To explore how to make offshore wind a reality in Australia, MinterEllison brought together Andy Evans (Co-Founder and CEO – Oceanex Energy), Matthew Forwood (Head of Project Engineering and Due Diligence – DNV Australia and NZ), Simon Harvey (MinterEllison), Michelle Knight (MinterEllison), Chris Keane (MinterEllison) on a webinar panel moderated by Fiona Lewis (MinterEllison).
This article provides a summary of the insights the panellists shared on the current state of, and prospects for, offshore wind development in Australia. These insights included observations on risks and challenges based on their involvement in overseas and emerging Australian projects.
The legal framework for the regulation of offshore wind in Commonwealth waters is summarised at the end of this article.
Several Australian locations provide opportunity for offshore wind
In Victoria, grid access may mean that only three to four licences could be granted for windfarms offshore from Gippsland, even though the declared area covers around 15,000 square kilometres. A nine gigawatt target by 2040 suggests four to five projects, each potentially being up to two gigawatts in size and involving over 100 turbines.
New South Wales is potentially an even more attractive market for offshore wind than Victoria due to its:
Western Australia has a track record of large projects and infrastructure, including offshore projects. It also has access to oil and gas expertise, a large supply chain and notable industry support.
New Zealand is a new market with plans to implement a regulatory framework in place by next year. As its energy usage is similar to Victoria, New Zealand is likely to accommodate five to ten gigawatts of offshore wind projects.
Project location will determine the ability to use floating turbines
Offshore wind projects involve the installation of either fixed or floating turbines. The depth of water in which the project will be located will drive the decision as to which type of turbine to install. Floating turbines will be more likely in New South Wales where the continental shelves have steep gradients. In contrast, fixed bottom turbines will be more likely in Victoria, Northern Tasmania and Western Australia where the continental shelf extends out further from the coast.
For locations where floating turbines are appropriate, they offer several perceived advantages over fixed turbines which include:
- the potential to disconnect, and then tow, them inshore for major maintenance once they are operating;
- much erection and partial commissioning can be done onshore before towing them offshore for installation; and
- the ability to install them closer to population / load centres, subject to addressing social licence considerations.
A wide range of factors contribute to Levelised Cost of Energy (LCOE)
LCOE is a critical factor for developers building, or bidding for, an offshore wind project. A wide range of factors contribute to LCOE including:
- energy yield or wind resource;
- Capex, OPEX, and cost of finance;
- distance from shore and port facilities, onshore grid infrastructure, and load centres; and
- the nature of the location including water depth, seabed conditions, foundations, and whether the cable needs to be buried or can be easily laid offshore.
Optimising current size turbines is likely to be a greater driver for LCOE than larger turbines. While turbine sizes will increase over time, achieving economies of scale through greater standardisation in turbines in the current 15 to 20 megawatts range will probably unlock greater LCOE value. These economies of scale could facilitate substantial cost reductions like those achieved with onshore wind, solar PV and battery storage.
Funding offshore wind through the development stages
Around the world, government has led much of the funding of offshore wind projects. This funding has often taken the form of feed-in tariffs. In Australia, projects are likely to see a mixture of state-based ‘contracts for difference’ (CFDs) and contracted off-takes with retailers:
The mix of private financing typically varies by the stage of the project:
- for the first five to seven years of a project - balance sheet funding is common to meet development expenditures; and
- once a project reaches final investment decision - a multitude of banks will likely be available to become involved in its funding. Although this is a known asset class in other jurisdictions, there is still likely to be a premium associated with financing early projects in Australia.
Meeting the challenges of vessel procurement
The construction of offshore wind farms requires an additional consideration not present for onshore wind development - the procurement of specialised vessels for construction and operation.
Specialised vessel types and procurement options
Offshore windfarms require the use of highly specialised vessels, which fall broadly into four main categories:
- turbine installation vessels – which can be either jack-up or floating and usually feature specialised cranes that hoist the large and heavy turbines;
- cable-laying vessels - for the installation of inter array cables between the WTGs and between the WTGs and shoreside;
- service operation vessels - for performing regular inspections and maintenance of the windfarm, many of which include specialised machinery like adjustable gangways that enable technicians to reach the turbine blades for servicing; and
- crew transfer vessels.
There are three options for procuring these vessels:
- purchase;
- bareboat charter - take possession of the vessel and the specialist equipment on it, without any crew or specialised labour to operate the vessel; and
- time charter - take possession of the vessel, the equipment on it, and the specialist contractors and their personnel operating the vessel.
The early stage of development of the Australian offshore wind industry means that time chartering is likely to be the preferred, and likely the only realistic, method of procurement for the foreseeable future.
Overcoming vessel scarcity
There is a significant shortage of these specialised vessels worldwide, especially turbine installation vessels. Shipbrokers and analysts expect this shortage to continue at least until the end of the decade. Developers of Australian projects are likely to find vessel availability particularly challenging due to:
- Australia's distance from Europe, as these specialised vessels are largely owned and operated by European contractors; and
- vessels used in other parts of the world, even if available for use in Australia, may not satisfy the strict requirements of Australian laws concerning the environment and safety at sea.
One potential solution that project developers in Australia will need to consider to address this worsening vessel shortage is the acquisition or development of a fleet of vessels for use in Australia, and potentially New Zealand as well.
