Risks and uncertainties in the planning of offshore wind projects Megaprojects:

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Megaprojects:

Risks and uncertainties in the planning of offshore wind projects

MASTER’ THESIS

by

J.A. van der Wal

Abstract

The number of initiated megaprojects have increased throughout the years. Megaprojects are large and complex projects that entail multi-actor management, non-standard technology and processes. This thesis focuses on exploring offshore wind projects (OWPs) as megaprojects. The offshore wind industry is novel and rapidly growing due the ambitious goals set by governments for example. The complex and unique structure of megaprojects like OWPs result in a slim amount of predictability and transfer of knowledge. A project is measured based on three performance indicators: cost, quality and time. The planning has a dominant impact on the continuation of a project, as a lack of planning increases the possibility of failure. Literature regarding planning, especially risk identification and uncertainties involved in OWPs, is limited. Research in these areas are the main aim of this thesis. With the Delphi-technique, this research interviewed 26 experts from a variety of backgrounds in the offshore wind industry. The analysis identified designed a framework that depicts the planning phase of an OWP and identified ten risks and seven uncertainties that are most common in an OWP. The most prominent insights of the research are that the process is dependent on (1) the government and (2) the project structure. The former refers to the dependency of the basic elements of an OWP that need to be approved and permitted by the government. The latter refers to the dependency of the project on the investment structure, which can either be finance on balance or project finance. The framework developed for this research allows the industry to gain a better overview of the planning process of an OWP. However further research is required to investigate whether the identified framework and risks and uncertainties are applicable to OWPs and megaprojects in general.

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Master’ thesis

Megaprojects: risks and uncertainties in the planning of offshore wind projects EBM028A030 & NBS8399

ECN_WIND_2014_289 J.A. (Jannes) van der Wal

Prinsenstraat 9, 9711 CL Groningen

j.a.van.der.wal@student.rug.nl / jannesvanderwal@icloud.com Tel: +31(0)6 36122578

student number RUG: 1909312 student number NUBS: 130629188

16.298 words (excluding tables and references) December 18th, 2014

DD-MSc. Technology & Operations Management

Supervisor & assessor: dr. J. (Jasper) Veldman (University of Groningen) - j.veldman@rug.nl Co-assessor: dr. J. (Jingxin) Dong (Newcastle University) - jingxin.dong@newcastle.ac.uk Universities

University of Groningen, Faculty of Economics and Business Nettelbosje 2, 9747 AE Groningen

Tel: +31(0)50 3633741

Newcastle University Business School

5 Barrack Road, Newcastle upon Tyne, NE1 4SE Tel: +44(0)191 2081500

Company

Contact person: P.J. (Peter) Eecen - eecen@ecn.nl ECN (Energy research Centre of the Netherlands) Westerduinweg 3, 1755 LE Petten

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List of figures

List of tables

Figure 4.1: Developed framework for the planning process of an OWP 18

Figure 4.2: Experienced uncertainty for successful continuation of the project 23

Figure 5.1: Project structure continuum 32

Figure 5.2: Developed framework of the planning process in the Netherlands for an OWP 37

Table 2.1: Phases in an offshore wind project (adjusted and summarised from Gerdes et al., 2005: 138)

4 Table 2.2: Detail description of the first two phases described by Gerdes et al. (2005: 138) 6

Table 3.1: The interviewee characteristics 10

Table 3.2: Coding tree 13

Table 3.3: Quality criteria 14

Table 4.1: Explanation of the different activities that take place in the framework 21

Table 4.2: Identified uncertainties 25

Table 4.3: Identified risks 30

Table 5.1: Comparison between the two project structures 31

Table 5.2: The identified changes in the risks and uncertainties for a project finance structure

33 Table 5.3: The identified changes in the risks and uncertainties for a finance on balance

structure

34 Table 5.4: The identified changes in the risk and uncertainties for the newly implemented

Dutch process

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List of abbreviations

BOP Balance Of Plant

CAPEX Capital Expenditure CAR Construction All Risk CPM Critical Path Method

DCF Discounted Cash Flows

DEVEX Development Expenditure

DG Decisions Gates

DOO Developer Owner Operator

DSU Delayed Start Up

EIA Environmental Impact Assessment

EPC Engineering Procurement Construction EWEA European Wind Energy Association FEED Front End Engineering Design FID Financial Investment Decision

FOB Finance On Balance

HSE Health, Security & Environment ITT Invitation To Tender

LD Liquidated Damages

LLI Long Lead Items

O&M Operations & Maintenance OWP Offshore Wind Project

PF Project Finance

PostPF Post-Construction Project Finance

PPA Power Purchase Agreement

PrePF Pre-construction Project Finance

SDE Stimulering Duurzame Energieproductie (Renewable Energy Project Incentivisation) SME Small and Medium-sized Enterprises

SPV Special Purpose Vehicle

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1. Introduction

Last year the total capacity of wind energy grew with 10.2% in the European Union (Eurobserver, 2014). This rapid growth is driven by the ambitious goals that are set by a large group of countries to increase the use of wind energy by 2020. The EWEA (2011) predicts that 14% of the total European electricity demand can be covered with wind power in 2030. The largest part of that wind energy will come from offshore wind turbines (EWEA, 2009). Although the investments are considerably higher for offshore than for onshore wind parks, they generate a greater amount of electricity due to higher wind speeds above sea (Bilgili, Yasarn & Simsek, 2010). The rapid development and deployment of this type of engineering construction is not without risks, which underlines a strong need for building experience, and a dedicated focus on innovation to optimise the delivery of renewable energy through engineering constructions (Koch, 2012).

