Doom and gloom or coming boom?

In the turbulent waters that surround the UK the potential for a major contribution to the country’s energy supplies is waiting to be exploited. Certainly the UK is blessed with a huge resource, but do the economics of offshore wind stack up? David Appleyard reports.

Just a few months ago the UK’s emergent offshore wind sector looked shaky. For despite the acknowledged resources the country is blessed with, policy backing at both the domestic and European level, and several early successes, the offshore wind industry appeared plagued with uncertainty after one of the major backers of the flagship London Array project announced that it was to pull out of the development.

The news that oil major Royal Dutch Shell was to sell its stake in the 1 GW 341 turbine London Array, to be sited in the Thames Estuary, came on the heels of a decision by the company to switch funds initially allocated to UK offshore wind towards US onshore wind investments instead. ‘In this context the London Array project, which is still in its development phase, is being looked at as part of an ongoing process. Our current focus for new projects is in the United States where we can leverage our business development skills, project management and power trading skills, and of course government incentives to deliver what we believe are competitive returns’, a statement from the company said.

The suggestion that better returns could be made elsewhere was echoed just days later by comments from Sarwjit Sambhi, energy director of UK utility company Centrica’s Power Business Unit, who argued that the offshore wind sector in the UK was marginal at best. Indeed, Sambhi was quoted as saying: ‘The worrying trend is that if the manufacturing costs continue to increase, then I think that the wind target is under threat’, a reference to both the rising costs of turbines in an increasingly constrained market – with prices under further pressure from the high costs of commodities such as steel, copper and aluminium – and government targets which envisage some 33 GW of offshore wind capacity operating in the UK by 2020 up to and including Round 3 of its offshore programme.

With two of Europe’s largest energy players clearly questioning the future economic value of developing offshore wind resources and seemingly little scope for optimism in the face of accelerating costs, the skies appeared dark over this nascent industry. Nonetheless, the British Wind Energy Association (BWEA) played down the impact of the Shell decision, saying that the UK wind industry remained confident that the economics of offshore wind farms was sound.

A storm brewing?

Ranged against such an apparently negative backdrop are a number of fundamental issues which give support to the sector, and the BWEA’s optimism. Perhaps chief among these are commitments to reduce emissions of carbon dioxide and simultaneously expand the role of renewable energy in the UK’s generation mix.

Along with ambitious domestic targets for renewables, under the latest proposals from the European Commission, the UK would be obligated to source 15% of its electricity demand from renewable sources by 2020, with wind – and offshore wind in particular – expected to play a major role. The climate change issue is closely followed by increasing concerns over energy security of supply. In the past year, the UK has shifted from being a net exporter to a net importer of natural gas and with crude oil trading at well over US$100 per barrel, alternatives to gas – whose market price is closely related to that of oil – are rapidly becoming much more attractive.

Indeed, blaming record wholesale energy prices, two of the UK’s largest energy retailers have announced massive hikes in tariffs for consumers in recent weeks. Centrica subsidiary British Gas managing director, Phil Bentley, explained: ‘The simple fact … is that we have entered an era of unprecedented high world energy prices.’

Meanwhile, not only is the UK windiest country in Europe, it is also blessed with relatively shallow seas and the offshore engineering expertise associated with its North Sea drilling industry. Consequently, the UK makes an attractive location for offshore wind development and the growth of a domestic industry.

Thus, while concerns over commercial and technical viability continue to restrain the widespread take-up of offshore technology, the underlying market fundamentals in many ways appear more positive than negative.

Crest of a wave

Commenting on Shell’s withdrawal from the London Array, BWEA chief executive Maria McCaffery had said: ‘This is business as usual’ and just weeks later a number of announcements appeared to immediately lift the prospects for wind in the UK.

Partners in the London Array, E.ON UK and Denmark’s Dong Energy announced an agreement to buy out Shell’s stake for an undisclosed sum with Dr Paul Golby, chief executive of E.ON UK, saying: ‘We hope to be able to keep the project on track and we should be able to complete the first phase by the end of 2012, subject to securing a number of important contracts, such as those for the wind turbines.’

