Moving offshore

Being ahead of the renewables game is a risky business. E.ON’s Michael Lewis, MD of Europe for Climate and Renewables, tells Natalie Brandweiner of the logistical challenges of offshore projects, the effects of the financial crisis and the problems of transmitting in an age-old infrastructure.

“There is a complex interaction between policy, behaviours and technology, and we have to win the technological battle”
-Michael Lewis

E.ON's overall strategy to move towards a lower carbon generation portfolio is a relatively recent phenomenon. Pulling together different elements, one of them being the already existing renewables business within the E.ON Group, the company is moving toward more environmentally conscious policies. New to the position of MD of Europe for Climate and Renewables, Michael Lewis explains how continuing to manage the growth that was already in the portfolio, as well as managing external growths through acquisitions, was vital fir the change in company strategy. "It was a major challenge of integration, making sure that our own people who were in the E.ON Group were now moving into a new division, E.ON Climate and Renewables, and we had to make sure that all functioned properly," he explains.

"This meant integrating the new people we brought into the group from North America in the case of Airtricity, Spain, E2i and in Italy, all with different histories, different cultures and nationalities - all of that had to be integrated. Then we had to create an integrated strategy for the new division and that was based on creating the right strategic focus for both different technologies and geographies.

"We focused on markets where firstly there was sufficient growth where we could invest our money and secondly, they were attractive markets where we could get a decent return on our investment. The two major challenges were integration of people and businesses and focusing strategically on the right technologies, and both of those were huge exercises in our first six months. The final big challenge we had was bringing new centralized functions into the organization."

Centralization

He notes that previously E.ON held renewables businesses in the UK, Nordic and Germany, all of which worked independently and were procured separately. Since the inception of the Procurement department, located in Düsseldorf, all such operations are done in one location and distributed to the whole of the E.ON Group, allowing for bigger orders, providing stronger market power and better efficiency with the company's big suppliers to the company, such as Siemens and Vestas.

Offshore construction also became centralized. Being a major part of the company's growth structure, there had previously been offshore projects in three different countries, each managing independently of each other. Again, Lewis notes how each project separately dealt with the same suppliers, vessels and skilled people, and so another new department was created in Düsseldorf to manage the company's entire offshore portfolio. The final department, Asset Strategy and Technical Excellence, was created in order to centralize information, as well as operations such as the SCADA system to create a much more efficient way of ordering the company's various datas and manage their assets appropriately.

Financial crisis

Fortunately the initial implementation of these activities began in the summer of 2007, so avoiding the challenges of the financial crisis until later. "We had a run-in of around six months up until Christmas of 2007 where most of the integration work and the new creation of the new departments took place, so we didn't really start to feel the impact of the financial crisis until the following summer and in particular, autumn of last year when Lehman Brothers collapsed," he explains. "It probably hasn't had a major effect on E.ON Climate and Renewables in the sense that we are a business which relies on our financing from our parent company and from the balance sheet of the E.ON Group.

"That means we've been able to maintain our investment at very high levels, so for example, up until now we've invested €4 billion in the renewables business since 2007. We will continue to invest another €4 billion up until 2012. Those levels of investment are historically unprecedented in the E.ON Group for renewables, and in fact, looking forward over the next three years, a total of one quarter of E.ON's investment in power generation will be portioned to renewables. To put that into context, if you go back to the summer of 2007, we had 450 megawatts of non-hydro renewables. Today, we have 2200 megawatts.

"By the end of 2010, we'll have 4000 megawatts, so a tenfold increase on 2007, and by 2015, we intend to have 10,000 megawatts; our investment is going ahead in spite of the financial crisis. The financial crisis has certainly impacted the timing of some investments, so the relative attractiveness of markets has changed. From our perspective, the key issue is not has it affected our ability to finance, the key issue is what impact has it had on the economics of the project. So if you get falling demand for gas, falling oil price, falling power price, that impacts the attractiveness of the project. We've looked at the different markets and reappraised where we invest, but in terms of the volume of investment, that hasn't really changed and won't change going forward. We're still committed to over a billion a year of investment in renewables."

Lewis states that the economic crisis has not necessarily encouraged the company to be sharper in their decision-making, for as he explains, "We're always absolutely ruthless in deciding whether a project makes a return or not and whether we do it." He notes that during the company's initial major move into renewables an external view became dominant that an emphasis on green energy was nothing more than a cunning marketing strategy, and E.ON themselves lacked any true belief in renewable energy. "That was never the case," he asserts. "We were committed to it from the beginning and that's been reflected in the amount of money we've invested.