Offshore wind projects (OWPs) are frequently described as large and complex projects and refer to megaprojects. Flyvbjerg, Bruzelius and Rothengatter (2003) describe a megaproject as a project that consists of complex engineering constructions, complex time schedules, huge costs constructions and complicated performance measurements. Megaprojects include e.g. bridges, power plants and public transportation projects (Priemus, Flyvbjerg & Wee, 2008). The size and complexity of these projects sometimes result in not successfully finishing all projects (Flyvbjerg et al., 2003). The demand for skilled workers and project leaders emerges in most countries due to an increase in megaprojects and expenditures. Considering that megaprojects are still uncommon and observed as standalone projects, the knowledge and lessons learned from one project to another does not take place regularly. Successful megaprojects are copied frequently and implemented in other countries with minor adaptations to local or project-specific situations (Priemus et al., 2008). Additionally, PM Network (2014) emphasises the importance of understanding and standardising project management practices. Project management is commonly applied by companies to handle novel and complex activities (Munns & Bjeirmi, 1996). However, the problem is that there is a lack of knowledge transferability between megaproject stakeholders. Consequently, knowledge is available in the industry, however it is not generally applied. Since literature did not disclose any research, developing a standardised project management practice or procedure that can be applied to OWPs or megaprojects seems essential.

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account during the entire process of a project. Like an OWP, it involves a series of reciprocal actions and phases that include planning with the authorities, engineers, the public and other stakeholders. Each phase in an OWP has its own value to successful project deployment as the interaction between the different stakeholders creates complexity that generates uncertainties and risks for an OWP (Koch, 2012). Puddicombe (2006) highlights that planning is nothing more than an ongoing process of assessing, restoring and preventing uncertainties and risks in the project. Alessandri et al. (2004) support this by stating that managers need to address the critical nature of risk and uncertainty in the decision-making process of a project. Without identifying and assessing the risks and uncertainties, decisions made for the project are likely to be sub-optimal (Alessandri et al., 2004). Zwikael and Sadeh (2007) add to Alessandri et al. (2004) that risks must be managed throughout the entire life cycle of the project; starting with the planning phase, when risks must be identified and analysed. Gaining a better overview on the process of a megaproject is necessary to gain (1) a better insight in the critical path(s) a megaproject goes through, (2) a reduction in the complexity and (3) an insight in the unknowns related to a megaproject. Giezen (2012) expects that a better overview of the risks and uncertainties will result in making a project and planning more manageable. However, no specific research about OWPs or megaprojects is performed related to planning or associated risks and uncertainties. Giezen (2012) stresses the necessity to focus more research on megaprojects. Therefore it is curious there has not been a focussed approach to the planning of an OWP or a megaproject yet. Is the planning perceived to not be relevant to the life cycle of an OWP or megaproject?

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2. Theoretical framework

This section discusses megaprojects with special attention to OWPs and the identification of planning phases so far. Next, project management is discussed focused on the planning dimension and the risks and uncertainties in a project. The section concludes with the relevance of this research and the research question.

2.1 Megaprojects

A project is an activity with a defined beginning and end (usually constrained by time), to meet unique goals and objectives (Vacar, 2013). The scope of projects has changed throughout time. Nowadays the delivery time of a project needs to be shorter as external factors drive the design solutions such as environmental policies and the construction financing (Gransberg et al., 2013). Projects can be categorised into either simple or complex projects. Projects can respectively be the organisation of a family event or the installation of an offshore oil rig. Flyvbjerg (2009) describes that organisations have the tendency to pay attention to greater and bigger projects due to the special and unique features without knowing what a bigger and complex project requires. Complex projects are frequently carried out under a greater amount of risk and uncertainty, with more chances of unforeseen aspects that can emerge over a longer period of time in comparison to small projects (Millar & Lessard, 2008). This indicates that complex projects cannot be treated the same as simple projects.

Koch (2012) and Flyvbjerg (2011) studied complex projects and describe them as megaprojects. Flyvbjerg (2009; 2011) defines a megaproject as an engineering construction project that contains complex interfaces, complex decision-making and planning, a lot of risk, non-standard technology and design, a multi-actor management process with conflicting interests and costs more than hundred million dollars. Megaprojects are often dominated by the problem of cost overruns and lack a focus on planning (Priemus et al., 2008). Although the impression is that megaprojects show similarities over different sectors, the variety of megaprojects is considerable as a lot megaprojects are standalone projects. Firms often focus on the success of an individual project and show minimal forms of learning effects from one to the other (Jiang & Klein, 2014). Flyvbjerg, Holm and Buhl (2002) moreover observed that over the past 70 years a constant underestimation of large projects occurred, as most of them exceeded their budget and planning.

2.2 Offshore wind projects

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2.3 Main phases of a megaproject

As a project progresses, certain tasks are planned at the beginning of a project, gradually finish over time and are followed-up by other (new) activities. A classical project is subdivided in a beginning, middle and end. Brockmann (2009) identified three main stages for a megaproject that speak for themselves: conception phase, negotiation phase and implementation phase. A more detailed overview of a megaproject is used in this research and is developed by Gerdes, Tiedemann and Zeelenberg (2005) who identified seven main phases for the realisation of OWPs. The phases consists of (1) pre-project planning, (2) detailed project planning, (3) production and procurement, (4) engineering, testing, installation and commissioning, (5) full operation, (6) re-powering, and (7) dismantling. Each of these phases consists of important tasks that need to be performed (see Table 2.1).

Table 2.1: Phases in an offshore wind project (adjusted and summarised from Gerdes et al., 2005: 138)

All the processes and phases described in Table 2.1 are outlined as separate steps. It needs to be noted that the phases and processes run parallel to a certain degree. No additional literature is written whether the phases described by Gerdes et al. (2005) are valid and the phases identified are the phases through which a megaproject develops. Currently it is unknown whether skipping a particular phase causes

Phase Description

Pre-planning Pre-feasibility study, development of strategies and the project structure.

Detailed planning Project approval procedure, site investigation, functional requirements of main

elements, planning of internal controlling system, financing and insurance arrangements, tender process and the master plan.

Contracting / financial investment decision

Engineering, testing Detailed engineering and planning, pre-testing and training.

Production & procurement Production of elements, quality assurance and control, factory acceptance tests,

interface and workflow management and transport to logistic centre.

Installation & commissioning Site preparation, pre-assembly, installation of the foundation, installation of wind turbines, installation of electrical infrastructure offshore and onshore,

commissioning of supervisory control and data acquisition systems.

Full operation Service, maintenance and environmental monitoring.

Re-powering Replacing old with new technology that, either have a greater capacity or have

more efficiency resulting in an increase of generated power (Power Partners, 2009).

