Supply Shortage, Seller’s Market
China is in the midst of an offshore wind installation dash where developers are rushing to install a large number of offshore wind turbines, as some 40GW projects are in desperate need to become grid-connected by 2020. Meanwhile, there are just over 4GW existing offshore turbines. [READ MORE to understand China’s Renewable and Energy Pricing Shift that lead to the installation dash.]
Between 4GW and 40GW, there is a massive demand gap. Shortages of supply capacity have already led to some 25% hike in tender prices this year.
But the supply shortage is actually in every corner of the value chain. Among all, a raising issue is the lack of offshore construction capacity–from construction companies, installation vessels, O&M vessels, marine engineering equipment to the expertise in conducting marine engineering works.
When there are shortages, there are opportunities. Many equipment suppliers in Europe are expecting to harvest from this 2-year installation dash.
Before mapping out these opportunities. Below are some of the key industry facts that you may want to know.
Emerging Players, Mixed Backgrounds
Prior to 2017, there were limited Chinese companies active in the offshore wind construction & installation. But newcomers have made an inroad to the field—at a startling pace, attracted by the blue-ocean market.
The backgrounds of the offshore wind installers are mixed: some are the results of shipbuilding, heavy machinery manufacturing companies seeking vertical integration; a few are the offshore construction moving to wind and energy; there are also power engineering companies moving to the sea by joint venture or acquisitions.
Two subsidiaries under China’s giant construction conglomerate China Communication Construction Corp (CCCC) used to be the leaders in the field. The duo is CCCC Third Harbor Engineering Co (中交三航局) and Jiangsu Longyuan Zhenhua Marine Engineering Co (龙源振华).
- CCCC Third Harbor: one of the 53 first-tier subsidies of CCCC, the installer in China’s first offshore wind farm Shanghai’s Donghai Bridge project. As the first the entered the water, CCCC Third Harbor has more experience especially in construction in the shallow shelf waters off Jiangsu
- Longyuan Zhenhua: a 50-50 joint venture between China Longyuan and Zhenhua Heavy Industries Corp (ZPMC)—the former is a wind development subsidy of China Guodian; the latter an established engineering manufacturer under CCCC. The marriage provides the JV a unique positioning. Longyuan Zhenhua is one of the very few installers in the market of capacity in shipbuilding, ship ownership, and installation.
Besides the CCCC duo, Nantong Offshore Construction (NTOC) is—surprisingly—a private company that is active in the field early on, partially owing to its geography location— close to China’s first batches of intertidal wind farms that are mostly located near Nantong of Jiangsu.
Next to the trio, Huadian Heavy Industries, China Railway Major Bridge Engineering Corp Fifth Company (中铁大桥局 MBEC 5th Co) are currently the other known players—the “usual suspects”—in the market.
Emerging players have quickly crossed over to the field, including:
- MBEC-FSIC: the Fujian-based joint venture between MBEC and Fujian Shipbuilding Industries Corp (FSIC 福船)
- CNPEC: based in Guangdong the engineering branch of China General Nuclear, the in-house EPC of the nuclear and renewable power utility
- GPEC: Guangdong Power Engineering Corp is a subsidiary construction contractor of China Energy Engineering Corp (CEEC)—one of the two key electricity engineering and construction conglomerate in China
- ZTPC: Zhengjian Power Engineering Corp, another regional electricity power construction firm under CEEC
- Zhongtian Offshore Engineering Corp: the offshore manufacturer known for its dominant position in the subsea cable has shown its ambition in crossing over to construction market, with three new OW vessels built
Backgrounds of the construction companies are highly mixed, mainly can be categorized into four groups:
- provincial electricity construction firms under the two major power engineering groups (CEEC and PowerChina) [READ MORE on China’s Two Major Electricity Engineering & Construction Groups and Their Backgrounds]
- key offshore wind developers’ construction business unit or joint ventures or (e.g. CGN and CTG) [READ More on China’s Key Power Developers and Utilities and Their Background]
- infrastructure builders with offshore project experience (CCCC, MBEC)
- cross-over from the equipment manufacturing (ZPMC, Zhongtian, Hengtong)
The Missing Pieces: Experience
There is a key issue to note. Despite there are more and more Chinese offshore wind construction companies emerged, they are not fully constructing and installing the projects themselves. Often time, they work with external sub-contractors to get things done.
I will talk about the sub-contractors in a future piece. Overall, most sub-contractors are private companies and only recently moved to the offshore wind construction market as their clients’ demand. This, in fact, opens up a window opportunity for foreign suppliers seeking to enter the Chinese market. Because the sub-contractors are new and the market is lucrative, they are eager to get external help; as they are private, they may be more open to foreign technology and equipment.
China’s sole offshore oil major— China National Offshore Oil Co (Cnooc)—has yet to step in the lucrative construction market, although its Shanghai-based subsidiary made a judgment call to invest in two projects.
The absence of CNOOC is surprising, who has a lot to offer in terms of offshore engineering.
On the other hand, Shenli Oil Field of Sinopec participated in some construction works in offshore wind. Headquartered in Shandong, the oil firm would seek to secure more orders in the regional market, as Shandong province plans to kick off serious renewable development in the Bohai Bay.
Currently, the supply shortage of the installation capacity supports the business cases of various emerging players, many of whom in fact lack the offshore engineering insights. The general lack of offshore experience cast a shadow of the economics of many offshore wind projects to be built in the coming 1-2 years, which face project delays, construction risk and spike of construction cost.
Again, to limit such risks, the new players may look abroad for technical expertise and advanced equipment, in theory opening up market opportunities for various European offshore companies.
Demand for Installation & Other Vessels
China’s demand for offshore wind installation, O&M vessels, as well as marine engineering equipment is on the rise. The demand is huge.
Prior to 2016, China only has 5 offshore wind (OW) installers. The number of OW installation jack-ups have increased quickly in the past two years but is still far from enough to cater to all the demands.
At the moment China is the largest market globally for offshore wind vessels. A data from Clarkson suggests that, by April, 14 Chinese shipbuilders are under 28 contracts to build offshore wind vessels for the Chinese construction companies, which accounts for 74% of the global OW vessel orders.
According to the Chinese energy media Energy Observer, six new OW vessels will be put into operation today, pushing the total number of OW vessels to over 30. However, this still can not fully cater to the demands.
It is estimated, to cater to the 44.7GW project in the pipeline, the market would need 300 work vessels. Certainly, this is a market with countless untapped opportunities.
We collected the more recent date on the offshore wind installation vessels in operation and under construction in China. The below tables are for your reference. More updates are deemed to come.