"It isn't a marketing ploy and that's reflected in the fact that we only invest in projects where we can meet a commercial hurdle, which has always been the case. That hasn't changed because there's a financial crisis. We always look at what return can we get on a project: does it meet our hurdle rate? Are there better alternatives where we can invest the money?"

Regardless of the rest of the industry's activities, E.ON is committed to its work in renewables: so far it has invested €4 billion and at least €6 billion in 2010 in renewable generation plant protection projects. The company recently approved the London Array project and signed an agreement with Siemens to build a major Danish offshore wind farm for the Rødsand II wind project. E.ON regards offshore as a very important area for the future of the European Union renewables targets.

Offshore projects

"If you look at all the work that has been done to obtain 20 percent of primary energy from renewables by 2020 or beyond, it requires a large investment in offshore technology. If you look at where we are today, we've installed around 1.5 to 2 gigawatts of total offshore capacity. If we're going to meet the target, we need to get to something like 40 to 50 gigawatts, so that's a huge increase within a period of between 10 to 15 years. That means we've got to prove the technology capable of operating in the harsh marine environment and get the supply chain focused on delivering solutions so we can install them quickly and efficiently.

"So we've built the renewables offshore strategy, which tries to take the easier locations first. It's a question of the physical nature of the projects because there are varying degrees of offshore. For example, the first project we did, Scroby Sands in the UK, is a very near shore project - three kilometers from the coast, relatively shallow water and only five meters deep. That is comparatively easy both to install and to operate because of the proximity to the shore, and also to put the foundations in place because of the relatively shallow water.

"We're now moving into larger projects like Rødsand, a much bigger project than Scroby Sands, is generating 207 megawatts as compared to 60 megawatts at Scroby Sands. Still in relatively shallow water near Denmark, about five kilometers from the shore and in ten-meter deep water, we can use the skills we learned at Scroby to build a bigger wind farm with larger turbines and a bigger capacity. We want to bring the skills we learned at Scroby in the easier offshore environment to the slightly more difficult and challenging environment at Rødsand and build a much bigger project with a larger number of foundations and different turbine types.

"We want to prove that we can do this on a large scale and not only Rødsand in Denmark. We also have another project, 180 megawatts in the UK at Robin Rigg in the Solway Firth, again proving that we can install at a large scale but still in the relatively near shore, shallow water environment. When we've mastered those projects and we've proved that we can install efficiently, that we can get the right vessels to the sites so that we can have a reduced cycle time and reduce the capital costs, and when we're happy that the turbines can operate well in that environment, we then intend to move into the larger far shore, deep water projects, so these are projects outside of the 20 meter depth and 20 kilometers from shore and below.

"Those projects will be a bigger challenge both in the installation and in the operational phase, so we want to learn our trade in the so-called offshore, light projects before we move to the difficult ones, and London Array, which we recently approved, that will be the largest offshore project in the world when it's constructed. That's 1,000 megawatts, and again, just to put that into context, Scroby Sands is 60 megawatts, a much bigger proposition. It's about learning the trade, learning how to build a project of that size and making sure we can operate it efficiently, and get the high levels of availability that we need to make it a viable economic proposition. All of our projects so far, not only are they there to create value in themselves, they're also part of a learning curve to enable us to get to the larger offshore projects. Before we build those big potential projects, we want to make sure we can cope with the easier projects. That's our offshore strategy; there are still massive challenges there, but it's absolutely critical we deliver if we're to meet the EU targets," says Lewis.

In order to ensure that E.ON remains a learning organization, continuous audits throughout the projects' timeline are being conducting: learning to understand the problems and areas for improvement. A sophisticated method of tracking has been created to improve processes and combat the challenges of health and safety incidents. Cycle time is also assessed using various metrics to compare performance both in the construction and operational phases.

E.ON's centralized offshore construction also allows them to prevent staff attrition whilst simultaneously ensuring new staff are trained. As Lewis explains, "People are critical to this, and not just our own people who manage the projects, but the crews who work for the contractors and the vessels." Continuously motivating highly skilled workers is a challenge for almost every employer in every industry. In order to keep its employers happy, E.ON provides visibility within its project pipeline, having a number of projects in development as well as a number in construction, so employers can see the structure and be moved accordingly. "Younger people can learn their trade on projects with more experienced project managers, before they can in turn move onto another project in a structured way, so it's all about continuity."

Transmission

Innovation is regarded as bringing endless benefits, in any industry, but is being ahead of the time a viable option given Europe's transmission distribution network? Will it be able to cope with the move towards renewables? Lewis regards the transmission debate as having two aspects, the first being how to connect these multiple projects and the second being how to transmit the energy produced. "We'll have to create new transmission systems to link up the sources of demand. The major challenge is offshore - we've got to create a completely new infrastructure network where it's never existed before," explains Lewis.