Dismantling Better referable as decommissioning; what needs to happen with the wind turbines

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2.4 Project management

Project management is the process of planning activities, organising, directing and controlling resources, procedures and protocols to achieve unique goals for a project within certain time, cost and quality constraints (PMI, 2014; Lecher, Edington & Gao, 2012). Project management is frequently applied as a tool to increase the productivity and overview (Frame, 1995), as it helps the project to efficiently handle novel or complex activities and controlling the achievements of the project objectives (Moons & Bjeirmi, 1996). Project management is further indicated to help defining the work requirements, establishing the extent of work and the allocation of resources (Munns et al., 1996). Therefore many organisations (need to) recognise the value of project management as an effective way to structure tasks and to implement organisational change (Jiang et al., 2014). The project dimensions (time, costs and quality) are of equal importance in a project and need to be fulfilled to deliver the right scope of work (Lopez del Puerto et al., 2014). The success of a project is associated with the final result of the project (Munns et al., 1996). Throughout existing literature the contribution of these three dimensions have widely been discussed and emphasised. Planning is an element that provides control over the main steps and activities that need to be performed within a project. Both Johnson et al. (2001) and Megavind (2010) state that planning can have a significant contribution to the success and progress of a project.

2.5 Planning

Throughout the literature, planning is expressed in different terminologies such as time and schedule (Drury-Grogan, 2013). Planning and scheduling are closely related and are frequently performed separately from each other but sequentially (Wong, Zhang, Wang & Zhang, 2012). Current literature makes a distinction in strategic, operational and tactical planning. Strategic planning refers to the formulation of business policies and resources allocations. Operational planning relates to meetings and assessment developments. Finally, tactical planning refers to the administration of routine and daily decisions (Shivakumar, 2014). The strategic planning influences the many tactical and operational decisions according to Shivakumar (2014). Cummings and Daellenbach (2009) point out that in literature there has been a transition in using the term strategy instead of planning. This indicates that researchers make a distinction between planning and strategy, after which recent initiatives called for recognition and the need for accurate planning at the strategic level.

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Table 2.2: Detail description of the first two phases described by Gerdes et al. (2005: 138)

Pre-planning according to Johansen and Wilson (2006) is essential to limit the potential for later delays and cost overruns. Whittaker (1999) identified a strong correlation between budget overrun and schedule overrun, which might indicate that planning can make a difference. Although planning is not directly associated with costs, it can make a huge difference when not enough resources are allocated (Puddicombe, 2006). Duncan and Gorsha (1983) support this by indicating that project planning is needed to overcome under-costing, overspending and late completion. In a case research of 3.500 projects spread over different industries, overruns appeared to commonly exceed between 40 to 200 percent (Morris & Hough, 1987). This indicates that planning at the beginning of a project can have a dominant impact on the rest of a project. Although a detailed planning at the beginning of a project does not guarantee success, a lack of planning will most probably result in guaranteed failure of the project (Dvir, Raz & Shenhar, 2003). This phenomenon is described by Lovallo and Kahneman (2003: 58) as the planning fallacy: “the tendency to underestimate task completion and costs, even knowing that the vast

majority of similar tasks have run longer or gone over budget.” This causes managers to pursue projects

that are unrealistic and unlikely to stay within the set budget and time. 2.6 Risks and uncertainties

Puddicombe (2006) and Kezner (2009) state that planning is an ongoing process of assessing the uncertainties, risks and trust of a project. Novel projects with a long duration, like megaprojects, are commonly plagued with fundamentally unforeseeable events and unknown interactions within the project (Loch & Pich, 2002). The variables that are unknown in advance by the planner involve uncertainty and risk (NOAA, 2014). Uncertainties and risks are analysed with a risk analysis that assesses, manages and communicates the risks (Yoe, 2001). Frank Knight, an eminent economist, wrote in 1921: “Risk is present if

Phase Description

Pre-planning Pre-feasibility study of (1) stakeholder involvement, (2) technology to use, (3) supply chain

management, (4) logistics, (5) economic assessment, (6) environmental and public impact; Development of strategies for financing, media, stakeholder involvement and approval; Project structure.

Detailed planning Project approval procedure for the grid connection and the project itself;

Site investigation of the wind speed and direction, the (ocean)graphical, chemical, geological and biological influence;

Functional requirements of main elements determine the infrastructure, logistics and HSE; Planning of internal controlling system regarding the (1) key performance indicators, (2) quality assurance, (3) factory acceptance tests and (4) reporting systems;

Tender process for the preparation of documents, elaboration on proposals and negotiations with subcontractors;

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Uncertainty describes any situation that people are not completely sure about (NOAA, 2014). Uncertainty estimations are often based on the experience of the planner. However some things are fundamentally unknowable and occur randomly (NOAA, 2014). Evidently organisations would like to prevent uncertainties from happening, however it is impossible to identify and treat all uncertainties at the beginning of a project (Lechler, Edington & Gao, 2012). Hence, uncertainties are inevitable, regardless of how much information is gathered before the project starts (Hubbard, 2007).

Surprisingly, risk and uncertainty are both implying potential adverse effects on the project performance. Both terms deal with threats and opportunities that originate from a decision made (Ward & Chapman, 2003). Literature indicates that uncertainty is increasingly used in preference to risk (Ward et al., 2003), since uncertainty is more than the combination of risk and opportunity. Uncertainty management is not only focussed on managing perceived threats, opportunities and their implications, it also aims at identifying all the many sources of uncertainty which shape the perception of threats and opportunities (Ward et al., 2003; Lechler et al., 2012). Managers can use two methods to manage the uncertainty in projects: (1) simulation techniques and (2) project buffers (Loch et al., 2006). The former refers to the acknowledgement that planned activities have an expected duration, however these are subject to variation (Loch et al., 2006), resulting in a distribution of possible durations of the different activities. Simulation allows the project to quantify the possible durations of the project with a linked possibility, whether a certain timespan is achievable (Loch et al., 2006). The latter refers to scheduling activities at their latest starting times according to the classical critical path calculations (CPM). CPM adds a buffer at the end of the project with respect to the time required with additional variation. As a result of identifying uncertainties in a project, a project manager can identify the risks and opportunities in a project.

