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The reNEWS Podcast
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The reNEWS Podcast
How to make a merchant business case stack up in offshore wind
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Vattenfall head of wind Catrin Jung tells reNEWS Editor Stephen Dunne how the company has made corporate PPA-based revenue models work on several offshore wind farms and her mixed views on the drive towards Contracts for Difference across Europe
Welcome to the Morning News Podcast with me, Stephen Lombard.
SPEAKER_00There are still obstacles to overcome to get to that light at the end of the panel because we have quite a few projects still hanging before final investment decisions that are fighting for getting financial close and place.
SPEAKER_01So, Katrine Jung, thanks very much for uh being on the podcast.
SPEAKER_00Yeah, thank you for coming and visiting us.
SPEAKER_01Well, it's a beautiful office here, way above the Elbe River, right? Beside us here. So uh it's a it's a fascinating place to be and must be a nice place to work.
SPEAKER_00Absolutely, it's a nice view, and it's um every time something new to see and observe.
SPEAKER_01So you're almost a year into the into your role as the head of wind at Vattenfall. You came obviously from the offshore side of the business. How have you found the the initial period?
SPEAKER_00Yeah, um I I would say it's a bit a bit like coming home as well, because I have been heading um the group strategy part of Vattenfall before. And now I it feels like being back again looking across the whole portfolio. I'm now part um of the executive group management. So that means I also get to see more of what we call the integrated business. So um we do have the distribution business, the markets, um, sales, um, heat business, um, we have the generation hydro business, nuclear. So I I see more across the portfolio again, and of course, also can see how we prioritize between the different technologies and how then the renewables um fit in that we are working.
SPEAKER_01So offshore wind is probably m my favourite area, so we might start there given that's where your background in recent years as well. I mean, you know, one of the things we've heard recently is that after a period of real difficulty in offshore wind, that the sector is now turning the corner and you know is back in positive mode. We had a positive AR-7 result. We've had um a lot of countries now talk about the shift to CFDs, which has a lot of support in the sector. What's your view of offshore wind right now? And have we turned that corner?
SPEAKER_00Yeah, I would say there's definitely um light at the end of the tunnel. Um, I also think there are still obstacles to overcome to get to that light at the end of the tunnel because we have quite a few projects still hanging before final investment decision that are um yeah fighting for getting actually a financial close in place. And while we want to build up the supply chain and increase the capacity in the supply chain, there is still problems for wind turbine suppliers, vessel operators, foundation manufacturers to fill their factories. And that's still a concern I have because if we go through a dip now again or not a steady pace into growth, and then we have all this growth coming, we might plainly not be ready for it from a supply chain perspective. So I do think there's still something to overcome to get to this light at the end of the tunnel.
SPEAKER_01What are the obstacles that you mentioned? Like what's front and center of your mind in your role now when you think about trying to get to an FID decision on an offshore wind farm?
SPEAKER_00Yeah, what we see is that there is quite a lot of projects that are fully merchandise exposed, and we see a lower pickup of demand than we had expected, partially because um green hydrogen um industry is not coming in the same pace as we had thought it would come. So that takes out some of the electricity demand that we had expected, and then also quite a few countries are slow in implementing the Renewables Energy Directive three, which gives then uncertainty for off-takers. And what we need for the merchant price exposed projects is to fit a demand to the production. And that is is it's not easy right now because we have this time gap between when the electricity demand kicks in and when we need to take the investment decision.
SPEAKER_01Are you supportive of the shift to a CFD style system? There appears to be widespread support from industry coming through the trade groups, but you know, I have heard from speaking to some developers, particularly those with some of those merchant exposed projects, they they question whether the CFD is the be all and end-all, like it's being portrayed. Where do you guys come down on the CFD and the shift now towards that style of contract across Europe?