"The transmission network is not yet in a position where it can cope, but the good news is we have a number of years to get there, and that means we have to take a strategic approach to building a transmission network. We know where the wind resources are, we know where the offshore wind locations are. These are all set out in government policy by the crown estates, so for example, for round three where the bulk of the new capacity will be built, we know exactly where they are. If we start thinking about where the grid needs to be now, we can start thinking about where the grid needs to be strengthened in the future, and we can do that on a proactive basis to anticipate capacity coming on rather than waiting for it.

"Wind farms are much more expensive to build than the transmission network that takes the power away to customers. That means if there is going to be a slight mismatch, such as if one is built slightly before the other, it's better to have the transmission network in place before the wind farms come along than vice versa because the one costs a lot more than the other. With sound policy and the right strategic approach we can get there. The second issue is integrating wind into the transmission network, and this is all about intermittency.

"The good news is you don't normally get a position where all of the wind is not blowing at the same time. You get geographical differences whereby one part of the country might be windy or one part of Europe might be windy and another part might have zero wind, but in fact, although wind farms have a load factor of 25 to 30 percent that doesn't mean the wind is only blowing 25 to 35 percent all of the time. That's an annualized number. They are actually operating for a very large proportion of the time, but just not at full output, so you need to ensure that when the wind does drop and there are sudden changes in output, you have enough of what we call spinning reserve.

"We also need replacement of existing fossil capacity, which we'll gradually fade out over the next few years as various pieces of environmental legislation come into play. So the corollary is that we need existing coal-fired capacity and gas-fired capacity to be replaced because mostly wind does not provide a huge amount of capacity. It's a slightly technical issue: it provides the energy to displace coal and gas but it doesn't count very much for capacity because you can't guarantee it's going to be there when you might need it.

"That means you have to maintain that level of fossil capacity to provide the reserve and spinning reserve; I've often heard the argument made by anti-wind campaign. 'Wind's useless, it only displaces five to ten percent of coal.' It only displaces that much capacity, but it displaces a lot more energy, and that means it does significantly reduce CO2 emissions, which is an important distinction," he says.

Managing the transition period in between fossil fuel reduction and clean coal technology is a tricky business. E.ON's strategy is to increase gigawatt capacity to cope with increasing energy demand, moving to a lower carbon portfolio during the next 20 years and reducing its carbon emissions by 50 percent, making renewables a key feature of the company's growth. E.ON is also upgrading its old fossil-fired plants to become more efficient; most importantly it is embracing new technologies, such as the possibility of developing its nuclear business in the UK and developing its gas-fired technology to make it even more efficient.

"Clean coal, according to at least our view, is probably not going to be commercial until after 2020, but we're doing a lot in the meantime to help develop it. We're doing various pilot studies, we're building new highly efficient coal plants as a first step that are carbon capture ready. That means they have the right plant specification logistics whereby there's room to install a carbon capture facility when the technology becomes viable, so it is a tricky period, we do have a challenge, but there are clear pathways of how we can get there using existing technologies."

"There are other components," he adds. "The first one is policy. It's a huge challenge to coordinate how the globe responds. It's not enough for the UK or even Europe to win the battle, you need a global solution and that means a policy that can effectively limit carbon emissions across the world. Now, the means of achieving the carbon emissions will be technological but the policy has got to be in place first to make sure that those technologies can be applied.

"The other is a behavioral issue. We shouldn't underestimate the role that changing patterns of energy use and improved energy efficiency will play in solving this problem as well, so there may be solutions looking at demand side management, looking at significantly improving the efficiency of how we use energy, and those things again will partly be driven by technology, but also partly driven by people's behaviors as well, and what people accept as societal norms. There is a complex interaction between policy, behaviours and technology, and we have to win the technological battle. That's a necessary but not sufficient condition."

Lewis views the challenges threefold: economic, technological and policy. Renewables is still more expensive than convention generation, technology again raises the issue of cost, as well as the logistical challenges, and although Europe has what is the clearest policy framework of any region in the world regarding its target on CO2, it doesn't have a fully joined-up policy between its members.

"We need to tie together the infrastructure challenge both in terms of the grid, the port facilities we need to build offshore and the supporting technologies of coal and gas. We need to make sure the intermittent renewables can be efficiently integrated into the grid system, and E.ON is playing its role in all of those things through R&D, through to investing in major offshore projects, through to investing in the grid and indeed investing in conventional fossil fuel," concludes Lewis.