Offshore wind industry warns against strict local content quotas

Offshore wind developers are nervously awaiting Victoria’s local content targets, with some industry experts lining up last week to warn against the popular industrial policy tool.

Supply chain delays and costs will force a natural level of localised manufacturing and sourcing of a workforce, said industry players at the Australia Wind Energy conference.

“If we can maximise as much as we can down here, we derisk the projects,” says Hunternet Co-Operative advisor Boris Novak.

Novak believes it’s prudent to look at using local companies to do part of the work in Australia, given how the Covid-19 pandemic exposed how vulnerable Australia’s supply chains are, and given the political tensions in the South China Sea which are creating a new threat to trade routes into the country.

Furthermore, the huge number of offshore wind projects slated around the world suggests supply chain capacity needs to triple in the coming years, according to research by engineering consultancy Ramboll.

Currently there is a global pipeline of 1250 gigawatts (GW) of offshore wind projects, of which 185 GW in November last year were floating — but individually these are all small compared to what is coming.

Norwegian Energy Partners Asia pacific director Eirik Ellingsen says the amount of chain required by Oceanex’s 6 GW of Australian floating offshore projects alone would take the main factory in Japan three years to produce.

As a result, global suppliers are looking hard at what can be done on site as key manufacturing hubs around the world will be, if they’re not already, at capacity.

Oceanex is already doing this and making early progress in connecting local companies with large offshore fabricators, infrastructure manager Jordan Glanville says.

“We have done a lot of work getting to know the local skillset, and what’s available in the Hunter already,” he says.

“We’re finding a huge hunger to meet with localise some components of supply among global suppliers.”

The carrot or the stick

Local content rules stipulate minimum levels of locally sourced services, manufacturing, or workforce and can be punitive, or rewarding — but economists hate them because they distort markets by pushing work to higher-priced local providers.

Victoria has promised local content rules by the end of 2023 for its offshore wind industry.

The US is an example of what happens with both punitive and rewarding rules.

The Jones Act allows only US built, owned and operated vessels to carry people or goods in US ports, which thus far has meant foreign vessels have had to travel directly from a foreign port to the offshore wind farm.

It’s held up the offshore wind industry and forced any developers to use US built boats at a vastly inflated cost.

But then came the Inflation Reduction Act, which offered a 10 per cent investment tax credit if the local part of construction meets its guidelines, another 20 per cent for projects starting by 2024, and increasing to 35 per cent, 45 per cent, and 55 per cent for those starting each year after.

And if construction costs bounce by 25 or more because of the local content rules, the Treasury will hand over a subsidy to help.

Fischer says the US is a case study in being over-optimistic about local content, as the rules worked at the start but as soon as inflation began to surge for equipment, a lack of cost indexing has forced “80 per cent of projects” to be put on hold.

Pinching from oil and gas

Australia’s local ‘in’ will likely be via its current oil and gas industry.

Perth-based Matrix Composites is one example of a local company that has leveraged its way into the global supply chain via this industry, figuring out a gap in local markets and now supplying subsea pipelines for a deepwater oil project in Brazil run by Saipem.

The amount of Australian involvement in its offshore wind projects will likely be very similar to the experience of its oil and gas industry, says Ellingsen.

He recommended not bothering with a local content percentage at all, because people trained in the gas industry as well as people coming off major government projects, such as the Metro Tunnel in Melbourne which is due to finish in 2025, will be absorbed into the offshore industry anyway.

Sustainability could force local content

Front runner offshore wind proponents like Star of the South are pushing a strong sustainability angle, but this could also be the “hidden key to success”, says Fischer.

He believes companies will find ways to get around local content rules, but sustainability could be a way to both differentiate projects “and indirectly forces local content”.

Fischer says equipment could be pre-fabricated in China but put together in Australia, satisfying sustainability issues around the carbon footprint of the offshore wind industry, while factoring in cheaper manufacturing and local content.

Certainty about pipeline

What global suppliers need from Australia now is certainty of what the pipeline will look like, Fischer and Glanville said.

Australia’s first offshore wind zone was only declared seven months ago.

Victoria is part way through sorting out which applicants will win a feasibility licence for that zone, offshore from the Gippsland coast.

CNOOD-Wenchong heavy Industries executive director Dale Young says Australia is clearly not at the stage where it has a pipeline of projects yet, which suppliers can fit themselves into.

When the shape of the industry becomes clear that is when suppliers like CNOOD-Wenchong will be able to see how local companies can fit into their supply chains.

For example, the UK and the EU have used monopile foundations for 30 years, but the 30-odd projects proposed for Australia incorporate floating turbines, and monopile and jacket foundations.