US Offshore Wind - Developers Challenge: Managing Risks & Uncertainties in Front-End
Updated: Mar 9, 2021
Offshore wind (OSW) projects, like their cousin’s oil & gas projects are capital intensive and carry significant uncertainty and risk upfront (front-end) due to lack of data in the early phase of the project, especially in the emerging markets where industry is immature. US The success of such projects is measured by the value delivered during its operation life-cycle in comparison to value that was promised at front-end space prior to the final investment decision (FID). This brings front-end to the center of focus rather than construction and implementation phase.
Insights from Offshore Capital Projects
One of my key learning from twenty years working in offshore oil & gas capital project is that some projects fail to deliver the expected value not because of their poor execution, but through poor decisions and failure to act in the front-end space (before construction). In the OSW industry, the investors are very wary of unpredictability of revenues, levels of returns and value erosion. This requires front-end developers to have rigorous process for making high quality decisions.
So how do complex capital projects like OSW and O&G make high quality decisions? The best way is to understand that the capital projects are exercise in decisions making under uncertainty. The best way to manage uncertainties and risks in these projects is to use a decision-driven, stage gated process (slide is my adaption of front-end process for OSW from O&G). Risk management is central to the value creation and preservation. The risks can be internal and external and must be managed through entire spectrum; technical, economic, commercial, organizational and political.
What Are the Uncertainties & Risks in OSW?
The US OSW projects, unlike their European counterparts, are especially prone to more severe meteorological conditions (ex: hurricanes). Given the emerging nature of industry, the uncertainties and risk concerns investors, developers and operators alike. Some of them are
Technical risks (lack of data, wind speed, cost, schedule, technology, others)
Predictability and levels of return
Stability/predictability of regulatory environment and government support
Limited market experience and capabilities
Shifting political priorities
How To Managing Uncertainties & Risks?: Practices Worth Replicating
The earlier phases of the project are marked by large uncertainty due lack of data. Therefore, in the feasibility/assessment stage, a range of scenarios (project design envelope or PDE) are developed; based on for example, various site conditions (wind speed, wave height etc.) against various development options (foundation type, wind turbine size etc.). As more data is collected through survey, design and deployment (SDM) strategy; uncertainty and risks are reduced in subsequent phases, giving a tighter estimate of cost, schedule, value and execution strategy to be adopted later in construction phase.
Dialogue Driven Decision Process Improves Integration
Stage gated, capital value process facilitates, a dialogue driven process, between decision makers and development team. Resources needed in any given phase are decisions driven rather than activity driven. An earlier project framing, allows for the integration and managing of interfaces, which are many in capital projects. It provides clarity on; objectives, value drivers, critical success factors, risk management, stakeholder management, road-map and deliver robust decisions.
Value Is Identified & Created in Front-End; Realized in Execution & Operation
The front-end developers/managers identify and create/maximize value in the project that project execution managers preserve and realize in the execution phase. The benchmarking insights for example from offshore capital projects in oil & gas industry, clearly establishes that higher the front-end loading (i.e. acquisition of data in early phase to manage uncertainty/risk), the better will be the concurrence between front-end estimates and actual value of revenue stream, cost, schedule and hence realized value of the project in the operation phase.
Bottom line; Robust Decision Making Process
The OSW industry in US is an emerging industry. It is on a learning curve, collaborating rightly with experienced international OSW developers. However, there is a need for the US developers to develop their own robust decision making process in front-end space, suited to their needs, to manage a pipeline of +30 projects currently in planning.