As offshore wind investment gains momentum, Canadian pension funds face uncertainties surrounding cost and returns in the evolving renewable energy landscape
Offshore wind investment has emerged as a pivotal aspect of the global energy transition, with investments in clean energy technologies surpassing $1.7 trillion this year, outpacing fossil fuel investments, as reported by the International Energy Agency. However, the road to offshore wind success is not without hurdles, as investors grapple with cost considerations in this burgeoning sector.
In Canada, concerns have risen as the province of Alberta imposed a six-month moratorium on approving new wind and solar power projects exceeding 1MW. Officials argue that federal restrictions hinder the development of backup generation for renewable energy, such as natural gas.
“Returns on offshore wind are becoming more and more challenged,” said Wael Sawan, CEO at Shell, in June, reaffirming Shell's commitment to only build renewable projects with initial returns of 6-8%.
Government targets to increase global wind power installations five-fold annually by 2030 have been deemed unrealistic by research group Wood Mackenzie. Achieving this goal would necessitate $27 billion in supply chain investments by 2026. The group’s projections suggest a more conservative annual capacity increase of 30GW by 2030, far below the 80GW target set by governments worldwide.
“The supply chain is struggling to scale up and will be an impediment to achieving decarbonization targets if change does not happen,” said Chris Seiple, vice-chair of power and renewables at Wood Mackenzie.
In the midst of these challenges, there have been some positive developments. The Ontario Teachers' Pension Plan Board has entered a partnership with Corio Generation to finance the initial development of a portfolio encompassing up to 9GW of offshore wind projects. This portfolio includes 14 projects, both fixed bottom and floating, situated in South Korea, Taiwan, Japan, Ireland, and the UK. These projects are currently in the developmental phase under Corio's supervision.
Ontario Teachers' intends to acquire a substantial portion of Corio's stake in these projects, supporting their development, construction, and operation. Furthermore, Ontario Teachers' has committed to achieving net-zero greenhouse gas emissions across its investment portfolio by the year 2050.
Investments in offshore wind projects have slowed in recent times, raising questions about their attractiveness to institutional investors.
“Recent events will not significantly change large-scale investors’ interest in wind energy,” said Bill Rogers, global head of sustainable energies at CPP Investments. “However, the risks associated with their development are now better understood and could lead to some investors increasing their target returns on wind energy to account for greater variability and uncertainty around outcomes.”
“It could also lead to some investors underwriting more conservative assumptions than we have seen in the recent past, particularly around capital expenditures and development timelines,” he added.
CPP Investments, on its part, has allocated $14.15 billion to renewable assets. The firm “will continue to evaluate wind opportunities and expect[s] to further invest in the technology”, Rogers said.
Labanya Prakash Jena of the Climate Policy Initiative in India highlighted that while wind power expansion has not met expectations, it is crucial to rely on multiple technologies for achieving net-zero emissions. Jena emphasized that “it is the job of governments to make it [commercially] viable”, especially offshore wind, which is capital-intensive.
Looking ahead, experts anticipate a convergence of factors that will facilitate offshore wind investments. Improved technologies and reduced costs, coupled with government recognition of the energy gap, are expected to pave the way for fewer barriers to offshore wind investments.
The International Renewable Energy Agency reported significant cost reductions in wind energy, with onshore wind LCOE decreasing by 56% between 2010 and 2020. The LCOE of offshore wind projects also fell by 48% during the same period.
Large institutional investors have opportunities beyond initial projects. “There is increasingly robust ‘offtake’ demand for wind, which is the market to purchase contracts for a supply of wind energy,” said Rogers. “Companies in the offtake market, such as utilities or larger commercial and industrial companies, are looking to target wind projects with a different production profile relative to onshore solar.”
CPP Investments, for example, is actively seeking new opportunities in renewable energy and “expect[s] the figure will grow as we continue to invest in renewables and in companies that are decarbonizing their operations.”
