Political storms threaten Europe's offshore wind goals

* In Britain, world's largest market, political risk rises

* Competitors partner up to tame costs

* Germany should support EU in propping up carbon market

By Barbara Lewis and Karolin Schaps

BRUSSELS/LONDON, Oct 10 (Reuters) - Political wavering inBritain, the world's biggest offshore wind market, is castingdoubt on European ambitions to build a fleet of giganticturbines out at sea, desperately needed to meet legally bindingclimate change targets.

The increasing scale of offshore wind means it is the onegreen energy source able to make up for the phase-out of nucleargeneration - especially in the EU's largest economy Germany -and for the closure of ageing and polluting coal plants in othercountries such as Britain and France.

In addition, it is less prone to opposition from localresidents, whose "not in my back yard" response to onshore windfarms has often blocked projects.

But the financial crisis has made politicians rethink howmuch taxpayer money to spend on offshore wind, especially inBritain where the finance and energy ministers disagree o n theissue.

"It's just yet another example of mixed messages anduncertainty, all of which give industry a reason to say 'youknow what, it's too hard, I'm gonna head to a differentjurisdiction where my investments are welcome'," said BenStansfield, senior associate at law firm Clifford Chance, whospecialises in energy legislation.

"The delays will no doubt come if (finance minister George)Osborne keeps making comments which industry finds unhelpful."

Last week, seven of the biggest wind investors, includingturbine-makers Vestas and Gamesa , warned thegovernment in a letter seen by Reuters that a shift in politicalsupport could push them to take their money elsewhere.

"Historically, the UK has benefited from being known as acountry with low political risk for energy sector investments,"the letter dated Oct. 5 said. "Undermining that reputation wouldhave damaging consequences for the scale of future investments."

Two big turbine manufacturers, GE Energy and Vestas,have already backtracked on plans to set up factories inBritain, showing that, even though other factors may havecontributed to these decisions, the government failed to makeinvesting in British manufacturing attractive enough.

"As a new industry, hearts and minds are very important forpublic perception and politicians have a big role to play inthat," Dean Cook, the head of UK renewable energy at consultancyDeloitte, said.


Rather than providing reassurance, Britain's divided rulingcoalition has heightened political risk, critics say, with achange in rhetoric that has spooked some internationalinvestors.

Comments by finance minister Osborne suggest he is shiftingemphasis to natural gas and away from greener technology tokickstart growth in the $2.5 trillion economy.

This week, for instance, Osborne raised the prospect of a"generous new tax regime" to encourage investment in shale gas.

Such remarks can ripple through boardrooms across Europe.

"If Osborne says 'I'm not sure we should be spending moneyon renewables, I think gas maybe is more interesting', I canguarantee I will get a call from RWE AG saying 'are you doingthe right thing?'" RWE Innogy's Chief Operating Officer PaulCoffey told reporters.

As the renewable arm of German utility RWE , RWEInnogy has invested billions of euros in offshore wind inBritain and Germany.

Assessments of the cost of building an offshore wind projectvary enormously, but, even though costs have fallen, investmentsneeded are roughly double those of gas-fired power plants.

The British government estimated that offshore wind farmscost between 149 ($240) and 191 pounds per megawatt-hour (MWh)to build, compared with between 75 and 127 pounds for onshorewind and 76 to 79 pounds for the most efficient gas plants.

An industry task force commissioned by the governmentpredicted the offshore cost could fall to 100 pounds per MWh by2020 if construction were streamlined and the industry improvedcollaboration.

One approach is the formation of cost-sharing consortiums toundertake projects. All but one winner of Britain's latesttender for offshore wind concessions were made up of competingfirms joining forces to spread the risks.

Linking up with neighbouring offshore parks, meanwhile, canhelp beat the financial and logistical challenge of getting agrid connection to the shore.


Connection delay has been a major issue in Germany, whereturbines are being placed far out to sea, making for anestimated 1 billion euro bill for a link to land.

In theory, the German government is supportive. Followingits decision to phase out nuclear energy in the aftermath ofJapan's Fukushima disaster, Chancellor Angela Merkel has thrownher weight behind offshore wind to make up the shortfall.

Her cabinet in August approved a draft law to help offshoreprojects by passing some of the cost to consumers.

But funding is still uncertain. Part of the problem is thecollapse of the EU's Emissions Trading Scheme (ETS), which wasset up to charge emitters of carbon and thus discourageinvestment in polluting energy sources.

A carbon allowance is trading at around 8 euros per tonne ofcarbon , a negligible cost for plant developers thatdoes not incentivise a shift from carbon-intensive plants togreen power.

Germany should, therefore, be among the first to supportEuropean Commission plans to prop up the carbon market, analystssay. In practice, divisions between the economy and environmentministries are expected to hold it back from taking a stance.

In France, which is just embarking on its first offshorewind projects, the election of President Francois Hollandeearlier this year is regarded by many as favourable for offshorewind developments.

Hollande has promised to boost the share of renewables inthe French energy mix, overwhelmingly dominated by nuclear, andhas vowed to continue with offshore tenders.

Results of such commitments remain to be seen and therealities of the offshore wind sector across Europe's mainmarkets highlight the fact that governments are ultimatelyresponsible for assuring investors and taxpayers of the benefitsof offshore wind.

"I think the support of politicians for offshore wind,particularly in times of austerity, is very important," saidDeloitte's Dean Cook. "Because ultimately the end consumer paysfor it."

($1 = 0.6176 British pounds)

(Additional reporting by Muriel Boselli in Paris; Editing byDavid Holmes)

((Barbara.hm.Lewis@thomsonreuters.com)(+32 2 287 68 43)(ReutersMessaging: barbara.hm.lewis.thomsonreuters.com@reuters.net))