SPEAKER_00Yeah, I would say we are have a bit mixed feelings because generally, as a company, we believe that market mechanisms are something good because they would steer towards the most efficient solution. Um, so we very much believe in the power of the EU ETS and the marginal pricing. And if you use CFDs to push too much supply into the market, much more than the grid can handle or then there's demand, you are not bringing the system in a balance. So I do think that where we stand now, CFDs can provide a good amount of volumes to actually bridge this potential gap I was talking about, so that you have a supply chain that can continuously grow. But I also think there needs to be a demand-supply balance because if you don't have demand that picks up the additional supply, what should be the purpose? Then as a government, you're just paying on top for something that is not that much needed or cannot be delivered to a customer. So it's it's a bit mixed feelings, but also when we talked about it in Wind Europe, we said that still a part of the volumes would come into the market via PPAs, and then the CFDs could be there to stabilize the market, and that's what we then subscribe to because we we said that this is probably what the market needs right now.
SPEAKER_01Vattenfall is one of the few developers that made the non-CFD business case work around the merchant project, Nordlicht being the big example of that, which you reached FID on earlier this year. Could you maybe talk us through how exactly you were able to unlock that merchant-based business case and what are the lessons from it for similar projects in the future?
SPEAKER_00Yeah, I would say it started with Hollandskus South, which was the first project that was built on a zero subsidy or zero um bit basis. And um we are, as I said in the start, we are an integrated company, so we are quite used to having long positions. Um, and we have balance sheet financing, so we are not depending on a project financing basis. And that makes it easier, I would say, because we're used to having those long positions and to trade in the market, and maybe also to go through a phase where the PPA market is not so liquid and wait for demand to kick in. And that's what we did with Holland-Sukkus South. So there we we took the FID, owning the full wind parks, the 1.5 gigawatt. And at the time we hardly had any secured revenue flow. But we believe that the levelized energy costs of the project are so low that we will find off-takers when the off-take market kicks in. And it's a bit similar with Nordlicht, we actually do have um PPAs in place, not for the full volume and not also for the volume we took over from BSF when we took the FID. But we see that we believe it's a competitive project from a cost perspective, and we do believe the market will go into energy transition, and then there will be the demand for clean electricity from off-takers. But we can allow ourselves a bit of time between FID, the financial investment decision, and actually closing positions at a level that fit to the cost and margin expectation that we have.
SPEAKER_01Not every developer has that luxury uh to be able to take that approach. Uh, one of the things you hear about merchant business cases is the risk, particularly around negative prices in the market. The Netherlands being a prime example of that where prices quite regularly uh turn negative. How do you deal with that on Holland's E Coast South? And you're obviously looking ahead to the iMudenmeer Alpha project under the Z-Vonk partnership. You know, how do you manage that problem?
SPEAKER_00Yeah, we have the benefit of having a very strong trading department. So, of course, negative prices is part of the story, but then um we can also trade intraday quite well and then um get benefits from that in the market because we have the trading capabilities. So, of course, the negative price hours we will not produce, that's clear. But um, we can also get some margin from acting quite flexibly into the market, and that's a piece that some people sometimes forget: that you can actually turn down the production from a wind farm relatively fast, so you can act quite quickly towards um market signals, and then it is um finding that balance and being being being spot on in um how we trade intraday.
SPEAKER_01I mentioned the the latest Dutch project iMutonvare, which I think the plan is to hit FID later this year on that. How's that process going? And are you confident that you'll be able to hit that milestone given the uncertainty in the market at the moment?
