Getting offshore wind off the ground – procurement risk for jack-up vessels

Demand for installation vessels set to outpace supply 12 min read

It's been a busy six months for offshore wind, with proponents now entering the application period for Australia's second declared offshore wind area, the Hunter offshore wind zone, with applications for the Gippsland area having only closed in April.

While Australian offshore wind projects remain in early feasibility and environmental and planning phases — and construction and procurement considerations are still far off — project proponents will be considering the availability and reservation of critical long-lead time equipment and materials so as not to be left adrift once it is time to commence construction. Chief among such items are the specialised turbine installation vessels (jack-up vessels and heavy lift vessels) that are both essential to offshore wind turbine installation and in short supply in global markets.

This Insight explains some of the challenges and contracting considerations that proponents will need to consider when putting together their procurement strategy.

Key takeaways

• Global and regional demands for wind turbine installation vessels are expected to outpace supply by as early as 2024, by some estimates. Various supply chain pressures (including limited shipyard capacity, long manufacturing lead times and the rapid technological obsolescence of older vessels in the face of larger turbine specifications) exacerbate this supply-demand imbalance.
• Australia's geography, environment and weather conditions present both a challenge and an opportunity for vessel procurement. While Australian projects could make use of summer installation windows during the Northern Hemisphere's winter, long distance voyages and smaller market sizes may deter operators from making the journey to Australian waters.
• Australian offshore wind projects that intend to utilise fixed-bottom turbines should begin to plan their procurement of installation vessels now, including how to manage the interface issues that may arise between related construction packages, and the degree of flexibility that will be required to manage various installation windows.

Installing fixed-bottom offshore wind turbines 

For fixed-bottom offshore wind projects, a typical turbine installation will comprise the turbine itself and an undersea foundation and/or jacket structure suited to the seabed, water depth and metocean conditions of the turbine's site. As might be expected, a key logistical challenge for any offshore wind project is the coordinated installation of these components, typically achieved by using specialised heavy lift vessels and jack-up vessels (referred to collectively in this Insight as installation vessels).¹ Early offshore wind projects made use of vessels adapted from the offshore oil and gas sector; however, newer projects have made use of vessels specifically designed to install the new generations of larger 8MW+ turbines. Depending on the relative sizes of a project's components, multiple vessels may be mobilised in parallel to install the foundations, jackets and turbines. While some vessels are capable of installing all components, different classes of vessel will typically be used to install different components, based on their relative capacities.

Global demand for installation vessels

Given the ever-increasing pipeline of announced offshore wind projects and targets, it is expected that demand for installation vessels will outpace supply at a global level in coming years. Some predict this may occur as early as 2024, while other analyses suggest that the bottlenecks will arise in the latter half of the decade^{2 3}– in either case, given the long development periods for the delivery of new projects, securing vessels will be a key issue for proponents to consider. Reports indicate that some newly manufactured vessels, and other vessels that are still under construction, have already been reserved for several years post launch.⁴

As at October 2022, a report by the Global Wind Energy Council indicated that there were 107 jack-up vessels with offshore wind turbine installation experience operating worldwide, working alongside 76 other heavy lift vessels used for the installation and transportation of other components.⁵ Of those vessels, the majority were located in Europe or China, with the remainder split between the rest of Asia and the US.

Geographic Distribution of jack-up vessels (2022)

 

Geographic Distribution of Heavy-Lift Vessels (2022)

 

A further 47 new offshore wind installation vessels, predominantly jack-up vessels, were reportedly under construction for delivery over the next two to three years.⁶ These raw numbers are relatively low given the number of offshore wind projects in development worldwide and while the global market for oil and gas sector offshore heavy lift vessels is larger than this, they reflect vessels suited to the requirements of offshore wind projects.

Several features of the installation vessel supply chain contribute to the potential for global – or, at least, regional – supply shortages:

• Long lead times in manufacturing: the lead time for manufacturing new vessels or refitting existing vessels makes it difficult for operators to quickly increase supply in response to changes in demand. Current lead times are typically between two and four years after an order is placed – eg:
  • Jan De Nul Group ordered two jack-up vessels from China during 2019 and both were delivered in early 2022;
  • Van Oord ordered a new jack-up vessel in October 2021, which is expected to enter the market in 2024;
  • Maersk Supply Service ordered a new-generation wind turbine installation vessel in March 2022 that is expected to be delivered by 2025; and
  • Cadeler started refitting a foundation installation vessel into a wind turbine installation vessel in May 2022, with expected delivery by late 2025. 
• Manufacturing capacity is limited: there are relatively few countries with installation vessel manufacturing experience. China is a leading manufacturer, and is currently building more than 10 next-generation vessels for European operators,⁷ alongside shipyards in Japan, Singapore and South Korea, with some manufacturing in the US, in part motivated by Jones Act restrictions.
• Technological obsolescence: the average size of installed turbines is expected to increase from 8MW in 2022 to 18MW by 2030, driven largely by the efficiencies of larger turbine blades and the demands of competitive tender processes.⁸ These taller and heavier designs require purpose-built installation vessels with larger capacity cranes, reducing the usefulness of smaller early generation vessels, and vessels converted from the larger oil and gas sector fleet. With the rapid rate of technological development in this space, manufacturers also face the risk of their vessels becoming obsolete before reaching profitability, depending on their approach to pricing for vessels over the coming years.
• New vessels are often committed to projects years in advance: in 2021 the average utilisation rate for installation vessels was between 85% and 90%.⁹ As demand for installation vessels increases, new vessels are often committed before launch. For example, Cadeler's new F-Class jack-up vessel, which was announced for construction in May 2022, with expected delivery in late 2025, has already secured two contracts that will see the vessel fully booked until 2030.¹⁰
• China's supply is reserved for local projects: China's fleet of installation vessels represents almost half of the installation vessels worldwide; however, those vessels are primarily used for local projects and are not generally available to alleviate global demand.¹¹ This may change as the installation rush in China stabilises following the cut-off of the offshore wind feed-in tariff in China. Still, China's fleet is equally at risk of technological obsolescence (discussed above), due to the MW installation capabilities of the vessels.

