, thank you very much for making the time and   you know, to talk about this  this very important kind of annual report that you guys put out. The Global Wind Energy Council puts out a annual report, which looks at the global Wind markets and the latest one for 2024 was actually published just a couple of weeks ago in mid April.

So Mark, let me just jump in with with the questions that I really wanted to ask you. First of all, could you just give us a very quick high level review of the global wind markets in general in 2023? Sure. 

Well, so the good news is that in 2023 it was a good year in many ways. So 117 gigawatts. Of total wind installations  reached COD and that's a 50 percent increase from 2022.

So that's pretty remarkable.  54 countries actually installed new wind last year. So again, a great, great number. And because of this, we've actually increased our forecast through 2030 by about 10%. Yeah. And again, as I, as I think I said, globally   onshore wind. Surpassed 100 gigawatts for the first time ever. 

Last year was also a good year for offshore wind, but, but not the peak. It was the second biggest installation. So  a lot of new sort of peaks happening, you know, China, of course, is, is the monster in all of this. They did something like 75 gigawatts. So almost 65 percent of the global total.  But Latin America also saw growth, you know, led by Brazil's new installations.

4. 8 gigawatts. So yeah, a lot, lots happening, a lot happening globally. But I think, you know, I think one of the key messages also from the report is, you know, while this progress is great and many of our members are happy with it, there's so much more that needs to be done to reach any of the net zero or climate targets that have been set around the world.

Right, especially now that we've   that we want to triple renewable energy capacity by 2030. But talking about the report again, and there's a whole bunch of conclusions in the executives summary, but from your own personal perspective, what would you think would be the You know, top two, top three, top four of the takeaways from, from this.

I think, you know, one of them again is just the record growth, which is  you know, it's amazing that so many companies in what to be very clear was some, you know, some difficult environments, you know, 22 and 23 with, you know, You have the war in Ukraine, you know, the war in Gaza  commodity price increases, interest rate rises, and interest rate rises hit renewables much harder than they do fossil just because of the upfront capital cost nature of renewables.

But again, so I think it's a, it's a great achievement. I think One of the other challenges that we see, or some of the biggest challenges is we have grids, we have permitting issues, and these are some of the things that are really slowing down additional installations because, you know, the Global Wind community  is very willing To accelerate and install even more.

The financing is available if the projects are appropriately de risked. So I think one of the, so the KeyMesh is a great year, but yes, lots more to do to de bottleneck and streamline. 

With regards to, you know, the grid, Bottlenecks as well as permitting issues are some places kind of worse than others and some places better than others, or is it pretty much a global, I mean, I'm not a grid bottlenecks is, is a global issue.

And so, and permitting issues is an issue in many, many countries. jurisdictions, but is there some places where it's a little bit better in some places a little bit worse? 

Yes, as always, with, with everything in life and you know, like Australia, they, they're, they do a pretty good job on their grid planning.  

 The permitting in some countries, what they're doing now  in Korea is an example of they're looking to move towards. This is where you have a single entity or, or that's responsible for sorting out all of the, dealing with the local communities, dealing with the EIAs, doing the wind measurements and all of those things.

It's, it's, it's a model that Denmark has used quite successfully, but that takes a long time. And  those, those government led projects  while they sort of streamline some things, they also increase the timelines. So you know, it's a, it's a two edged sword. There's both a good part to it and a challenging part to it, but at pretty much everywhere in the world, if we want to meet these targets, permitting has to move faster than it is today.

As does great. Focusing on Asia in, in the report  there's a list of markets to watch. And in Asia, they include Australia, China, India, Japan, the Philippines, South Korea, and Vietnam. Obviously we need a couple of hours to talk about each of these markets, but are there like two or three? Markets that out of these that you would like to kind of highlight.

Well, China's, you know, it's, it's a monster market. It's, it's, it's a massive market. The, the, the scale of installations that they achieve every year is, is. Never ceases to amaze me, you know, so I think that they deserve a lot of credit for that.  You know, they also dominate the supply chains because they need to build their, you know, their, their wind turbines and install them.

So, you know, China's always a very fascinating story. I think in the last couple of years, one of the outliers was, was the Philippines, you know, a few years ago, nobody.  seriously considered the Philippines as a, as a viable market for offshore wind. But with the new president, President Marcos, the new secretary Lotia   and the, the government's very, very strong commitment to really building out RE and not just wind, but, but all kinds of RE.

And, you know, this was driven by a lot of things like, for example, the   you know, the commodity price spikes  really hit the Philippines because they're, you know, they import most of their coal and, you know, almost all of their oil and it really hit them hard. And so they're looking at renewables not just as a sort of a economic competitiveness issue.

They're looking at it as an energy security issue. And that's increasingly what you're seeing also in places like Korea and Japan, which are also extremely import dependent for their energy.  Another, you know, Vietnam has been kind of a stalled market, but I will say that in the last month or two, there have been a number of developments.