SPEAKER_00Yeah, that's of course a very good question. So maybe a bit of background. So you you say rightly it was called IMERDENWER, it actually was the beta part. Um, and then we um renamed it to SEVONG. We are together there with um Copenhagen infrastructure partners, so we are not um in it alone, which also helps um for the financing and risk taking part. And then when we won the project, it was a two-gigawatt project, and we had a system integration obligation that we wanted to fulfill with delivering of um green hydrogen via electrolyzer. Um we then realized that um the green hydrogen market is not developing as we thought it would, and also the pipeline towards Germany from the Netherlands will not be built in the speed as was announced earlier. So we then actually last year had a discussion with the Dutch government and the ministries to find a solution because we still wanted to continue with the project, but we plainly couldn't get out of Rotterdam with our green hydrogen. There was no physical way to get out from there. And on the other hand, um the Dutch government was still interested to get the renewables targets fulfilled. So we then found a solution where we would deliver now one gigawatt um without the system integration obligation. And um the second one gigawatt would be built later when there is more chances to actually use green hydrogen in the end. So I would say that's part of the story that we were able to find a business model that has worked before for us, um delivering plainly an offshore wind park with very good um windside conditions and also good ground conditions, and by that um find a way to have a cost-competitive project. Um what we do now is again what we usually do. We are out in the market looking, is there offtake? Do we believe or when do we expect off-take to come in? And again, that doesn't need to be exactly at FID for us, but we need to have enough um evidence that um there would be a competitive pricing where we can come in with our volumes.
SPEAKER_01And without getting into anything too sensitive, I mean, what what do you see from the off-take market in the Netherlands? I mean, there is certainly a perception in Germany that that industrial demand hasn't really emerged yet for offshore wind. What's the picture like in the Netherlands? And going back to your original point at the start of the conversation about you know demand and demand profile, obviously, hydrogen we can put that to one side for the short term. I mean, what does that whole image and picture look like?
SPEAKER_00Yeah, I would not put hydrogen at the side because um, even if we maybe don't need to build the electrolyzer, we still see quite some electrolyzer projects in the market, and there are subsidies available for those, and there are companies that want to build them. So for us, they are still a very interesting potential off taker, but they then also need to get the FIDs in place, and for that they need to secure the green hydrogen offtake. Um, but again, we we do believe uh again, even more so maybe triggered by the Middle East conflict, that there will be a shift away from fossil fuels, and then um we will need clean hydrogen, and then we will need the volumes from offshore wind. So it's it's a bit playing this integrated um business game of um being very close to our customers, and even if they don't sign in blood right now, um to still get the feeling at which prices um could they offtake so they can then deliver clean hydrogen with the their subsidies available and their yeah, all their conditions that they have um towards their customers.
SPEAKER_01And what about the industrial and and corporate demand? What's that? What does that look like at present?
SPEAKER_00I mean, that was never so much present in the Netherlands compared to Germany. Um in Germany with the yeah, big chemical companies and the steel companies, there's plainly a lot more demand, and that is uh corporate demand. Uh and that is has always been less in the Netherlands. In the Netherlands, we have been looking very much at refineries um and then also smaller off takers. So the the yeah, the crowd of potential off-takers is is a different one, has been a different one.
SPEAKER_01And I guess pricing comes into it given the macroenergy picture. Corporates are probably looking at the longer term and trying to pitch their pricing right. How do you square that circle between what you need to get for an offshore wind farm and what the corporates are willing to pay?
SPEAKER_00I mean, we are quite clear on which price level we need, so there's not so much conversation about that because either that can be matched or not. I think what is more challenging at times is the time gap. So if you look at um Nordlicht, we are um going into um commissioning into operations in 28, and then it's a lot easier to find um yeah, to have that conversation because then also the industrialist, the offtakers know much better what they need in 28. Now Sebong is not so much further out with the first one, but it is 29, and that already gets more difficult. So yes, sometimes it is plenty also sitting it out and waiting for the off-takers to um find their way to um match making their business case work. But we're always very clear on which price level we would need. So if that can't be paid, then we we wait. Um insofar. Um when the offtakers have more certainty around how their customer base looks like, then it it starts to match up and it matches it starts to match up for Nordich.
SPEAKER_01But um Sevong is plainly a bit further out in time, and that doesn't make it easier in this case.biz. Now, back to the show. It strikes me like we've just talked for the last few minutes about, you know, a merchant-based business case and we talked about the CFD. I mean, you you you guys are obviously putting a lot of effort in here to make the merchant route work for offshore wind, and suddenly the market seems to be pushing in a different direction back towards the CFDs. Do you find that a bit, you know, unfortunate or unfair that you've had to, you know, that that you guys are making it work. Others seem not to be able to make it work, yet, you know, governments are listening to those guys and introducing CFDs to for everybody?
