Canterbury, UK — Despite its potential, offshore wind installation activity has been relatively slow to take off. Early optimism has been replaced with the realization that sustained growth has taken longer to materialize. However, the last five years have seen progress, according to the World Offshore Wind Market Forecast 2012-2016.
Concern about the links between rising global average temperatures and increasing man-made Green House Gas (GHG) concentrations has led to ambitious long-term policy action on climate change, including the Kyoto Protocol. Implementation is being driven by policy action at both regional and national levels, a prime example being Europe’s ambitious “20 percent by 2020” targets whereby E.U.-27 leaders agreed to a binding target of sourcing 20 percent of primary energy from renewable energy sources by 2020.
Of the various low carbon alternatives, offshore wind is well placed due to a combination of factors including large untapped resources, relatively high energy yields and the potential to develop projects on a large “utility” scale. In particular, the potential to develop very large offshore sites, often beyond visual distance from shore, is becoming increasingly attractive as opposition to the development of onshore wind strengthens. Consequently, offshore wind is becoming a critical component in many countries low carbon strategies; for example, Germany has set a target of 25 GW of offshore wind capacity by 2030.
Experience to date
Despite the potential, offshore wind installation activity has been slow to take off. Industry watchers will remember early projects in the U.K. market — 2001 onwards — and optimism at the time regarding short-term growth prospects. In reality, sustained growth has taken longer to materialize. However, the last five years have seen progress with the majority of global installations in this period: more than 3.5 GW of offshore wind capacity is now online, in excess of 2 GW is under construction and over 100 GW is in various stages of development.
To date, construction activity has centered on the North European region with the U.K. representing the largest individual market and major projects coming online in Germany, Denmark, Sweden and Belgium. More than 50 projects — including 16 in the U.K. and 14 in Denmark — have been installed in Northern Europe representing more than 3300 MW of total capacity, compared with the less than 300 MW installed in the rest of the world. Consequently, a dedicated supply chain providing construction and operational services, has started to emerge around the North Sea region.
Offshore wind projects have increased in scale over the last 15 years and projects to be installed over the next three years to 2014 show this trend continuing. The earliest offshore wind farms were located in water depths of 10 meters or less and were typically less than 5 km from shore. Offshore wind farm capacity, average water depth and distance from shore have all been increasing over this period.
Past 2015, offshore wind projects will continue to increase in scale. For example, many U.K. Round 3 projects are likely to have capacities greater than 500 MW. These future projects in the U.K. and other markets represent unique challenges to project developers. Each construction phase of these “mega-projects” will see hundreds of multi-MW wind turbines being installed in water depths of 35 meters or more and increasingly far from shore. Every project will require long-term charters of several highly specialized installation vessels and purpose-built port facilities to handle the increasing dimensions of modern wind turbines, support structures and balance of plant.
As shallow water sites are built out, deep-water sites (water depths of 35 meters or more) are set to become more common in the U.K., Germany and other key markets. At this point the types of structures commonly used today, namely monopiles, begin to become less cost competitive as both the dimensions and piling forces increase. New structures to be utilized in deeper water include tripods and lightweight jackets.
Whilst capital requirements are already high with recent projects in U.K. waters costing more than €1 billion to construct, U.K. Round 3 zones and other similar mega-projects will require even greater capital outlays on a sustained basis, necessitating new financing models and public support at both a national and regional level.
In the large U.K. market, projects have historically been built through balance sheet financing by international utilities. However, with the increasing investment implied by future projects — U.K. Round 3 alone could cost in excess of €90 billion to build — this model is unlikely to be sustainable. Unlocking additional funding streams has thus far proved challenging for the global offshore wind industry with private investors remaining cautious, a trend reinforced by the financial crisis.
Concerns have been raised by private investors due to a combination of factors including high levels of risk in the construction phase, turbine reliability issues and concerns over the long-term stability of financial incentives. The general trend of rising capital expenditure has been a particular cause of concern; inexperience, lack of competition and major technical issues all contributed to significant cost escalation in the five years prior to 2008. At the same time, returns for many recent projects have not been sufficiently attractive to offset risk levels. On a more positive note, there are clear indications that costs have started to plateau.