And so we actually expect to see some movement going forward in Vietnam. So again, that's something to watch. Vietnam kind of stalled the last few years, but it has amazing potential. And so again, keep your eye on Vietnam.  

Got it.  Another kind of question is with regards to the state of, you know, the actual capital investments and the financing, sort of money side of things. 

Could you have a quick review on that for 2023 and kind of explain your thoughts on how the outlook is for that? 

Yes, we ran at the request of government. In the Philippines, we ran a finance workshop. We brought in some      development banks, some  international commercial banks, some domestic banks  some lawyers, developers to all kind of kind of talk this through and, you know, talk through how the first offshore wind projects in the Philippines would actually be financed.

And,  you know, I think, as I mentioned before, the cost of capital.  Hits renewable energy projects much harder than it hits fossil, you know, fossil plants, you know, have, for example, you know, 40, 50 percent of their total costs in upfront capex.  The rest is fuel costs, but that's spread out over, you know, 25 or whatever years.

And when you discount that, You know, it's, it's doesn't get hit as hard by a, you know, a 2 percent interest rate increase as does, you know, a wind project where the vast majority of the overall cost of the project over its lifetime is the upfront capex.  So that's been a big topic and, and there's an increasing number of voices that are, that are questioning  sort of the risk premiums that are placed, you know, on these emerging and developing economies.

Thanks.  And so that's, that was one of the topics that we had at the workshop. And so I think, you know, the bankers will always tell you, we have plenty of money. If you come to us with a  a well structured de risk project, we're happy to lend to you. And that's always been the case as, as, as you know,  but you know, it's, it's when you're looking at a new market and by new market, I mean, new, for say offshore wind,  you know,  There's a lot of apprehension and there's a lot of things that, you know,  domestic banks in particular, in a lot of these countries don't understand because they've, they've never had to look at it deeply and finance it before.

And so some of the risk premiums  I personally believe are a little bit higher than, than, than what they should be.   So  what we do at GWEC is we spend a lot of time working with the banks, working with the developers, working with government and other key stakeholders, supply chain companies, et cetera, to really try to de risk these projects, because that is the best way to bring down the cost of capital is, is, is really bring down both the perceived and the real risks in a project. 

On a related question, in terms of the investors, I mean, we know that there's a local, I mean, Asian utilities that are interested in, in investing in offshore wind. What about demand from private equity funds and infrastructure funds? How was that in 2023? 

To be, to be honest.  I don't see a lot of PE activity in this space because  the project sizes are, as you mentioned   are quite significant and the PE funds don't want to kind of put that kind of money up front.

The other thing is, you know, the international commercial banks  and, you know, the multilaterals will, you know, want to see a very experienced developer.  Because the way that the projects are structured in the  historical gas and coal fired world, you know, you get a single EPC wrap, that single EPC contractor is responsible for everything in the project, except project development and financing, etc.

But once once the project is in construction, there's one single entity that's responsible. And you always have to get one that's well known internationally that makes the banks comfortable.  It's different in, in offshore wind for, for reasons that I honestly don't fully understand, but the way that most projects are done. 

Is the developers  split the packages   the construction packages into, you know, 4, 6, 8, maybe 10 packages. And then they deal with all of the interface risks. That job, you know, in a coal plant would have been done by, say, Mitsubishi Heavy.  But now, it's the developers that are doing this. And it's, it's There's a lot of debate in the industry, but it's probably in part due because there are some of the risks that are unforeseen.

And so a single EPC contractor would probably charge such a premium to do this that the developers have said, well, I think we can just do it better and cheaper ourselves and manage the risks ourselves. So since the projects are also, they tend to be SPVs with no recourse to the sponsors, you know, then the international banks,  I have taken a little bit of time to try to get comfortable with this, you know, this split package construction approach.

So that's been one of the, one of the bigger challenges. And, you know, again, like for example, last week in the Philippines, we were talking to, to domestic banks, they financed, you know, billions of dollars of this. of, you know, power projects there, but it was always through a single APC. So again, they're trying to get their heads around this and, and that's a little bit of a, of a challenge.

But again, I think what we do at GWEC is we work very hard to kind of help them understand through workshops, closed door sessions, and, you know, in just other ways, again, to, to de risk and bring down the cost of capital.  

Understood. And the multilateral is very active. 

Very active, yeah. 

Yeah, they're, they're very, they're very happy to be, okay, well,  happy it's, it's their job.

That's what they do, right? This is, this is one of their reasons for being. And especially, you know, when you're talking countries like Philippines, Indonesia, Vietnam, you know, they're, they're very happy to help come in and bring some, you know, de risking capabilities, you know, again, just to buy down the cost of capital through some sort of guarantees, you know, insurance, et cetera. 

Understood.  So I guess we can move to the last question, which is very, very key.  Any views on 2024 and beyond in terms of growth, in terms of investments, in terms of financing, et cetera?  