Megaprojects have a high degree of complexity, especially in the beginning, due to the higher accumulated risk (Gerdes et al., 2005), that results in more likeliness to fail. The amount of risk influences the level of planning effectiveness (Zwikael et al., 2014). The complexity, size and huge budget require additionally focus for an OWP, since most stakeholders are not able to take the accumulated risk alone. This results in combinations of firms and public institutions that execute the project. The unique nature of a megaproject results in entanglement of risk and uncertainty, since a lot activities have to start from scratch with slim resources to learn from previous experiences. This causes a threat for the optimisation of the project (planning) (Lechler et al., 2012; Belassi & Tukel, 1996; Anderson & Joglekar, 2005). It is the primary role of the project planner to identify risks and uncertainties in the parts of the project that have the greatest potential to cause concern (NOAA, 2014). The most important thing to do is (1) to acknowledge the existence of the risks and uncertainties and (2) plan and incorporate them into the analysis (NOAA, 2014).

2.7 Research relevance

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reduced which directly influences the cost overruns. Due to the novelty of OWPs as megaprojects, planning for OWPs are often performed blank and involve high uncertainty and high risk. No specific literature focuses on the risks and uncertainties factors of OWPs related to planning. These factors are not investigated yet in this setting, while they are expected to contribute to project planning optimisation and management of megaprojects.

2.8 Research question

The relevance of this research results in the following research question:

What are the risks and uncertainties in the planning phase of an offshore wind project?

This research aims at gaining better insight in the planning of an OWP and the identification of risks and uncertainties linked to the planning phase, that influence the successful continuity of an OWP. Given the non-repetitive nature of projects, uncertainty and risk are at the core of project management for OWPs. This results in a high dependency on decision-making under a high degree of project uncertainty (Acebes et al., 2014). Forms of uncertainty or risks regarding timing issues could be related back to particular phases, decisions or activities within the planning of a project. Depicting the planning process in a framework could provide the management with a better overview of how, what and when phases, tasks and activities need to be performed. This framework is developed throughout the research and will be explained in the next section. Eventually, it is expected to contribute to optimisation of OWPs and reduce the experienced uncertainty and risk. In order to answer this main research question, supporting research questions are formulated:

1. What is the structure of the starting (planning) phase of an offshore wind project? A. What are key issues in the planning phase of an offshore wind project?

B. How does the developed framework of the pre- and detailed planning fit into practice? 2. How do risks and uncertainties influence the planning phase of an offshore wind project?

A. How are risks and uncertainties assessed in offshore wind projects?

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3. Methodology

The methodology will first discuss the design of the research and used method. Next the research will explain the data collection and data analysis, concluded with the research quality criteria.

3.1 Research design

This research is of explorative nature with a qualitative approach. The purpose of this research is to discover and describe what is happening at the start of an OWP (Handfield & Melnyk, 1998). As indicated in Section 2, almost no literature is written about the planning phase of a megaproject, let alone OWP. The main technique that is utilised for the data collection is interviewing experts on their view and opinion (Handfield et al., 1998). The Delphi study is considered as an appropriate research design to describe, discover and gain insight in a research area (Handfield et al., 1998, Akkermans et al. 2003). The Delphi study essentially provides an interactive communication structure between the researcher and experts in a field, in order to develop themes, directions or predictions about a topic (Neill, 2007). The Delphi study is not uncommon in the field of operations management as Subramanian and Ramanathan (2012) indicated that Delphi is frequently applied in different explorative studies like technology, product planning and quality management.

3.2 Delphi technique

The Delphi study is well suited as a consensus-building method to collect data from a panel of selected subjects (Hsu & Sandford, 2007). The feedback process in this technique allows interviewees to assess the judgements and information provided by other experts and themselves (Hsu et al., 2007). Another important characteristic of using Delphi is the ability to provide anonymity to the interviewees. This reduces dominant individuals that otherwise may influence the group interaction (Hsu et al., 2007). The Delphi process is an iteration until consensus has been achieved. The Delphi process consists of four rounds in which the data is gathered. After each round the different opinions and findings for the specific topic are identified, summarised and developed for the next Delphi round. The new insights are point of discussion in the next round. The precise process of the Delphi technique is explained in detail by Hsu and Sandford (2007). The criteria used to select the eliciting experts is described in the next subparagraph.

3.3 Interviewing

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3.4 Data collection

The interviews are conducted in person and are collected and organised according to the following guidelines and procedures. All the interviews were held in the period between the August 2014 and the 30th of October 2014. Appointments with the interviewees were at their offices and set between 60 and 90 minutes depending on the interviewee’s expertise and availability.

The first round of the Delphi technique was focussed on developing and establishing a firm first framework that depicts the different phases and activities that took place in the pre and detailed planning of an OWP. The draft framework had been developed with a literature research and was further established by interviewing three internal experts at ECN. These conversations consisted of open discussions about the draft framework and related theory. The second Delphi round consisted of starting the interviews with the experts. The preliminary framework as result of the first round (see Appendix B) was used as input for the interviews. Throughout the second round the preliminary framework evolved based on the reflections of the experts, which eventually resulted in the final framework. This research briefly performed a third Delphi round that critically assessed and validated the developed framework from the second round with a number of experts at ECN.

At the start of each interview a couple of documents were provided to the interviewee to guide the conversation and aim of the research (see Appendix A, B and C). At the start of the interview a number of predetermined questions were used to start the conversation (see Appendix D). The interviews were attended by only one researcher, and in order to not lose important answers and information mentioned by the interviewee(s), the conversations were recorded. This assured higher quality of the interview transcripts (Karlsson, 2009). The transcripts were completed after the interviews and provided to the interviewees in order to review and revise the transcripts if necessary.

3.6 Data analysis method

After reviewing and revising the transcripts by the interviewees, the transcripts were used for analysis. In order to perform a clear and efficient analysis, the answers of the interviewees were coded by means of a coding tree (see Table 3.2). The coding tree distinguishes main topics, (sub)-themes and possible additions from the transcripts by appointing them to different sets of variables. Kwalitan was used as an instrument to highlight and organise the coding of the transcripts in order to get a good overview of all valuable data. The explorative nature and Delphi technique of this research result in a high variety of data that will be summarised in possible mechanisms or patterns.

