A recent market warning issued by Lamprell, a major construction firm involved in offshore wind, sheds important new light on claimed cost reductions in that sector.
Last week Lamprell Plc, the international construction company, warned the markets that it expected to make a loss of approximately $80m on its share of the construction of the ScottishPower Renewables, East Anglia ONE Offshore Wind project that it is underway in English waters off the Suffolk coast.
The loss is sufficiently large for it to affect the overall standing of the company, and required a very candid announcement and discussion to fulfill disclosure requirements and allay market fears:
“[…]the issues on the EA1 Project will significantly impact the Group’s profitability in 2017, with total losses on the EA1 Project to completion estimated to be approximately US$80 million, which will be booked in full in 2017. The additional costs on the project have been caused by a number of variable factors including investment in further, unplanned staffing and equipment requirements, as well as significant additional shipping and subcontractor costs. This forecast loss on the project does not include any potential liquidated damages. We remain in constructive discussions with our client and are confident of meeting their expectations around the delivery schedule requirements.”
The difficulties, if not quite predictable, are hardly surprising. East Anglia ONE, will comprise 102 wind turbines with a combined capacity of 714 MW, the wind turbines being some of the largest currently available, at 7 MW in capacity each, with a total height of 197 metres and a rotor diameter of 154 metres. The foundations alone of each turbine are 65 metres in height and weigh 845 tonnes. This is civil engineering on an extremely large scale and in very difficult marine conditions. Something will and anything could go badly wrong. (Data from 4C Offshore.)
Clearly this has implications for the capital cost estimates of the wind farm, reportedly £2.7 billion, but the scale of the underestimate is as yet unclear. Lamprell is not responsible for the entire project, perhaps only a quarter of it by cost, and as yet no other contractor has announced difficulties on this project, or indeed on any others. But the recent collapse of Carillion gives grounds for wondering whether Lamprell is simply being more candid than other companies in this area.
Indeed, until its collapse, Carillion was in fact itself a significant player in the offshore wind sector, being responsible for the Front-End Engineering Design (FEED) studies relating to onshore cabling for offshore wind farms, and other related matters. For example, it was contracted to construct the onshore grid connection for the £1.3 billion Rampion Offshore wind project and also for a £30m contract in relation to the Dudgeon Offshore wind farm, which opened in November 2017. Naturally enough Carillion had undertaken other utilities sector work, and Carillion was also involved in three major works for National Grid [https://utilityweek.co.uk/national-grid-allays-fears-carillion-collapse/], including a grid link for the Horizon nuclear power plant project at Wylfa. One of the many interesting things that could emerge from the Carillion investigation will be whether aggressive and unrealistic underbidding for grid infrastructure, in relation to offshore wind and elsewhere, was a part of its troubles, and if so what bearing this might have on the generally optimistic assessment of costs of rewiring the United Kingdom in order to accommodate a high share of wind and solar power.
There can be no doubt that an underestimate of costs and thus an unrealistic bid is a pressing and very real problem for Lamprell, some of whose shareholders have now probably joined that hitherto small group asking whether the capital cost of offshore wind is really falling. It would be interesting to know what ScottishPower Renewables makes of it, but perhaps they don’t care that much. As shown by Lamprell’s necessary reference to “potential liquidated damages” and hopeful reference to “constructive discussions with our client”, such things as cost over-runs and late delivery may, as far as the developer is concerned, be someone else’s problem.