Advancing in Reverse

Russian pipeline gas is out; so is coal. Yet Europe is still managing to win the energy war and keep warm. As the saying goes: “We’re not retreating, we’re advancing in reverse.”

The transition to renewables has been on the E.U. agenda for decades, but its progress has been slow and unsteady. A mixture of short-term solutions and long-term idealism are currently mingling together like brackish water in the turbulent estuary that is E.U. energy policy.

And the Russian bear hunting for salmon in that estuary is making things complicated.

FSRUs

Thanks to a warm winter, filled-to-the-brim gas bunkers and convoys of liquefied natural gas (LNG) tankers – as per CNBC, 10 percent of the global fleet is anchored in Europe waiting to unload – it looks as though Vladimir Putin’s faith in General January and General February was ill-advised.

Squadrons of floating “terminals” (really, modified tankers) are waiting at strategic harbors to feed Qatari and American LNG into pipeline networks formerly supplied by Russia. They’re called Floating Storage & Regasification Units (FSRUs), and to charter one can cost more than €200,000 per day.

Seven new FSRUs are presently deployed all the way from France to Finland. Three are in Germany, and two more are scheduled to arrive shortly. These ships can be moved around as needed or they can be left in situ as offshore installations. In the latter arrangement, they take on LNG into their tanks, then heat the LNG with seawater to re-gasify it and finally deliver it to shore through unloading arms or hoses.

Including FSRUs, Europe’s capacity to import LNG is projected by the U.S. Energy Information Administration to grow by 34 percent by the end of 2024, enough to handle 54.75 billion cubic meters (bcm) per year. By comparison, total European pipeline gas imports from Russia amounted to 143 bcm in 2021. The difference between those numbers is the chief problem that needs to be overcome.

Europe’s gas bunkers were 82 percent full in January 2023, according to the E.U. Council, and so a shortfall can be covered for some time. But nobody wants to fill up a big tank using a narrow funnel.

On December 17, 2022, German Chancellor Olaf Scholz complimented himself for “building” what he described as Germany’s “first LNG terminal” in Wilhelmshaven. By “first LNG terminal,” he was referring to a floating FSRU unit, the Hoegh Esperanza, which is a purpose-built tanker; and by “building” he meant renting, since the Hoegh Esperanza will leave town after 10 years unless its charterparty is renewed. Even with what Scholz called the new “Germany Speed,” it would never have been possible to engineer, permit, build and operate a traditional LNG terminal so swiftly.

For example, the on-land, not-built-in-a-shipyard ?winouj?cie LNG terminal in Poland cost €950 million and took five years of hard work from groundbreaking to its operational start. It can handle the same amount of LNG as Hoegh Esperanza: five bcm per annum. And unlike the Hoegh Esperanza, the ?winouj?cie LNG terminal doesn’t cost €73 million per year just to rent.

Pie-in-the-Sky Investments

But FSRUs are essential, at least right now, because offshore wind power – and renewable energy in general – is an idea whose time has still not yet come, at least not like Germany’s Green Party Vice Chancellor Robert Habeck imagined. Europeans need energy now, not in 10 or 20 years.

Renewables should have been ready to go by 2023. They’ve had decades of runway and vast public subsidies, but in Europe’s moment of need they still weren’t far enough along.

The renewables industry is littered with pie-in-the-sky investments that went bankrupt: Powerwind (2011), BARD (2013), Prokon (2014) – known for its direct mailer advertisements to German households hawking “guaranteed” returns on its corporate debentures, of which the author was personally a frequent recipient – Ambau (2019) and Senvion (2021).

Those defunct companies have had their assets and knowhow scooped up by new companies, only for those companies to also go bankrupt. This played out for BARD, whose facilities were taken over by Cuxhaven Steel Construction GmbH (2016), which were in turn acquired by Ambau. Following Ambau’s bankruptcy, the same facility was bought by Titan Wind Energy, a Chinese limited company listed on the Shenzhen Stock Exchange.

The arc of European offshore wind power is one of startups subsidized by government money that end up in a politically driven boom-and-bust cycle. As buildout goals change and the taxpayer-funded payment framework shifts like quicksand, companies burst onto the scene – and then sink.

Such chaos would have been acceptable if, like the government-run railroads and telegraph companies of yore, money was of no concern so long as the goal was achieved – namely, that renewables would be the way Europeans get the bulk of their electrical power. For a government-owned endeavor, stability and reliability matter, not customer service or profit.