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Table 3.2: Coding tree

Topic Sub-theme Description Code

Megaproject General All statements, comments and insights that refer to classic

observations about megaprojects or comparisons between them.

Mega_General

Wind All mentions, comments and insights that refer back to specific situations of wind projects either onshore or offshore.

Mega_Shore

Planning Duration Mentioned time indications of durations of certain

activities, phases or tasks that can be related back to the project.

Plan_Duration

Phases Mentioned phases or activities that take place in a specific

moment in time in an offshore wind project. Plan_Phases Process Expressions from the interviewee about the process the

planning goes through or needs to go through. Plan_Process Decisions Gates Points described decisions gates in the process/planning

that need to be taken and what they behold. Plan_Gates Framework Answers provided by the interviewee how the framework

is right or should be changed. Plan_Framework

System New Answers related to the new process system that was

initiated by the Dutch government per 2016. System_New Old Answers that refer to the regular (old) process system that

is applicable until end of 2015. System_Old Country Answers that relate to the emphasis on the differences in

the process per country. System_Country Government Answers that relate to tasks the government needs to

perform or the project is dependent on. System_Govern

Risk Impact Described or perceived impact of a certain risk on the

project. Risk_Impact

Estimation Description of the assessment of risks in a project for

offshore wind. Risk_Estimation

Uncertainty Impact Described or perceived impact of a certain uncertainty on

the project. Un_Impact

Investments Description of the assessment of investments on a project

for offshore wind and its uncertainty. Un_Investments

Relationship Investments The linkage between investments and the perceived or

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3.7 Validity and reliability

For a qualitative research it is important to validate the gathered data by assessing the quality criteria (Karlsson, 2009). Table 3.3 displays the most relevant aspects of the validity aspects. With the use of multiple interviews, literature and reports this research ensures construct validity of the findings, next to peer debriefing of the interviewees after their interview. The internal validity is established by recording every interview to ensure quality of the transcripts and the Delphi technique that allows the comparison and discussion of the answers provided by previous interviewees with the next interviewee. The external validity is ensured by selecting 26 experts with a varying background in offshore wind, based on their dominant experience and expertise of a main area (initiation, permitting, concession, designing and financing) of the planning phase. Each phase of an OWP is least discussed with three experts, in order to critically discuss and assess it. This ensures that the framework corresponds to practice. The reliability of this paper is ensured with the research protocol of how the interviewees were questioned and which questions were asked. The research protocol eliminates the observation bias of the researcher as much as possible (Emans, 2002). Interviewees were additionally given the possibility to review and revise their interview transcripts. The validity of this research and the framework are considered to be good by the aforementioned arguments moreover since the average expertise of per interviewee is twelve years. Table 3.3: Quality criteria

Criteria Description

Construct validity • Multiple sources of information (interviews, literature, reports); • Expert interviewing to verify and validate insights;

• Peer debriefing of interviewees after the interview.

Internal validity • Recording of the interviews;

• Delphi technique applied.

External validity • Verifying findings with practice;

• Experts selected on their dominant knowledge and experience area.

Reliability • Interview protocol;

• Interview context transcript;

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4. Results

This section will discuss the findings in relation to the identification of the different risks and uncertainties mentioned by the interviewees. Observations and interpretations of the experts are used to support the results. A capital letter in this section refers to an interviewee (see Table 3.1). In order to ultimately discuss the risk and uncertainties for the planning phase of an OWP, this research first discusses the framework that has been developed throughout this research.

4.1 Importance of the planning phase

Discussing the planning phase of an OWP, interviewee A clearly stated why the planning is essential:

“From the building phase on the project is straightforward, however the time until then in e.g. acquiring the permits, is the longest and hardest to plan.”

The overall goal of a project is to successfully complete the project. C and Z emphasise “the chance of

continuation of the project grows over time and for that reason the planning can make a difference.” O

confirms this by indicating that “putting more effort and time in the preparation of a project results in

better and more favourable risks, costs and investments.” The experts indicate that currently there are a lot

unknowns regarding the development stage of an OWP. S stresses the necessity that the first phase, the preparation, is the hardest to plan:

“It is important to develop the steps of the process in advance. Because a lot of problems can be related back to insufficient preparations and not sufficiently take the project settings into account.”

The preliminary phase is very important, since everything that later in the project needs to be performed is conceived and developed in the pre-phase (interviewee F). The possibility of making a mistake in the beginning could result in an OWP that will not be optimal during its life cycle. While the industry is interested in OWPs that need to operate fifteen to twenty years, the developers are only short-term focussed on rapid completion of the project with as much profit as possible (interviewee X). F further stresses:

“The first phases of the project determine the rest of the project to a large extent, it can be the decider for the project itself and its future course.”

The last two arguments clearly display by support of the experts and literature that gaining a better understanding of the planning phase is essential. U highlights “it is necessary to discover the process since

the planning is mainly planned by the restrictions (in time) of the permitting.” Gaining more insight in how

to improve the planning can help the overall performance of OWPs, as R stated: “while the technology is

continually developing, the planning process has almost stopped. This results in the completion of OWPs with old technology.” The next section will discuss the results of the experts’ view on the different steps to

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4.2 Framework

The framework is observed by C as “a framework that gives a good representation of the practice.” Figure 4.1 depicts the framework that is the result of all the interviews, illustrating the planning phase of an OWP from pre-initiation until financial investment decision (FID). Table 4.1 additionally explains the meaning of the different activities within the different phases. What most interviewees, like X, state is “all things in the

process interweave with each other, as activity one cannot be pinned and finished without the next activity in mind.”

4.2.1 Pre-initiation

All interviewees noticed that the framework is linearly displayed as a lot of them mentioned that “all the

activities in the process continually shift and are parallel processed.” A lot of the interviewees indicated

that they missed an initial step in the framework, as an OWP starts with: government decision.

