A new report on offshore wind from energy advisors Douglas-Westwood concludes that sector spending is set to average almost €15 billion per year over the next ten years, hitting a peak of €18 billion in 2016.
"To enable growth in this new sector, a new manufacturing supply chain is slowly developing and, at the same time, valuable experience and additional supply chain capacity from the offshore oil & gas sector is being utilised." -- Frank Wright, Douglas-Westwood
Capital expenditure levels are expected to increase greatly over the forecast period, though beyond 2016 the recorded Capex falls due to lower levels of visibility on projects post-2020. However, due to the strong long-term drivers for renewable power, the authors believe that capex will be maintained at or exceed 2016 levels. Based on recorded project data, they forecast total capital expenditures of some €50 billion from 2013 to 2022.
With forecast offshore wind installations averaging 3.2 GW per year for the next decade, cumulative offshore wind capacity is expected to reach over 37 GW by 2022.
According to the analysis, ‘World Offshore Wind Market Forecast: Prospects, Technologies, World Markets 2013-2022’, the market is anticipated to grow steadily, with the UK, Germany and China set to account for 64 percent of all offshore wind installations.
Annual additions in the UK are forecast to average around 530 MW, reaching nearly 8 GW of cumulative capacity in 10 years’ time, while Germany is anticipated to become the largest offshore wind market by 2022 with some 9 GW. The Chinese market is expected to add, on average, over 600 MW yearly and reach a cumulative 6.7 GW by the end of the forecast period.
The report also identifies a number of emerging markets including France and Sweden, with 2 GW and 1.4 GW installed respectively. They are expected to overtake established markets such as Belgium and Denmark.
Addressing Growth Challenges
Highlighting a series of challenges which are acting to constrain development, the report observes that growth in offshore wind has been accompanied by rising capital costs, which have more than doubled in the last 10 years. Contributing factors include an immature supply chain, lack of standardisation, rising cost of capital, commodities price escalation, and increasing technical difficulty associated with more recent projects.
Commenting, Douglas-Westwood manager Frank Wright said: “At the current time, we see increasing activity in Germany with a large amount of capacity set to come online in the near future. To enable growth in this new sector, a new manufacturing supply chain is slowly developing and, at the same time, valuable experience and additional supply chain capacity from the offshore oil and gas sector is being utilised.”
At present, the levelised cost of energy (LCOE) for offshore wind is over €160/MWh – 70% higher than onshore wind and more than twice as high as a modern gas-fired power plant.
Data from the most recent projects indicate that capital costs have started to level off and currently lie between €3.5 million and €4 million per megawatt installed. The firm estimates that Opex levels currently represent between 2 percent and 3 percent of the project capex level.
At this cost level offshore wind is clearly uncompetitive, the report says, pointing out that capital outlays and recurring operational spending mean that subsidies are required to support development, at a time when the public finances in key markets are squeezed and consumers are seeing rising energy prices.
Risks associated with offshore construction, new turbine technology and offshore operations have made it difficult for project developers to tap into new sources of capital. And despite growing interest from investor groups, such as pension and insurance funds, balance sheet financing by utilities is expected to remain the prevalent model. This is unsustainable in the long-term, the analysis states, and in these circumstances, funds may not be sufficient for supporting current development plans, and a funding gap is likely to appear after 2014.
However, despite these challenges, the analysis also states that the drivers for low carbon energy are strong, and the potential of a new industry and the accompanying jobs is attractive to politicians. Furthermore, project scale in terms of capacity and size of wind turbines has been continually growing, and industry studies forecast that increasing the size of projects can be a substantial driver for cost reduction.
Image credit: Offshore windfarm, via Shutterstock