When government held up the industry, structural inefficiencies could be papered over. Taxpayers and ratepayers paid the bill. Revenue per kilowatt hour was guaranteed. Electrical grid operators were legally required to purchase said kilowatts; utility companies bid on stretches of ocean designated for offshore wind parks where they knew how much money they would be earning.

Eventually, to stave off a revolt by ratepayers, e.g., against the infamous, ever-increasing German renewable energy transfer tax, politicians played a game of musical chairs with funding mechanisms while making a mess of fixed feed-in payments, buildout quotas and subsidies. These have now been scrapped in favor of competitive bidding.

Easy Pickings

With the buffet ending, market forces taking charge and the highest interest rates in a long time, European investors are shy about throwing the dice again. Asset prices are down. That’s drawn in Chinese investors, who want a piece of Europe’s market at a nice discount.

Pour one out for the companies that researched the technologies, devised the engineering and made the mistakes that have made life so much easier and more profitable for their latter-day Chinese successors. China Three Gorges and Goldwind recently announced a 16-megawatt offshore wind turbine unit. China State Shipbuilding Corporation (CSSC) Haizhuang recently revealed its 18-megawatt turbine.

These are the industrial fruit of decades of costly trial and error – mistakes paid for, largely, by Europeans. Siemens Gamesa’s plant in Taichung, Taiwan, by contrast, will be able to produce a 15-megawatt unit by sometime around mid-2024.

Not only are Chinese offshore turbines as big as or bigger than their European competitors, but they’re also cheaper on a per-megawatt basis. The difference is stark – and impossible for European manufacturers to beat, given their high costs of labor, materials and regulatory compliance.

For big turbines, Vestas and Siemens Gamesa have ex works costs (where the buyer picks up the item at seller’s factory and commonly pays for pickup, loading, clearing and delivery, plus taxes) between $850,000-$1,350,000 per megawatt vs. $556,000 per megawatt for Chinese manufacturers.

"China has the most efficient, concentrated, and low-cost supply chain for turbine [manufacturers] in the world,” says Norman Waite of the Institute for Energy Economics and Financial Analysis.

On the other hand, Indra Mukherjee of S&P Global Commodity Insights suggests that "well-established local players and local manufacturing" act as a moat for Western incumbents, protecting their established customer base. But wind energy would hardly be the first legacy industry with an “Old Boys” network to have its pipes cleaned by a low-cost, foreign disruptor.

If Not Now, When?

For now, Europe can rely on sea power for energy – a combination of wind power and LNG imported on ships. Eventually, though, the Hoegh Esperanza and the other FSRUs will leave. Will the vast parks of offshore wind turbines be ready to go by then?

Europe’s homes and industry need hundreds of gigawatts, and the new way of doing business means “cost-plus” bids for offshore wind park development rights. Speed matters. Price matters more than ever. So who will be the first to win such a bid by using Chinese turbines?

And what will that mean for Europe’s big domestic renewables players like Siemens Gamesa? Right now, its plant in Cuxhaven can build 360 wind turbines annually rated at 11 megawatts. It’s the centerpiece of the German Offshore Industry Center, which is anticipating €100 million of fresh government funds that will soon sluice through for new installation ship and warehouse piers.

In words that might have been spoken ten years ago, Olaf Lies, Minister for Environment, Energy, Building and Climate Protection of Germany’s Lower Saxony region, argues that the “piers will provide the companies situated there with reliability in their planning for future project development. Likewise, this signal will also be a magnet for further corporations to establish themselves.” Another €200 million in government and private funding would follow, asserted Cuxhaven’s mayor Uwe Santjer. Another speculative free-for-all surely awaits.

But will the vision of a decarbonized, renewable future for Europe finally be achieved? Will this investment be vaporized by bigger, cheaper Chinese wind turbines delivered from Asia by purpose-built heavy-lift vessels? Will politicians change course again at the halfway point?

There’s only one sure thing: None of this spending will replace the Hoegh Esperanza today.

And coal will, of course, also be overstaying its welcome. The phaseout happening in multiple European countries, like France, Austria, Germany and Belgium, is off the table for now. “Given the current state of the electrical network, I nonetheless fear greatly that this production tool is necessary,” said Thomas About, shift supervisor at the Emilie-Huchet Coal Power Plant in Saint-Avold, France, which was refired by French government decree in September 2022.

Nightfall

Europe’s energy assumptions have been crushed. “So the universe is not quite as you thought it was,” wrote Isaac Asimov in Nightfall, a classic about a planet’s first experience with darkness. “You’d better rearrange your beliefs, then. Because you certainly can’t rearrange the universe.” – MarEx