“The government plays an important role in this entire process. Mainly because they have set their goals and policy to generate 16% renewable energy by 2023. The process needs to start with their decision

otherwise the project developer cannot even start” (Interviewee S)

O indicates “it starts with a governmental ambition to create an interesting investment climate that will

attract long-term investors.” P observed a close collaboration between the industry and the government in

this pre-initiation stage to help build and provide answers and information on the development of the government policy. The process consequently arrives at the first decision gate (DG), DG-0. According to Z

“this is nothing more than assessing whether the project has possibilities to continue or not.” The experts

indicated that DGs are incorporated in the process in order to make informed decisions to continue the huge investments for a megaproject. Z added “DGs are moments where the project developer seeks

permission for commitment to the next step in the project.” D furthermore indicates “DGs determine the amount of work that needs to be done for the next DG.”

4.2.2 Initiation

U states that the initiation phase consists of “assessing the business potential, the possible permit options,

locations, is subsidy for “renewable energy project incentivisation” (SDE: stimulering duurzame energieproductie) possible and what does the desk study tells the firm.” R adds that:

“There are some prerequisites for an OWP; the location (1), the permit (2), SDE options (3), and (4) the grid connection. These are required to secure and even start an OWP.”

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4.2.3 Concession and permitting

This particular part of the planning process is indicated by all interviewees to be the most prolonged phase. R and J indicated “the moment the project loses the most valuable time due to the interaction with

the government for the different permits and the site investigation.” The frequent contact that is required

with the different departments within the government causes the majority of delays. It is acknowledged by all the experts that acquiring permits is hard and costs a lot of valuable time. P states that:

“Before the permit is final, the time for appeals and objection consume the majority of time and results in the most uncertainty in the process. The only way to prevent this as much as possible is to plan and

anticipate at it, by making compromises with the relevant parties.”

This phase is as A stated “a continuous interaction between the different stakeholders, aimed at satisfying

them all as good as possible in order to prevent possible appeals and objections of the requested permits.” The expected duration of this phase until DG-2 is hard to determine, since experts did not agree

with each other on the duration. The duration hugely differs per project due to the unique characteristics. Most experts eventually agreed on a duration of six to twelve months for the concession phase and two to three years duration for the permitting.

“The possibility of appeals and objections on the permits adds a lot uncertainty to the expected planning of the project” G said. It is further known according to C that “the project genuinely never avoids updating the environment impact assessment (EIA), because it needs to continually provide prove that it is within constraints after changes. The more changes listed, the more trouble and uncertainty is added to the project since it then depends whether the permit is still within constraints.” J marked “in order to get the permit, a project developer needs to file a preliminary design of the OWP.” The re-application of the

permits is a common thing in the process since constraints influence the design of the project and the selected design needs to be assessed whether it suitable (interviewee Y). The project can only apply and request its SDE after approval of the permit(s). J and Z stress:

“SDE is essential to be present in the project for the financing part of the project, since the debt investors want to know what the leverage of the government is next to their investment.”

A superficial site investigation is further required in this phase. Since H indicated that this activity is really expensive, most projects or contracting parties delay this until the contracting-bid has been assigned. E admits “the site investigation does not take place in the early stages of the project. It is commonly

performed after the permits are approved.” The purpose of the site investigation is explained in Table 4.1.

After performing these activities and achieving them, the project arrives at DG-2. Experts agreed on the positioning of the DG, as the project according to I and J reaches an important decision because “the

perceived uncertainty in the project drops after this DG because the permits and SDE are then supposed to be acquired.” After DG-2, the processes performed are almost fixed and will not be changed, only if it is

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4.2.4 Detailed design and tender

The project continues after DG-2 with the invitation to tender (ITT) towards contractors. This process is about issuing the request to commission the elements for the OWP. The approach according to Z for the ITT can be approached in two different ways:

“The ITT can be performed via (1) Front-End-Engineering-Design (FEED) studies or (2) a cooperation contract. The former better specifies the details of the tender and project, as the project developer decides

in this case the activities that need to be performed by whom and with how many interfaces. The latter is aimed at collaboration between the developer and contractor to look at the best possibilities for the design

and ultimately commissioning.”

E adds that with the ITT, someone needs to manage the different interfaces between the different parties and contractors. This is an important aspect that needs to be managed as it involves a lot of risks. After this choice, the detailed design phase commences and builds on the preliminary design of the previous phase (interviewee P). According to K the detailed design phase is “developing the small details of the

wind park based on the previous (coarse) calculations, with a more detailed attention to the specifics with the preferred contractor.” Since the FID is not yet achieved, the contractor stays a preferred contractor

until the contracting has been completed.

Y notes “ideally the final detailed design is drawn before FID, however certain aspects e.g. the desired

quantity of steel, are unknown at that time. This results in postponing decisions or activities past FID.” E

confirms from experience “details that are essential for FID are designed when necessary, however the rest

is frequently done past FID.” The main reason for this behaviour is:

“The risk of not achieving FID is still present at this stage and a firm wants to prevent huge investments without the certainty of successful continuation. Thus the things

that can be postponed to post-FID are desirable.” (interviewee E)

The activities of this phase in Figure 4.1 are further developments of the project. B expresses “logistics are

an essential part in the design phase, since it is the building block for the rest of the project.” However P

adds “logistics and O&M cannot be fully completed before FID, due to late changes in the planning a.o.

the weather.” This research interestingly observes that the grid connection, one of the four essential

elements for an OWP, is only placed and discussed here. The experts mentioned that this process, although it asks for interaction with the government, is straightforward and does not take long. Formulating all the details of the design phase takes between one to one and a half years including ITT. 4.2.5 Contracting and financing

Before a project can continue to its final planning phase, financing, it needs to address the contracting of the (sub)contractors (interviewee E, Q). This is an important moment in the process, because the contracts provide the terms and input for the financing phase. U mentions “it is preferable to work with as few

parties as possible to control the risk level.” If everything is signed, the project continues with the

financing. W highlights “financial details are already processed throughout the project, however at this

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At FID investors want to know who are contracted, since it is important to them where they spend their money on, to check whether the parties involved have a good track record (interviewee V). M stated that

“the heart of the financing phase is the financial model and the discounted cashflows (DCF).” The project is

financed with debt and equity at a ratio of 70:30. Q stated “the project is bankable if the project achieves

to gather 30% equity whereupon the bank launch can be initiated.” The remainder of the required

investments (70%) is financed by banks, private investors or capital investors, however this can only be done if the main risks are covered.