Supply chain development
Recent market growth has stimulated supply chain development and growing differentiation between the offshore wind and onshore wind sectors. A specialist supply chain is developing around the North Sea with leading companies based in Germany, Denmark and the Netherlands. Despite its position as the premier offshore wind market, the U.K. has struggled to retain investment and profits locally. However, several offshore wind turbine manufacturers have announced U.K. production facilities. Supply chain movements in the U.K. have been unlocked in part by aforementioned public infrastructure funds. Major investments are also being made in Germany with an “offshore wind cluster” of turbine and foundation manufacturers developing in the Bremerhaven area.
With increasing scale, competition for manufacturing capacity and installation resources is becoming increasingly fierce. This has led to a trend towards vertical integration and consolidation in the supply chain with wind turbine manufacturers acquiring manufacturers of major subcomponents such as gearboxes and generators. This trend is continuing into the area of installation vessels where several project developers have identified a need to secure vessels, either through long-term charters or in extreme cases by funding new-builds. As an example, RWE Innogy placed a €100 million order with Daewoo Shipbuilding & Marine Engineering in the Korean Republic to construct an offshore installation vessel.
The U.K. will continue its position as the leading market for offshore wind from 2012 to 2016. Consecutive licensing rounds have helped to build the UK’s leading position with Round 2 and Round 2.5 construction continuing through the forecast period to 2016. These projects will help to maintain momentum prior to the start of construction activity on Round 3 towards the end of 2016.
The Renewables Obligation (RO) scheme has thus far incentivized steady growth and will continue to operate throughout the forecast period. Consultation is ongoing with regards a potential replacement based around a feed-in tariff (FiT). In the longer term, a well designed FiT could further boost U.K. activity by giving increased certainty to private investors.
The supply chain in the U.K. is developing slowly, with its current strengths resting in areas such as deepwater support structures and array cabling. Over time, the ambition is to have significantly more manufacturing activity in the U.K. and public money has been made available for this purpose.
In Germany, a major shift in nuclear policy will benefit renewable energy, along with natural gas and electricity imports. Policy has been redesigned in order to make offshore wind more attractive with a generous FiT in place and clear policy on grid connection for offshore wind farms. Germany already has a very large project portfolio and early commercial projects are moving through the construction phase.
The German supply chain is extremely strong with large public and private investment in regional manufacturing clusters such as Bremerhaven. With more independent project developers, securing financing for German projects may prove challenging. To date, funding from the European Investment Bank (EIB) has proved essential in moving projects forward.
Steady growth is expected in the Chinese market from 2012 to 2016. In the longer term, China is anticipated to become the largest global market early in the next decade. China has been building expertise through a series of small projects — often in shallow waters — with larger developments imminent. Generation incentives are currently decided on a project-by-project basis but in the future, a fixed tariff, similar to that found in onshore wind, may come into play.
As with onshore wind, the intention of the Chinese government is to build a large domestic industry. For this reason, offshore wind project development is strictly controlled with majority foreign ownership prohibited. A domestic supply chain is also developing with several Chinese manufactures offering multi-megawatt wind turbines for the offshore market.
In the forecast period, which runs from 2012 to 2016, we predict 15 GW of new offshore wind capacity will be added. The U.K., Germany and China will be the largest markets, which together will install over 12 GW or 83 percent of the new global capacity. Growth will accelerate in 2013 as U.K. Round 2 construction continues. Germany starts to see multiple commercial-scale wind farms come online. Annual added capacity will average around 3 GW compared with the 2007 to 2011 average of less than 600 MW. In all, cumulative global offshore wind installed capacity is expected to surpass 18.6 GW by 2016.
Over €51 billion of capital expenditure is expected for projects coming online between 2012 and 2016, a level six times greater than in the preceding five-year period €8.1 billion). The U.K. and Germany will account for €35 billion of global offshore wind expenditure, with China representing the third largest offshore wind market (€6 billion). Annual expenditure levels rise throughout the forecast period peaking in 2015 at €12.4 billion.
For more on the World Offshore Wind Market Forecast 2012-2016, see: http://www.douglas-westwood.com