British Prime Minister opens world's largest wind farm

David Cameron called the London Array  "a big win for is renewable energy" because it shows that we can "have renewable energy projects at scale... right here in Britain".

Yesterday saw the launch by Prime Minister David Cameron of the world’s largest offshore wind power plant, the London Array, located in the Thames estuary, approximately 20 kilometres off the Kent and Essex coast.

Owned, developed and built by a consortium consisting of Dong Energy, E.ON and Masdar (Abu Dhabi’s state backed renewable energy company), it has a total capacity of 630 megawatts (MW) and will generate enough power to supply 500,000 British households with clean electricity.

It is estimated to reduce annual CO2 emissions by approximately 900,000 tons, equivalent to the emissions of 300,000 passenger cars. Construction involved over 75 organisations and 6,700 people.

The London Array consists of 175 wind turbines supplied by Siemens, who also made the grid connection. Dong Energy and Siemens will be responsible for the service of the wind turbines through a long-term agreement.

DECC said that companies from all over the UK had benefited, "with construction supplies ranging from cable manufacturing in Yorkshire to boats from Brightlingsea to wind towers from Scotland".

Speaking at the launch, the Prime Minister used the occasion to back wind power and overseas investment in Britain, calling it "a triple win".

“First of all it’s a huge win for Kent. This project has been built by some of the bravest seaman, some of the most talented engineers, some of the hardest workers, and it’s going to continue to bring benefits to people in Kent for many, many years to come," he said.

He added that it's certainly "a big win for is renewable energy" because it shows that we can "have renewable energy projects at scale... right here in Britain".

Thirdly, he said it proved that Britain can "do big projects", citing also "a superb Olympics", Crossrail, "the biggest construction project in Europe", London Gateway, "the biggest port construction taking place in Europe", and "here you have the biggest offshore construction anywhere in the world. I think this demonstrates Britain is a great place to invest,” he concluded.

Energy Secretary Ed Davey called it “a bulk generator of power feeding into the diverse mix on our grid. It’s attracted billions of inward investment into our economy".

He added that the reforms outlined in the Energy Bill are intended to make sure that more projects like this come about.

Other massive projects (a total of 15 GW) are already in the pipeline, such as Teesside, Gwynt y Mor off the coast of North Wales and West Of Duddon Sands off the north west coast of England.

At Gunfleet Sands, off the Essex coast, the next generation of even more powerful offshore turbines is being tested in the water for the first time anywhere in the world.

At the end of March, the 75th and final turbine was installed at Lincolnshire's windfarm off the coast of Skegness, which has the capacity to power more than 200,000 homes.

Speaking at the opening, RenewableUK’s Chief Executive, Maria McCaffery, said: “The Prime Minister’s ringing endorsement of Britain’s offshore wind industry is a real boost for the entire renewable energy sector, which is a key growth area for the British economy.

“We’re about to witness a massive expansion in the number of people we employ in the wind industry onshore and offshore, from about 12,000 now to 76,000 by the dawn of the next decade, as long as Government remains supportive – today Mr Cameron has assured us that it will”.

The UK is expecting that offshore wind farms will help it reach its legally-binding targets to cut carbon emissions, with an aim of developing 18 gigawatts by 2020.

Pension funds - and Lego owners - go safely offshore – into wind farms

Carsten Krogsgaard Thomsen, Acting CEO of DONG Energy

Pension companies and industrial investors are increasingly finding that investment in renewable energy, particularly wind power, is providing a better rate of return, one guaranteed over a longer period, than elsewhere.

DONG Energy, which is a co-builder of several offshore UK wind farms including the London Array, has secured investment from Danish pension providers PensionDanmark and PKA, Dutch pension group PGGM, the owners of Lego, and Japanese trading house Marubeni, amongst others.

Leaving aside the intriguing idea of Lego building wind farms, Torben Möger Pedersen, managing director of PensionDanmark, which has £13.4 billion in assets, said "I think this will...develop into a standard investment case for many pension funds because the alternative of investing in government bonds provides such bad returns that you are obliged to identify alternative investments".

The company's total investment in DONG's wind projects is £475 million, and Pedersen plans to invest more in the future, as PensionDanmark increases the proportion of its portfolio allocated to energy and infrastructure from 6% to 10%.

"In five years we will have £19 billion under management. So our total budget for these kind of investments will be £1-1.5 billion over the next 10 years," he said.

Yesterday, DONG announced that it is using some of this finance to acquire 100% ownership of three offshore wind development projects in Germany in the North Sea.

These are Gode Wind 1, 2, and 3, previously owned by PNE Wind AG, with a total capacity of up to 900 MW. The first two projects already have permission to construct and operate while the third is still in the application stage, although this is expected to be granted in 2013.

Carsten Krogsgaard Thomsen, Acting CEO of DONG Energy, which is owned by the Danish state, said: “The Gode Wind projects in Germany are very interesting for us. If a positive investment decision is taken, we expect that construction of parts of the projects could begin by 2015, subject to the available grid connection confirmations."

Denmark is a pioneer in wind energy, and is now reaping the dividend of its experience. 25% of Danish electricity comes from wind power, contradicting claims by sceptics in the UK that a national grid cannot handle that proportion of wind power.

Some investors see wind power as an uncertain bet because they are expensive to build and maintain, regulation is uncertain, and the plants can face logistical and technological problems. However, other pension funds and investors clearly think differently; taking a longer view, they realise that such investments will provide a steady cash flow over 20 to 30 years, once the projects are up and running.

Last year, the OECD encouraged institutional investors such as pension funds to take more interest in financing the low carbon revolution. There are plenty of benefits, which offset the risks. Compared to unstable financial markets, the OECD points out that there is a clear advantage for those who team up with reliable partners like DONG.

Amongst the early movers in this field, with over £1 billion of investment in renewable energy, predominantly new wind farms in Germany and France, is Allianz of Germany. David Jones, CEO of Allianz Specialized Investment, observes that returns on wind and solar projects are now around 7%.

“This is much higher than many other asset classes,” he says. Moreover, the returns are "totally decoupled from the ups and downs of the financial markets", and far better than government bonds. 10 year UK government bonds are currently yielding a mere 1.5%, almost half the rate of inflation.

Pedersen says that PensionDanmark expects "a return with a spread of between 300 and 500 basis points above a government bond," that is “very much less risky than listed equities".

Walney wind farm in the Irish Sea near Cumbria, is co-funded with direct investment by Dutch pension group PGGM, which has allocated 15-20% of its infrastructure portfolio to renewable energy. Henk Huizing, its head of infrastructure investment, agreed with the OECD assessment: "If you have a good partner, then the risk for joining in the development phase can be acceptable, and you get a premium for going in earlier".

"I hope this will be a model that catches on," says Morten Buchgreitz, DONG Energy's acting deputy CEO for wind power, "because, just looking at the northern European offshore market, we expect that the capacity will have to go from 4 gigawatts now to 37 by 2020".

That is a factor of 10 increase, which will require about £80 billion. Although this sounds a lot, it is less than 1000th (0.08%) of the £18 trillion assets held by pension funds worldwide.

Some of the funding may come from the consortium of 80 of the world’s largest pension funds, that has signalled its readiness to provide funding for infrastructure projects under the Government’s £40 billion infrastructure guarantee initiative. More will come from the Green Investment Bank, when it is finally allowed to borrow.