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The Case for Wind

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By Erik Kravets 2016-05-20 19:33:01

(Article originally published in Mar/Apr 2016 edition.)

Does wind power make sense when oil is so cheap?

How cyclical is wind energy? Now that we are in a cheap oil phase, we must ask whether sites like the London Array (630MW, €2.2 billion) or BARD Offshore 1 (400MW, €3 billion) still make sense. Or what about gigantic wind farm installation vessels like Seajacks Scylla, which cost upwards of $200 million to build and makes sense only for the most challenging construction jobs?

Many offshore wind projects were started in the late 2000s and commissioned in the early 2010s, when oil prices consistently averaged more than $80 per barrel. With prices now just above $30/barrel, it would not be a stretch to assume that the environment for wind energy has shifted. After all, Udo Schneider of renewables consultancy Green Giraffe argued just this point at Bremerhaven's Rave Conference last October. Schneider noted that offshore wind would have to "prove its competitiveness" on account of low oil prices and that, given the risk, investors in wind would want higher returns.

Are Oil and Wind Prices Related?

But does the oil price actually have anything to do with the energy price? Are investors now exposed to more risk? And more importantly, do offshore wind farms only make sense when the price of oil is above a certain level?

For the entire 25 member states of the European Union, according to statistics from 2013, only nine percent of primary energy generation is from oil. Another 17 percent is from natural gas. The argument goes that natural gas and oil prices move in tandem because they serve similar needs.

So taken together, it could be argued that as much as 26 percent of primary energy generation in the E.U. is from fossil fuels that are either directly or indirectly influenced by the price of oil. And this, in turn, would seem to support the idea that as oil prices fall, so does the cost of generating electricity, which would make wind power – with its large fixed costs both in terms of principal and interest on financing and maintenance – appear to be less competitive relative to traditional fossil fuels.

However, starting in 2013 oil and natural gas prices began to decouple. The reason for the end of the "historically strong correlation between oil and natural gas prices," according to the U.S. Energy Information Administration, is that "natural gas prices have been kept down by the rapid development of shale gas."

This same shift is already taking place in the E.U. as U.S. LNG production upends the European market and causes a move away from long-term contracts to spot trading. U.S. imports will eventually end the oil-gas price link in Europe. But before that can happen, better terminals need to be constructed; LNG-carrier fleets need to be built out, and the requisite infrastructure on the European end must be ready to go, e.g., the new LNG-capable rail cars being developed right now by Hamburg-based VTG AG.

Statistics from the German Federal Energy and Economy Ministry support this argument. From 2012-2014, the years for which data is available, those households using oil for heat saw prices decline directly in line with the price of oil. Households using gas for heat saw their prices increase slightly. And electricity prices have increased more rapidly even than natural gas prices.

Thus, wind energy investors need not fear declining oil prices because they have had no effect on the cost of electricity.

Different Needs

Electricity costs in Germany, and indeed in Europe, are as high as they have ever been (from about seven cents per kWh in Sweden to 10 cents in France and 17 cents in Italy). The chief benefit of cheaper oil is lower heating oil costs for private households and some relief at the pump.

Building out offshore wind energy parks meets a different need than oil. It is not a cyclical industry and, indeed, given that electricity production is a far more regulated industry than oil and subject to far more taxes and subsidies, it has shown itself to be resilient to shocks and quite stable. The only energy source which has been less price-volatile than electricity is coal briquettes, for which data stopped being collected in Germany in 2009.

Heading into the near future, political and business support for offshore wind energy is set to accelerate with a new Siemens 7MW turbine plant opening in Cuxhaven, Germany in 2017. Projects permitted in the 2000s are also looking more feasible now that the original project development companies have either gone bankrupt (e.g., BARD) or sold the plans to third parties. These, in turn, have a lower cost basis and can operate the offshore wind farm at a profit, harvesting the rewards of the political and technical trailblazing done by others.

It looks like the political, technical and economic framework for offshore wind power is better than ever, and the foundation for the sale of electricity to the network at a steady price remains unaffected by the low oil price.  

Ships vs. Planes: EU Ferry Industry Report Is Mixed Bag

“Focus on Ferries” is the name of the new E.U. 2016 report on the impact of the 300 million euros spent since 2008 on upgrading ferry infrastructure. Investments range from conversions to LNG, newbuilds, installation of shoreside power and capital improvements to ports and vessels. The E.U.'s share of costs in many of these projects ranges from 20-50 percent. That's a lot of taxpayer money!

What is there to show for all this effort? Rather little, the report concludes. Indeed, industry performance has been more impacted by totally unrelated factors, among them “ECAs (i.e., Emission Control Areas), the abolition of the duty-free regime, the competition from fixed links and low-cost airline carriers, and the escalation of bunker prices.” In other words, tax hikes on shopping on board, budget airlines, environmental rules and costly fuel have hurt ferries far more than the €300 million could heal.

The report stresses that ferry retrofitting “is experimental and transitional." Parallel to a localized increase in the use of less-traditional fuel sources (e.g., LNG, methanol), limits on sulfur oxides (SOx) are costing the broader ferry industry dearly. And apart from LNG engines, abatement technology will inevitably play a big role in addressing the increased restrictions in the ECAs.

So given enough time and taxpayer money, will we be moving into a golden age of ferry travel with public money, cleaner fuels and engines, and more passenger rights?

To get more people to use ferries over planes, the report notes that faster boarding and greater service frequencies were needed. In addition, local ferry ticketing needs to be integrated into the broader transit system, especially when different operators are in charge of the land and sea networks. But this can be exceedingly tricky. However, regional and national ferries, the report found, are already likely to be partners with budget airlines.

Case Briefs

Charterers' Liability: The English Supreme Court is deciding whether actions of cargo receivers at the discharge port leading to the arrest of the owner's vessel can be attributed to "charterers or their agents." If so, the actions of the cargo receivers that led to the arrest would be regarded as an exception with respect to an off-hire clause in a time charter, meaning that the owner would be permitted to collect demurrage for time lost and, conversely, that the charterer would need to pay the owner for that time even in situations where the cargo receivers' conduct is not actually considered an obligation of the charterer. Until the Supreme Court's decision is made, charterers ought to carefully supervise cargo receivers since it's possible they will be held liable as described.

E-B/Ls: In the world of electronic cargo release systems operated by PIN codes, Glencore International v MSC Mediterranean Shipping discusses the modalities involved in the consignee obtaining his consignment of goods. An electronic bill of lading was issued and the carrier e-mailed a release note containing the PIN code to the consignee's port agents that was intercepted by criminal third parties, who took possession of the containers and absconded. In an English decision described by Dr. Emma Park of the Middle Temple as "controversial," consignees successfully claimed against the carrier for having surrendered the cargo to a third party without a delivery order, even though precisely this procedure was in accordance with the local port's custom.

Warehouse Customers Beware: The German Supreme Court maintained that the warehouse customer has the burden of proof in demonstrating that the goods he vouchsafed to the warehouse were in good condition at the time of their surrender. If the customer further removed items from the warehouse and later files a claim against the warehouse for the value of certain other items that were lost, which were not, in fact, the removed items, then the customer nevertheless has the burden of proof that the warehouse lost these specific items. In fact, the burden of proof remains on the customer, ruled the court, even when the customer had the ability to physically access the warehoused items. – MarEx

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.