On the same day Scottish and Southern Energy plc (SSE) was granted consent to develop a 456 MW onshore wind farm in southern Scotland. The £600 million (US$1.2 billion) project, which will be built in two phases, is known as Clyde. The wind farm will eventually have up to 152 turbines of 3 MW each and construction work is expected to begin later this financial year and completion of both phases scheduled for 2011, when it will be the continent’s largest onshore wind development.

Subsequently, the government announced that it had granted consent for a 315 MW offshore wind farm that will be the UK’s fourth largest. The Sheringham Shoal development off the coast of Norfolk in the Greater Wash is to be developed by Scira Offshore Energy Ltd, a joint venture between StatoilHydro and Evelop Projects. When fully operational in 2011 the wind farm will have 88 turbines.

‘This consent is a major progression for the project and shows that the UK government is committed to its target of producing 15% of its energy from renewables by 2020’, said Anne S. Lycke, head of Wind Energy at StatoilHydro and chairman of Scira.

If the project gets the final investment go-ahead, construction will begin in 2009.

Commenting on the decision UK energy secretary John Hutton said: ‘This new wind farm demonstrates our commitment to dramatically increase the amount of energy we generate from renewable sources, helping to cut the UK’s carbon emissions and secure our energy supplies.’ He added: ‘Companies want to build here because we have made the UK one of the most attractive places to invest in wind power. By the end of 2009 a further 626 MW of offshore wind power will be plugged in to the grid, making us world leaders.’

Nonetheless, while the projects continue to roll on, Mike Lewis, managing director Europe of E.ON Climate & Renewables, warned that the economics of offshore ‘remain challenging’, although he added that the flagship London Array project will give invaluable experience. ‘That means that we can take the lessons we learn from London Array for future projects that are further offshore and, potentially, even larger’, he said. Spokesman for E.ON Jonathan Smith added that one key advantage of the London Array project is its scale, which he says allows the developers to maximise any opportunities for a commercial return. However, Smith also echoed Lewis in issuing a caveat on the future commercial viability of the project saying: ‘There is no green light for the project’ adding that the Array is ‘viable’ if the original tenders for the project hold. The final contracts are not due to be signed until the third quarter.

Despite such apparent caution, UK utilities do not show any signs of slowing down in their pursuit of new offshore wind developments. For example, E.ON is also behind the 180 MW Robin Rigg project that is currently under construction in the Solway Firth, and has recently submitted proposals for the Humber Gateway project, a 300 MW development off the Lincolnshire coast, for example. Meanwhile, Centrica is still planning to build three new wind farms in the UK with a total capacity of around 1250 MW, including the 180 MW Lynn and Inner Dowsing project off the coast of Skegness in Lincolnshire and has applied for planning consent to develop the 250 MW Lincs project, also in the Greater Wash. These two are far from alone though. According to BWEA figures there are already more than 400 MW of offshore wind operational, a further 622 MW under construction and close to 3 GW of offshore developments currently approved.

Rolling out offshore

It is evident that economic returns continue to spur on utilities and developers in their goals for offshore wind. But obstacles remain, including MOD objections related to radar, the transmission connection queue, and obtaining planning consents.

Ranged against these issues are a number of important recent policy developments. The UK government set out a national renewable energy blueprint this year which is designed to help meet the UK’s anticipated 2020 renewable energy target.

The proposals include plans to extend and raise the level of the Renewables Obligation to encourage 30%–35% of electricity to come from renewable sources by 2020. The government is also proposing a new planning bill which will accelerate the approval process for projects of ‘national importance’ by granting priority consent and is conducting a transmission access review (TAR) designed to ease transmission bottlenecks. Also important is a recent agreement to explore solutions to military and civil aviation radar objections to wind installations which has been reached between the government, air traffic authorities and industry.

And, in a groundbreaking move, The Crown Estate, which controls the seabed in UK territorial waters, has said it is to share development risks for prospective offshore wind projects.