SPEAKER_00I have never thought of it that way. I think um there's quite a lot of other companies trying to make those business cases work, and maybe they make it work, maybe not. So we are all quite a couple of us are on that same page at the moment. And then if there are opportunities, then if we now have a couple of merchandise exposed projects in our portfolio, and then we have a possibility to add CFDs to get some more regulated income, it's actually a nice risk diversification. So that's rather how I would see it than being envious. And then there can be also um constructions of a CFD, like now talked about in Germany, where you could have an opt-out for a PPA. So you could still make it work by having a good relation to industrials and finding good offtake. Um, but you have the security to fall back or to stay on a CFD track if it doesn't work out. And I think that's a quite nice combination of keeping on track of um building out and not having um construction gaps while at the same time being able to still do the work and find win-win situations with industrial offtakers.
SPEAKER_01You mentioned Germany there. Uh there is some uncertainty, as you've said, about what the future looks like in German offshore wind, um, and you know, when we will see the next tenders, what the design will be like. I mean, in an ideal world, what would you guys like to see, and when would you like the auctions to restart?
SPEAKER_00Um, yeah, I mean, there's of course one part also to be realistic. So um I I mean we definitely would want to see a next auction next year, so in 27, and for that to be there, there would need to be drafts, and then would need to be then um the EU state aid um guideline be worked on, and so so there is quite some time pressure to make it work for 27, but it will also not happen earlier. Um, and then well what I also told to um Katharina Reiche when I had the chance to talk to her is that the Danish tender is quite well thought through. So um having a 20-year CFD and then um having it indexed and um yeah, still having incentives to work towards market sickness is quite a well-constructed setup. And um for me, the German government could just copy-paste it and then um at the opt-out, the ones to being able to opt out once for a PPA pass, and then we could be done in my view, because that has runs who state eight guidelines before. That's generally, I think, what we say in a market. If the countries could align a bit better between themselves, that would would really save us quite some efforts in understanding all the details of the rules all the time, making the new tender work and doing the calculations, fulfill filling all the templates. So it could be a lot more efficient, actually.
SPEAKER_01Whatever happens in Germany, there's gonna be a lot of projects and a lot of capacity that will still have to be progressed under the merchant business case. So those projects that have been tendered over the last four, five, six years. BWO, I think, said last week we need a we need a way to allow these developers to step away from these projects. There was reports that Total Energies was trying to find a way to step away from the projects. What do you think should happen to projects that you know can no longer be progressed once the new German offshore wind regime is in place?
SPEAKER_00Yeah, I think logically they would be brought into the market again. So I I mean the TSOs have already started to look into the design of this um of their grid connections, so logically they plan should should come back.
SPEAKER_01Before I ask a little bit about onshore wind, um at the group level, Vattenfall, obviously you have we've mentioned the projects Nordlicht and uh Zivonk. We've seen some changes as well around projects where Vattenfall has stepped back, like the floating. Project in Scotland, Muirmoor, I think is how you pronounce it. A couple of years ago, obviously, uh uh sold the Norfolk complex. Like, what does the long-term strategy in offshore wind look like? What markets are you going to look to to acquire new development assets? And how should we think about vattenfall in offshore wind? Because while you're building projects, you're also pulling back from some projects, and what does that look like for the market?
SPEAKER_00I'm still surprised you can't pronounce that word. Anyone should be able to look at it. Muirmore?
SPEAKER_01Muirvor?