“A number of risks need to covered before contacting a bank: (1) permits, (2) PPA, (3) contracts and (4) sufficient equity.” (interviewee Q)

Only the power purchase agreement (PPA) is not yet arranged at this stage. C states “the PPA is placed

this late in the process because it is not crucial and can change in an instance.” The PPA can be arranged

within a month according to K and is therefore not crucial. As a product of the risk-averse behaviour of banks, they like to develop contingency facilities. X mentions “contingency money is necessary because all

megaprojects are standalone objects and the project should not be re-financed in its lifetime. It is observed as a stand-by loan that can be used if there is a planning or cost-overrun.” Risks in the finance phase are

attempted to be reduced via e.g. long-term contracts, insurances or cash reserve as Q described. Project insurances can supplementary be applied to optimise the project finance which according to U “depends

on the financial and project structure of the project.” Finance on balance (FOB) firms use less insurances

since they can carry more themselves, compared to a project that applies project finance (PF). The latter requires to insure everything due to the special purpose vehicle (SPV) structure.

C concludes with the statement “getting banks on board contributes to the confidence, the FID of the

project and towards other interested parties.” The duration of this part of the process is expected to take

six to twelve months. Of which Q indicated “if the contracting phase is completed, the project should be

able to achieve FID within six months.” This results in a total duration between DGs of one and a half to

two and a half years (including ITT and design phase). 4.2.6 Financial investment decision

The third DG is planned just before FID and is focussed on obtaining investment approval as S indicates. Most interviewees indicate that DG-3 is treated as the FID. E describes the FID as “the act of signing all the

different contracts and agree on the different terms and ‘conditions president’ set by the banks and other debt parties.” Hence, after this decision the huge sums of investments get spent and the budget is

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Table 4.1: Explanation of the different activities that take place in the framework

Activity Explanation

Business case This is an elaboration on the business potential in which an extensive economic assessment is performed. The business case continually assesses the entire process of the project and is often an important aspect at the different DGs.

Building permit Acquiring the approval (water legislation) from the government to build on the _{location at sea where the project wants to build the wind park.} Business potential Assessing the business potential is determining whether the project has potential. By applying a quick-scan the project is assessed on the wind, location, subsidy potential

and the long-term perspective to whether develop the project further or not.

Contingency facility This activity is an aid facility for the project regarding e.g. warranties and liquid damages. W describes this as “a stand-by loan that needs to be used if there are

planning or cost-overruns.”

Contracting This is the activity of the project in which the design of the OWP is finalised and the different involved contractors and parties need to write down all the terms and agreements. Define collaborations and commitments to each other.

Debt The activity to gather 70% of the project money from external investors e.g. banks, private investors or capital investors. W stated “external parties are informed about

the financing requirements and the terms.”

Desk study Applying a quick-scan to what is already known or available about the project _{location regarding e.g the wind speed, environmental conditions, shipping routes.} EIA The environmental impact assessment for the location where the wind turbines will be placed. The EIA assesses the effect of the wind park on the ecosystem. K in

addition mentioned that an EIA consists of a projectEIA and locationEIA.

Environmental impact Perform measurement studies and publish the environmental constraints and _{conditions that need to be present for the OWP.} Equity 30% of the project money needs to be acquired via equity. Hence, money that has been gathered by the project developer itself, according to Q if the project structure

is a SPV. Otherwise the equity is just made available via the firm’s balance.

Financial Model

A model that is developed throughout the lifecycle of the project and is dependent on the approach (structure) of the project. In the final stages of the project all the terms of the contracts are placed in this model to see the final effects of different terms on the final DCF. It is also referred to as financial engineering by C.

Government decision The ambition and policy developed by the government to create an interesting _{investment climate for OWPs.} Grid connection The tasks and activities that are related to connecting the energy generated offshore _{to the power grid onshore. This process requires approval by the government.} HSE The HSE is the activity for the health, safety and environmental requirements that the project needs to take into account for securing complete safety for all working staff

during installation and operation.

Infrastructure This activity entails the electrical infrastructure, as well as the technical layout infrastructure. The precise location of the turbines is already determined in the permitting, however this activity is focussed on further optimisation.

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Table 4.1 (continued): Explanation of the different activities that take place in the framework

Activity Explanation

ITT

After the permits have been approved the project needs to publish an invention to tender (ITT). In this tender the project developers publish the constraints and

requirements for the OWP such as the way of construction: balance of plant (BOP), or the kind of wind turbine they require. Consequently, contractors can apply to the tender with a bid.

Location analysis The task to investigate whether there are economical spots of interests available _{offshore that are ideal for development, commission and operation of an OWP.}

Logistics / O&M

Describes the plans and activities that the contractor in the commissioning phase wants to perform. Y stated “logistics is essential in this phase, since it is the building

block for the rest of the project.” It also concludes the development of the detailed

O&M strategy for the operation phase.

Onshore permit This needs to be applied for, in order to get the approval for building and _{commissioning the required (sub)stations and cables to connect the OWP to the grid.} Onshore works Refers to the cabling and installation of different buildings and units that support the optimisation of the process from onshore to offshore. The permit provided in the

previous phase describes what is allowed, thus what needs to be performed.

PPA

The negations and activities to assure a power purchase agreement for the offshore wind park. Sending an ITT to a number of utility companies that are given the opportunity to make a bid on the PPA tender. The bidder becomes the recipient of the renewable energy.

Preliminary design A preliminary design is necessary as S indicated in order to file for the permit procedure(s). In the preliminary design the raw basics are determined, e.g. the coordinates of the wind turbines.

Project insurances Focussing on securing insurances that take care of delays in the project. Y notified the different insurances that can be applied: Construction all risk (CAR), Delayed Start-Up (DSU), property damages or business interruptions.

Project structure Selection between financing the entire project on balance or initiate a SPV with or _{without cooperations in order to finance the project.}

SDE

An operating grant provided by the government. Projects have to request the Renewable Energy Project Incentivisation (SDE: Stimulering Duurzame

Energieproductie) to receive a financial compensation for the renewable energy they generate. The SDE compensates the producers for the unprofitable component for a fixed number of years (Ministry, 2014).