With the proposals set to see up to 25 GW of new capacity installed by 2020, The Crown Estate is planning to invest up to 50% of the cost of obtaining planning consents, including enabling works to address generic, zone-wide environmental concerns, consenting bottlenecks, supply chain constraints and connection of new windfarms to the national grid. The latest addition follows some 8 GW of capacity that could emerge from the first two rounds.

The Crown Estate is inviting potential partners to bid for development zones shortly, which will grant them exclusive development rights. The specified zones are to be identified through both spatial planning by The Crown Estate and the Strategic Environmental Assessment (SEA) being undertaken by the UK’s Department for Business, Enterprise and Regulatory Reform (BERR).The Crown Estate has initially identified 11 zones, which they expect to allocate during the summer of next year before identifying specific sites within the zones. By 2013 individual sites will start to receive planning permission, with the first phases of the new Round 3 wind farms becoming operational in 2015.

Easing bottlenecks

Given significant political backing for offshore wind, and the global economic forces apparently ranged in favour of further development, the fundamental key to widespread offshore expansion remains the underlying costs of wind turbines. The supply-demand economics of wind turbines, therefore, remain a difficulty which no amount of policy support can overcome.

However, inevitably with high demand comes investment in production and supply bottlenecks may ease as manufacturers step up manufacturing capacity. For example, Ditlev Engel, president & CEO of Vestas recently said that, based on the announced expansion of wind power in the UK — onshore as well as offshore — the company has resolved to invest in a new blade technology centre on the UK’s Isle of Wight, which is expected to become operational in the second quarter of 2010. In addition to blade design activities, the centre will provide facilities for testing the world’s longest wind turbine blades and will become the fifth ‘major leg’ of Vestas Technology R&D.

In recent years, the entire Isle of Wight production has been exported to the USA, but following a change in production a large number of blades are expected to be sold to the UK market as the V90-2 MW and 3 MW turbines are particularly well suited for this market, onshore as well as offshore, Ditlev says.

Meanwhile, US manufacturer Clipper is pursuing its development of a 7.5 MW machine, the so-called Britannia Project, at Blyth in Northumberland and a number of other European manufacturers are believed to be considering expanding production, notably in the offshore sector.

Even so, Ernst & Young’s latest renewable energy country attractiveness indices reflects the reality that the UK’s wind sector is also faced continuing uncertainty. China displaced the UK in the top five most attractive countries for investment in renewable energy for the first time in the indices’ five-year history, the report says. With the UK dropping from fourth to sixth place in the All renewables index and from second to fifth place in the Long-term wind index, a number of questions remain to be resolved by way of solid policy direction from the government.

A key issue is the delay to the Energy Bill, which is still going through parliament, causing the UK’s ranking to fall. Jonathan Johns, head of renewable energy at Ernst & Young, believes that a further consultation period in the UK could lead to up to two years of relative inactivity, leaving just 10 years for the UK to establish a renewables infrastructure strong enough to meet its demanding 2020 target. ‘To make the UK a world leader in attracting investment in this sector, and to avoid it slipping further down the index, the government needs to consider creating tangible incentives for investors, following the lead of Germany and the ambition of China,’ Johns says.

In assessing the future prospects for the industry Peter Madigan, offshore renewables development manager at BWEA, sums up the situation by pointing to the wealth of resources that the UK has available that could enable it to become a world leader in the emerging offshore sector. Concluding that, overall, the situation is positive, he also warns that ‘it would be a great tragedy if we didn’t grasp this opportunity.’

Given the scale of this opportunity, the pressing demands of climate change, security of supply and soaring energy costs, the truth of such a statement is obvious.

David Appleyard is Associate Editor of REW
e-mail: rew@pennwell.com

Three UK offshore projects: Blyth off the coast of Northumberland; Scroby Sands off the coast of Great Yarmouth, Norfolk e.on uk/newscast and the Rhyl Flats project off north Wales which is under construction guy woodland rwe ag

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