The hidden cost of Scotland's offshore wind bill
Fraser Dobbie is the Chief Financial Officer for North Star, the leading offshore infrastructure support business across Europe’s energy sector
From late November the results of AR8, the latest offshore wind auction, begin to land, and the conversation will follow a well-worn script about whether strike prices are good value, whether clean power is cheaper than gas and whether bills will go up or down.
These are real questions, but in one important respect they are at the wrong level, the focus should be on how our offshore industries can output the cheapest possible product to consumers.
One topic that isn’t given enough attention is how the industry finances the assets that keep turbines turning, an area of waste that’s costing households and businesses across Scotland money.
Offshore wind depends on specialist ships to install and maintain turbines such as service operation vessels (SOVs), cable-layers and jack-ups, and these assets, which in total cost billions, are often owned inside the same companies that carry out projects on a turnkey risk basis.
When long-life, capital intensive infrastructure and higher-risk operations sit on a single balance sheet, the vessel owners fail to attract specialist infrastructure investors, increasing their cost of capital.
This premium ripples through every contract in the supply chain into auction bid prices.
The fix is not complicated, because separating ownership of long-life assets from service operations reduces the risk profile of both.
The energy industry has applied exactly this logic when it separated pipelines and storage from exploration businesses, financing costs fell and investment capacity expanded.
A SOV contracted to maintain a wind farm has reliable demand for up to 40 years, so there is no rational argument for financing it at the same cost of capital as a company taking installation risk in the North Sea, and treated as infrastructure, it attracts infrastructure money.
Public investment in supply chains, including the £20.4 billion for the National Wealth Fund and British Business Bank announced in the budget, is welcome, but it addresses what gets built, not how the ships that operate the industry are financed once they are in the water.
No public money is required to change that, nor is new legislation, because smarter ownership structures and the investors willing to back them already exist, what is needed is for asset owning companies to recognise their ability to improve total returns through separation of infrastructure from risk.
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This only works if the policy backdrop gives long-term capital a reason to commit, because investors price political risk as well as operational risk.
The Jackdaw gas field east of Aberdeen, first approved in 2022, spent years in limbo before finally being cleared last month, and every one of those years carried a cost for those financing it.
Assets with 40-year lives need policy with a similar horizon, which means a cross-party energy framework that holds regardless of who is in power, and this would do more to lower the cost of capital, and ultimately household bills, than any single auction result.
By Fraser Dobbie, CFO, North Star
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