SPEAKER_00Don't ask me. Yeah, I I take it it's like a Muirvor, but um yeah, I also not really firm on it. Um yeah, so in general, we we uh we never went um out of Europe, so we have a limited um scope of um countries we're working in, and that is the UK, it's um Netherlands, Germany, um, Denmark, um, Sweden, and we have one project in Finland. So I would say that will remain our focus. Um, and then projects need to come at the right time in the right size, because again, we are rather working with our balance sheet um rather than project financing, which also allows us to take different kinds of risks at different points in time, and um we try to match that in the best way possible. And um now, as we are carrying um 100% of Nordlicht, and we have um the Savon projects that is also then a one gigawatt if you take um both um together, that that is quite some financing that we are doing. So, and that means that other things we plainly cannot do at the same time. Um, that was a consideration when we looked into Norfolk, which was of course huge with 3.6 gigawatt, and it was also a consideration with Mir War on how much money would we need to spend um at which point in time. Um and that will plainly also continue. So we do have, for example, interesting projects in offshore wind in Sweden, which um don't work at the moment because there is no support in also not in the grid connection part. But um if they would come in play, if we would find demand fitting to it as well, we might not be able to do something else that um we might other in other ways do. So it's always this balancing what are the opportunities, what is the financing power, um, and how does it then fit to the to the um portfolio within those countries.
SPEAKER_01So switching over to onshore wind, then another project which I probably can't pronounce you inaugurated last week, uh Brusselsholm.
SPEAKER_00Yeah, that's better. That's that's good, yeah. Of course.
SPEAKER_01So that's obviously uh a project you've inaugurated, and I mean you you have a pretty big portfolio in several markets in onshore wind. Can you tell us a little bit about the near-term plan and pipeline for Vattenfall in onshore wind, what you're hoping to build in the coming years, and what are sort of key markets for you going forward?
SPEAKER_00Of course. So um in onshore wind, we are now focusing on less markets than in offshore wind. So we have projects in the UK, um, in the Netherlands, um, Germany, and um Sweden. And um yeah, of course, also there the conditions change over time. So now we see that uh in the UK onshore is um quite attractive. So um and we have been sitting and working on a portfolio for a long while, so we are now quite happy that we can bring those forward and accelerate them as much as possible. Um, also in Germany we've built um quite a large pipeline. So we are also trying to bring those projects now through permitting and then through um applying for the subsidy scheme. Um, and then um similar as to offshore wind, onshore wind in Sweden is a bit more difficult right now. So we did we had two inaugurations this year. Um first we had uh Willinger and then Brusa Holm now. Um but it's also difficult to bring new projects um to final investment decision right now, while we do have quite a large portfolio. But there we are really trying to work with then actively with the demand side, so not only waiting for someone to come, but also trying to find ways to um talk to data centers or talk to the steel companies in the north of Sweden and see how could timelines match. So, how could a production from new onshore wind parks match to um what the need of those um off takers could be? Because it is very low cost, um very cost competitive projects.
SPEAKER_01You mentioned four markets, Germany and the UK are probably in a different league to the Netherlands and Sweden. Um you know, and and the subsidy support regimes are very well established in Germany and the UK. In the Netherlands and Sweden, is it the same situation that offshore wind faces in it's about demand and it's about the business case and about not being able to stack those things up? Is that the is that the key issue for onshore wind in those markets and in other markets where perhaps the onshore sector is struggling somewhat?
SPEAKER_00And the Netherlands there is still there's the subsidy scheme, so there's the SD, where you can apply for at least the top-up. Um there the problem is actually rather space, so it's plainly getting permits and um getting quit connection, and the quid connection problem everyone has in the Dutch market right now. So um when we're looking into new projects, it's often also trying to use existing ones that we have been running for a while and that we could repower or use in different ways. So um so I would say for the Netherlands it's it's a different story, it's more the space problem and the yeah, uh permit quit connection. Um while for um for Sweden it is um plainly getting demand-supply together on a level that works for both sides.
SPEAKER_01Europe has come up with a lot of policy over the last few years, um the clean industrial deal, the net zero act, the accelerator act, so on and so forth. Is there anything there that you see that's helping um deal with some of these problems that that you mentioned, which aren't unique to the Netherlands or Sweden and they're present in most markets in to varying degrees? And there seems to be a mismatch between you know targets and delivery. Um are you seeing anything coming out of Brussels that you're you think actually that's gonna deal with these problems?