SDE possibilities Exploration if SDE is possible and applicable for the project. C indicated “in all cases the project starts with the knowledge or exploration of SDE options, since the project otherwise is not commercially viable.”

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4.3 Uncertainties

The main uncertainty that flows through the entire project for an offshore wind park is the uncertainty for continuation of the project. This is of course a regular business principle, however, all the experts emphasise this especially for OWPs. J describes the behaviour as “everyone is trying to postpone its

commitment, to not be dependent to others until the very last moment.” Subsequently, every party has to

keep in mind that “showing commitment to the project provides certainty to other parties and

firms.” (interviewee C). The postponement of the parties is explainable because:

“The project contains a lot of uncertainty, the uncertainty will only decrease if the project acquires the permits and subsequently the SDE.” (interviewee I)

This is the result of wind energy being an element of the government decision regarding renewable energy. The described uncertainty is underlined by T whether “the next government wants to pursue the

same goals as the current government.” Since the duration of an OWP can take between four to seven

years, new government elections could already have taken place. That is why “after DG-2 the amount of

uncertainty drops because the permit has been acquired and the SDE application is near completion.” (interviewee J). The enclosed remark of U explains that:

“These projects stay a megaproject meaning that there is a lot of risk and uncertainty, combined with huge investments.”

It is often accompanied with a lot of different parties who are all required to give their approval for certain decisions and investments. E describes this well by mentioning “the moment that the project closes in on

FID (approximately six months before), everything starts running. A lot of uncertainty drops because everyone is talking about the project and feeling secure about the FID since every party shows clear commitment to continue the project.” Figure 4.2 is the result of this research based on answers provided

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Figure 4.2 is discussed and validated with the experts, who ultimately reached acknowledgement on the Figure regarding the indicated uncertainty and CAPEX which respectively decrease and increase over time. The purpose of Figure 4.2 is to illustrate the uncertainty project developers experience throughout the life cycle of an OWP. As the Figure illustrates, the uncertainty decreases throughout the project measured at the DGs, since the project continuation is evidently decided at the DGs.

“Passing the DGs, the uncertainty significantly decreases during the project because of the added value, however the uncertainty never evaporates.” (interviewee J)

Figure 4.2 stresses the interdependency of the experienced uncertainty relative to the postponement of the CAPEX according to the experts. It is the crux that CAPEX postponement will not result in added value, thus evidently the uncertainty will not decrease. The Figure indicates that the uncertainty remains quite high until DG-2, despite the CAPEX. However, the uncertainty significantly reduces at FID (DG-3) to approximately 25% of experienced uncertainty towards successful completion of the project. This percentage is stressed by the experts to provide an impression of the interdependency and the remaining uncertainty. This finding is in line with an earlier remark made by A, namely “from the building phase on,

the project is straightforward… however the time until then in e.g. acquiring the permits, is the longest and hardest to plan.” E emphasises:

"The experienced uncertainty throughout the planning process is high until FID is achieved. Until that moment the investments are kept as low as possible since there is no certainty for project continuation.”

This uncertainty is led by the uncertainty of no return on investments. H mentions “throughout the process

the project needs investments, however the huge expenses are performed after FID since the project then has financed itself and is certain of continuation.” G adds “the investments made at the beginning of the project have a higher possibility of not returning at all then e.g. an investment in the design phase.” A good

example was provided by S who indicated “projects perform FEED studies to gain information for a better

price indication. However these studies require investments, investments made while the possibility still exists of not continuing the project.” Hence, an OWP aims to gain certainty and to know what the required

investments are. W implies that:

"The presence of risks is not a disaster, the disaster is only present if a risk is not allocated to someone or something. Otherwise it results in variation orders resulting in additional costs.”

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“This is part of the power play strategy of who is going to pay for the LLI or site investigation. Subsequently

the one who does, is also committed to the project due to the investment.” (interviewee Y)

The observation by Y indicates that if every investor would behave this way a project will never get started. Although it is understandable that every investor tries to prevent early investments, in the end someone needs to invest. This uncertainty can best be stated as entrepreneurial risk according to L and Y. This uncertainty is one that is prevalent in every investment decision, as in OWP this could e.g. be related to not continuing the project due to the dropout of the permits via a government decision (interviewee P). The weather is another uncontrollable uncertainty that plays a role. According to L “it is uncontrollable and

creates a huge uncertainty that influences a lot of the possible overruns and tight planning.” H illustrates “contractors have a limited time for driving piles which massively can be influenced by bad weather conditions.” Contractors have a limited timeframe per year to drive piles due to legislation with flora and

fauna. This adds uncertainty to the planning, since the weather can heavily fluctuate offshore. E believes this can be prevented as much as possible, with the use of extensive weather data. Table 4.2 summarises the identified uncertainties of this research with a short explanation. The uncertainties are ranked according to the frequency mentioned by the different experts.

Table 4.2: Identified uncertainties

These uncertainties affect the planning process in such a way that a lot of the involved stakeholders or parties remain skeptical and hesitant to commit to an OWP. The hesitation is often reflected in the tender price; firms incorporate the absence of data or certainty into their price (interviewee R). The scepticism is a result of the postponement of investments from one another, since most investors perceive too much risk

# Uncertainty Mentioned Explanation

1 Return of investment 21/26

The perceived uncertainty of successful continuation of the project is high at the beginning. Therefore investors suppress their investments to a later stage, due to the increased chance of losing the investment.

2 Ordering Long-Lead Items 19/26

LLI are expensive and need to be ordered before FID to prevent huge planning overruns afterwards. LLIs are also customised for the project, making them useless if the project subsequently does not reach FID.

3 Government shift 18/26 Elections can shift the regime in a country and can result in adverse

changes towards prior offshore wind decisions.

4 Not allocating all risks 16/26

Assessing and assigning unknown risks incorrectly, causing higher costs for the involved parties. This results in variation orders with higher costs for the entire project.

5 Site investigation analysis 15/26 If the assigned site is investigated and reveals that the suitability of the

site is insufficient despite the huge investments.

6 Entrepreneurial risk 8/26

The postponement of investments and commitments, resulting in a power play strategy of not being dependent on one another. Causing the project to create unnecessary uncertainty due to postponements.

7 Weather conditions 5/26