Yes. I'm generally very positive about,  you know, the future of wind, you know, my, my view is  it's going to get harder and harder to raise capital,  to finance.

gas fired projects. And to be clear, except in a very select few countries, it's almost impossible now to build coal. So I, I kind of prefer not to focus on coal.  I, I want to focus on, on  You know, LNG and gas. So I think the question in my mind is, you know, you're, you're developing a project today, you know, you, you get to finance, you finish construction.

It comes online 2027 ish. Then you say you have a 15 year debt tenor. That's 2042.  When are the banks going to start saying, Hmm, wait a minute, 2042 for a fossil fired power plant. Do I really want to expose. myself to that    just from a pure risk perspective. And I don't mean, I'm not, I'm not imposing any moral imperative.

I'm just saying from a pure risk perspective, because those plants are going to run less and less. They're going to be supplemented by batteries. And the only time that those plants are going to be needed is when there's some weird. multi day or multi week, you know, dry, you know, or, or, or limited wind or cloudy weather.

So you want to have a lot of solar or really, really bad hydro year or some combination, right? So they're going to run less and less. So the value of those plants would just be in the capacity.  And I think the question to me is,  That's just from an equity point of view, and I've, I've, I've advised on tens of billions of dollars of gas and coal fired power plants, historically.

 Is, is when, when are those questions going to be raised, and at what point, you know, will the debt tenors be reduced, which will, you know, make the, the costs of running them and financing them higher.  And I think that that's going to cause.  Even greater push to get more wind and solar and biomass and hydro and whatever and hydrogen, you know, new types of battery technologies, etc.

So that's going to start really a big push there.  And so I'm, I'm very interested to see how that folds out.  You know, the oil and gas industry has made, you know, huge profits in the last few years.  And, you know, some of them have very publicly.  You know, pulled back from, you know, their commitments to renewables.

And so, you know, I would be very interested to see how this folds out as, as the perception of risk increases in the industry. And, and I think that's, you know, positioning, you know, wind and solar and other renewables to have a very, very positive future.  I wish that future would come faster and I wish that fossils would get phased out sooner. 

 Because if you look around the world   There's a lot of very clear impacts that are already happening today, quantifiable impacts. And so, yeah, I really want to be a part of the future that kind of limits those impacts  and plans for a future for our children.  

One follow up question, Mark, if I could. 

When it comes to permitting, I mean,  you and I know that this is an issue. Governments know that this is an issue. And I've had, I don't know if it's wishful thinking or not that given a market that governments, excuse me, are quite aware of this major challenge that they are aggressively, for example, in Europe, Trying to do something about it.

So is that just wishful thinking on my part, or do you see some evidence  initial evidence that  you know, this, this particular problem is going to be tackled, which is, which is very important for offshore wind, because, you know, from  inception to  First cement, like they say, or commercial operation, it can take, you know, many, many years, right?

So so is that this wishful thinking on my part or or you see some evidence 

definitely see evidence as you mentioned in Europe  And that's the imperative to replace the Russian gas as well. So there's really you know, it's it's the energy security  You know narrative that's really pushing things there  And I think, you know, just as a caveat,  one thing I don't think that, that  I want to see is shortcuts  on environmental permitting, environmental impact assessments,  stakeholder engagement with local fisheries. 

You know, engagement with local, you know   you know, coastal communities.  So there's a real balance between accelerating the permitting,   of offshore wind projects  and at the same time, making sure that the right voices are heard. And, you know, I do that for, for, I say that for moral reasons, but I also say it for practical reasons, because if you don't, Do all those consultations correctly You know multiple projects around the world have been shown that it comes back and it bites you at some point in the future  So it's this horrible difficult Challenging balancing that these governments have to do Europe is has has gone the most aggressively because of the the russia gas replacement narrative  but you know other other governments around the world are trying to do it as well just to make it You know You  Cheaper, right?

The longer it takes to permit a project, the, the, the more money you ultimately have to be paid when you go to auction. There's whatever it is. So there's, there's lots of reasons to kind of streamline the permitting, but not eliminate it. 

Right, right, right, right. Yeah, we should places like  Korea and Japan would   we'll get direct together on that front.  

 But   but do you have any, any kind of final thoughts  final takeaways and some conclusions, Mark? 

I, I, again, I think, That the world is looking good for wind.  You know, we have our challenges just like any industry does.  You know, there's been some, some, a lot of lessons learned in the last few years about how you deal with risk in the industry, but those lessons, they've been learned, they, they, they, they won't be repeated.

And so, yeah, I'm, I'm. I'm very excited about the future, because I think going forward, we're going to celebrate ever more success. 

Fantastic. Once again, Mark, thank you so much for your time. I know you're in between trips.  And   I'm very, very grateful for your time. Thank you for having me. It's always great to speak to you.

Thank you. 

Thank you for listening to this episode of the Asia Climate Finance Podcast.  Please note that the Asia Climate Finance Podcast is presented for educational purposes only.  All information in the podcast must not be construed as investment advice.  Always consult a licensed investment professional before making investment decisions. 

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