SPEAKER_00I mean what I see is that the intentions are often good, but then the implementation needs to happen, and then I'm sometimes a bit afraid there's a new act coming before the implementation of the first one has been done. So and that does make it easier to um follow and to see where are the advantages and where where is opportunities and where is risk. So and that's usually also the message we give via our Brussels office. There is good ideas and there's mechanisms, so please implement them and let us see what the impact is before running for the next one, because um that yeah plenty adding up the the pieces that still need to be implemented don't don't bring so much more certainty at all.
SPEAKER_01One area where Brussels has been pretty active is is around the supply chain and the use of Chinese-made equipment, whether it be turbines, foundations, whatever. I think we saw Nordics this week uh come out pretty strongly and say Chinese turbines should be should not be allowed in the EU. We've seen the UK government do the same with the Mingyang uh in offshore, and there is a call then from the fabricators in Europe to ask Brussels to put tariffs on finished steel products or monopoles and the like. As a developer, where do you stand on this debate?
SPEAKER_00Yeah, that's of course a very, very interesting and important one, um, and also difficult one in a sense, because we quite like to work with the suppliers we know because we know where to go when there's a problem as well, and we know that usually in offshore wind projects there comes a problem at some point. So far, we've always been as tier one, we've always chosen European suppliers for that reason as well. Um yeah, plainly because we thought um that's a less risky way to deliver a project rather than risking some also logistical problem just to talk about one issue that can materialize. Um having said that, when we want to really increase and um ramp up growth, we might might play need more suppliers in the market and more volumes to deliver. So um, and then we can't we can't just put a band somewhere. What I on the other hand understand from a um foundation manufacturer if you have a playing field where the monopoles that come in um come without um big taxation, but this the foundation manufacturer in Europe needs to pay quite high taxes on steel imported, then it's not a level playing field. So then something is not really working well. And um even if it's a bit of a buzzword, so we would want to have this level playing field in place so there can be a fair competition. Um on the other hand, we do believe competition is generally good because we also want to deliver to our customers at the lowest cost possible, and then we need also this competitive angle. So not a really clear-cut answer, um, but um still back to generally, we would be maybe a bit more risk-averse when it comes to um new suppliers in the market. We would rather want to see the equipment first being in the water somewhere, um, and then um yeah, still support that there is competition in place.
SPEAKER_01As we've talked about here, you're developing and trying to get to FID on merchant business cases, where I imagine even more solid than a CFD, every single penny counts on CapEx. On that basis, if you have access to what are undeniably, as I understand it, lower cost uh suppliers, turbines, foundations, any ban would ultimately would stop you selecting those suppliers. So, on particularly on turbines, w where do you come down on what the UK has done? And in Germany, where there was a controversy when Lux Gara went with Mingyang, which obviously didn't work out. Are you saying that you would much prefer an open competition on turbines, or is there any way of satisfying the demands of the European OEMs while also allowing some competition in from Asia?
SPEAKER_00Yeah, I mean one question is of course, what does competition from Asia mean? Because um quite a lot of the equipment in the turbine suppliers that we have and no investors in Siemens Gamesa come from China as well. And then if Mingyang builds a factory in Europe, where to do the cut? Where is the where's the point where one equipment is more Chinese than the other? Um, and I also understand Mingyang was uh working quite heavily on creating data security, which is of course still the important piece to have in place also for governments to feel comfortable. So um yeah, finding solutions where all these can be satisfied, where a closed pass can be supplied for, where um there is data security and where there's a level playing field would always be something we want to see. And um yeah, if that's then a Chinese company um building manufacturing in Europe, um, or yeah, it's a different setup, we would always very closely look at the technology or want to see the proof points that um they can really deliver also in the European market, and then um then we can't close our eyes when cost levels are a lot lower.
SPEAKER_01The Renews podcast was produced and edited by me, Stephen Don. Click subscribe wherever you get your podcast to make sure you never miss an episode. For more exclusive market intelligence on the renewable sector, see renews.biz.