Procurement in the Australian environment 

While installation vessel procurement is a significant risk for all offshore wind projects globally, Australia's geography presents added complexity for projects looking to install fixed-bottom turbines.

With no existing offshore wind farms, projects will need to attract operators to Australia. Installation vessels would need to be in transit (rather than being operational) for greater periods of time to reach Australia's project sites, increasing relative vessel costs. A consistent offshore wind pipeline of sufficient scale may encourage operators to base vessels in Australia for longer periods, rather than in Europe or North America; however, volume effects may be precluded by projects being installed in parallel during the same period, or by a diversity of turbine designs that require different or refitted vessels. As the floating wind turbines slated for use in the deeper waters off the Hunter region will use different installation methods, their construction is unlikely to assist in building such a pipeline.

Specific weather conditions are required to operate installation vessels: namely, lower wind speeds and smaller wave heights that are more prevalent in the summer months, and that proponents will be keen to monitor throughout the term of their feasibility licences. There may be an opportunity for Australian offshore wind projects to install turbines during the Northern Hemisphere winter downtime, when vessels could sail from Asia to Australia to continue year-round operations. Project developers and vessel operators would need to be confident of installation vessels arriving on time for each project's installation window, and collaboration between projects may assist with coordinating the scale and sequencing of vessel bookings.

It is worth noting that Australia's current maritime regulations may require amendments to facilitate the use of internationally flagged vessels. There is an existing carve-out for offshore oil and gas projects that may provide a basis for accommodating offshore wind projects, but we expect that the Federal Government will need to clarify its application in the context of offshore wind. Given that offshore wind turbine installations are a long way off and the Australian offshore wind regulatory regime is developing at pace, we also expect such changes will be made at an appropriate time – however, this is something that project proponents should continue to monitor.

Implications for Australian projects

• Align installation windows and programming early: as installation vessels are typically committed years in advance of installations occurring, developers will need to balance the need to secure installation vessels early with the requirements that unanticipated metocean and seabed conditions, and later design and programming decisions, may have on the capabilities of such vessels. Developers will need to consider preferred installation windows and key programming constraints as early as possible, especially for the early round projects that look to be completed in the early 2030s.
• Consider interface risk between works packages: internationally, offshore wind projects have typically been delivered through the use of multiple critical works packages, rather than single fully-wrapped contract packages. A function of the capital intensity of these projects and the need for diverse technical capabilities, typical major contract packages include:
  • turbine supply and installation;
  • supply and installation of foundations and jackets;
  • supply and installation of offshore substations; and
  • supply and installation of inter-array and transmission cabling,

  with each further disaggregated into design, manufacturing, vessel and installation packages as required. In an unwrapped delivery model, the principal will typically bear most interface risks. As the constrained availability of selected installation vessels is likely to have a direct impact on the project's critical path and other works packages, it will be important to start considering early these interfaces, and the extent to which vessel procurement can be wrapped with other manufacturing, transport and installation packages.

• Have conversations about bankability and vessel risk: given that vessel procurement is an interfacing risk for offshore wind projects, and based on recent experience in other markets, we expect that vessel availability and reservation terms will be a particular focus for lenders when assessing the bankability of a project. Lenders may require detailed and robust cooperation and coordination frameworks, to ensure interface risk is adequately managed. For more on financing offshore wind projects, see our earlier Insight, Financing the Australian offshore wind industry.
• Start procuring vessel contracts: The limited availability of installation vessels means it is important to start the procurement process early, so as to have the best opportunity to secure favourable contract terms. Vessels can be procured from WTIV (wind turbine installation vessel) operators, such as Cadeler, Jan De Nul Group and Seajacks, or through wrapped supply and installation contracts with turbine suppliers. In some instances, vessel operators have been included in developer consortiums, in order to better ensure vessel availability, as is the case with the inclusion of Boskalis, an offshore vessel operator with a fleet of 650 specialised vessels including installation vessels, in the consortium to develop the Elanora Offshore wind project in Gippsland.

  If contracting directly with operators, project developers will typically enter into confidential preferred supplier or reservation agreements with WTIV operators that are later converted into firm contracts or conditional order agreements. Contracts typically include a specific installation window, the length of which can vary, depending on the size of the project and applicable weather windows. Reservation terms should provide:

  • certainty as to the availability and specifications of booked vessels, so that a lesser vessel cannot be substituted in its place;
  • clear triggers for converting preferred supplier agreements into firmer charterparty or installation contracts;
  • sufficient vessel availability periods;
  • flexibility to shift or extend vessel availability periods as may be required, possibly through priced extension options;
  • a detailed force majeure regime (particularly for atypical or out-of-range weather conditions that impact the installation window and unknown geotechnical risks);
  • a liquidated delay and termination damages regime, to protect the developer if a vessel is not made available at the required time or if the contract is terminated; and
  • a clear allocation of transit risk while the vessel is travelling to and from the offshore wind installation area.

Next steps for developers

Developers that are planning fixed bottom turbine offshore wind projects in Australia should ensure their risk assessments and feasibility studies recognise and account for installation vessel risk. Vessel procurement strategies should be considered as early as possible and executed before, or alongside, entering into construction contracts to ensure interfacing risk has been appropriately mitigated and to provide the best chance of delivering projects on time and on budget.