Mitigating the risk of delay and defects
Like many projects, offshore wind projects can suffer complex delays and defects involving significant sums. In the offshore context, marine operations are restricted to certain weather windows to allow for suitable and safe installation. Weather windows are agreed at the outset of a project. As they are based on the anticipated swell, current, wave height and wind, these windows may ultimately be insufficient to accommodate the conditions resulting on site, where there may be significant downtime associated with waiting on weather and potential delays.
Installation vessels have yet to be tried and tested in the Australian offshore environment. This leaves project developers to consider questions such as:
- Will the procurement of the vessel fall within or outside the tender scope and price?
- Will the contractor be responsible for procurement?
- Will the tender require the contractor to procure a specific type of vessel?
- What rights will the owner have to descope the contract or terminate and recover from the contractor if the vessel is unable to meet the required performance standards?
When considering these questions, developers should be prepared for the possibility that liquidated damages may be insufficient to cover the resulting delay.
Stakeholder engagement requires a top-down approach with a broad range of stakeholders
Even reputable companies could face challenges in obtaining feasibility licences if they have not engaged with stakeholders effectively. Stakeholder engagement for offshore wind projects differs from that of onshore wind projects in two main ways:
- A predominantly top-down process of stakeholder engagement
Many more stakeholders are involved in the engagement process before it delves into the details of a project. This high-level engagement involves engaging with Government around industry regulation, as well as securing industry and investor support for a project, before commencing engagement at the grassroots level. In contrast, onshore wind starts with engagement with local farmers or landowners and later builds up to engagement at the community level.
- A much wider range of stakeholders
The potential for offshore wind to have an impact on people for hundreds of kilometres more than onshore wind means engaging with a wider range of stakeholders to convince them of the opportunities associated with a project.
Ensure appropriate risk allocation when contracting
To minimise the risk of disputes, the contract needs to allocate risk clearly and properly address the different scenarios that may eventuate as the project is developed. For instance, if contractors engaged for Australian offshore wind projects are unwilling to take on EPC turnkey responsibilities, as has happened overseas, multiple packages will be let to different contractors. In this situation, developers need to pay close attention to the allocation of risk and responsibility/scope across the packages to avoid liability gaps.
Project developers need to pay sufficient attention up front to the dispute resolution clauses in any arbitration agreement with a main contractor to ensure that it includes robust joinder or consolidation provisions. For example, if a turbine supplier/OEM were late in providing the load information needed for the design of the foundations, but there is no joinder provision in the contract, the owner would be unable to join that supplier to an arbitration with the contractor. This could cause delays in progressing the dispute due to having to claim separately under the contract with the turbine supplier.
Even with appropriate contracts in place, the complexity of offshore wind projects and the role of external factors in marine operations mean that installation is unlikely to proceed to plan all the time. This means that developers should be prepared to manage a large number of variations during the installation process. Having an independent expert on hand, such as an appropriately credentialed marine warranty surveyor, to perform a technical review and approve the marine operations can assist in reducing claims.
Legal background
The Commonwealth regulatory framework for offshore electricity is set out in the Offshore Electricity Infrastructure Act 2021 (Cth) (OEI Act), the Offshore Electricity Infrastructure (Regulatory Levies) Act 2021 (Cth) and the Offshore Electricity Infrastructure (Consequential Amendments) Act 2021 (Cth). The OEI Act and associated regulations apply to Commonwealth waters, being three nautical miles from the coastline and extend to the boundary of Australia's economic zone.
The OEI Act establishes a regime for developers to apply for feasibility licences in relation to declared areas for exploration activities, commercial licenses to develop the projects, and transmission and infrastructure licenses for inter array and export cables.
Before licenses may be granted over an area a ministerial declaration (by the Minister for Department of Climate Change, Energy, the Environment and Water) is required. As at the date of writing, there has been a single declaration - an area of approximately 15,000 km² in the Bass Strait off Gippsland, Victoria. Applications for feasibility licences within the Bass Strait off Gippsland area were due on 27 April 2023. It has been reported that the National Offshore Petroleum Titles Administrator (NOPTA) (the Offshore Infrastructure Registrar under the OEI Act) received approximately 40 proposals. Where multiple applications could be offered a licence over an overlapping area, applicants are to be notified and invited to amend their applications to remove the overlap. If the overlap is not remedied (for example, because neither party elects to amend its application), the Minister may invite the applicants to submit financial offers.
An area of approximately 2,500km² in the Pacific region (off Hunter, New South Wales) was released and is awaiting formal declaration as Australia's second official development zone (expected by the end of July). Further regions identified as priority areas for assessment for area declaration are the areas of the
- Southern Ocean region off Portland, Victoria;
- Bass Strait region off Northern Tasmania; and
- Indian Ocean region off Perth/Bunbury, Western Australia.
The sizes of these areas are yet to be disclosed.
There has yet to be any indication made about of the size of future offshore wind zones, such as offshore from Bunbury in Western Australia.
The maximum licence area for both a feasibility licence and commercial licence is 700km² (including a 'buffer zone' within which turbines and mounting structures may not be located).
Developers of offshore wind projects need to be prepared to address a wide range of considerations specific to the offshore context. If you would like further insights into mitigating these risks proactively, please contact us.
