Global offshore wind activity has accelerated of late, with the majority of installations taking place over the last few years.
Construction has centred on the North Sea region, with the UK undoubtedly representing the bellwether market.
Growth in the UK market has benefited from a structured leasing process, generous financial incentives and strong political commitment.
The first round of UK offshore wind development was initiated by the Crown Estate in late 2000 and, since then, two further rounds of increasing scale have been announced.
Construction of round two projects is ongoing and extensions to early projects are moving forwards. These interim projects – taking place over the next five years – are bridging the gap prior to the commencement of UK Round 3.
The nine designated Round 3 zones represent more than 30 gigawatts (GW) of potential capacity and capital expenditure levels of close to £100billion.
Round 3 projects are on a different scale to what has gone before and are a fundamental component of the UK’s low carbon strategy.
Each construction phase of these mega-projects will see hundreds of multi-megawatt (MW) turbines being installed in water depths of 35m or more and increasingly far from shore.
Every project will require long-term charters of several highly specialised installation vessels, and purpose-built port facilities to handle the increasing dimensions of modern wind turbines, foundations and balance of plant.
However, while the Round 3 vision is both clear and potentially of great economic significance, what are the prospects for industry take-off?
Many industry-watchers will remember the early UK offshore projects and optimism at the time regarding future growth. In reality, sustained growth has taken a long time to materialise. It is also clear that Round 3 represents a step change in the industry which has been likened to the challenge faced during the early years of North Sea oil.
So what are the major issues that face this emerging industry? The first question to consider is around financing requirements. UK projects have historically been built through balance sheet financing by international utilities. However, with the increasing investment implied by Round 3, this model is unlikely to be sustainable.
Unlocking additional funding streams has thus far proved challenging, due to caution on the part of private investors, a trend exacerbated by the financial crisis.
Concerns have been raised due to a combination of factors including high levels of construction risk, reliability issues and concerns over the stability of financial incentives.
The general trend of rising capital costs has been a particular cause of concern; inexperience, lack of competition and major technical challenges all contributed to significant cost escalation in the five years prior to 2008. It should be noted, however, that recent project data indicates that costs have started to level off in the industry.
In the German market, where there are more independent project developers and hence a more pressing need for project financing, there has been some movement.
Private investment has been unlocked in part by funding from the European Investment Bank (EIB) to guarantee elements of construction risk, but it is unknown how long this approach can be sustained nor how many projects can be supported.
What is clear, however, is that further commitment from national governments and regional bodies will be required beyond the near-term in order to give comfort to private investors. Revenue support is another issue of fundamental importance. Any reductions in the level or duration of incentives can call into question the economic viability of more marginal projects.
To date, the UK’s adaptive Renewables Obligation Certificate (ROC) system has provided sufficient financial incentives to encourage utility investment, but the recent Electricity Market Reform (EMR) consultation has led to uncertainty.
While any major shake-up is considered unlikely, the process has unsurprisingly led to something of a hiatus in activity. Meanwhile, several major European markets including Germany have been moving forwards with long-term fixed incentive approaches in order to stimulate development, an approach which has proved successful in the example of onshore wind.
Recent market growth has stimulated supply chain development and a growing distinction between the offshore and onshore sectors.
Yet, despite its position as the premier offshore wind market, the UK has struggled to retain investment and profits, as many of the leading companies are based in Germany, Denmark and Holland.
However, several offshore wind turbine manufacturers have recently announced UK production facilities. Supply chain movements have been unlocked in part by public initiatives such as the UK-level Ports Infrastructure Fund and Scotland’s National Renewables Infrastructure Fund. Major investments are also being made in Germany, with an offshore wind cluster of turbine and foundation manufacturers developing in Bremerhaven (the Luneort project).
The success and continued growth of offshore wind has often been associated with the development of next-generation turbines with higher power outputs. However, the commercial deployment of these turbines has progressed more slowly than envisaged, with major manufacturers choosing to adopt a cautious approach.
On the one hand, manufacturers are choosing to concentrate on smaller onshore turbines, and on the other there is increased emphasis being placed on testing, reliability and efficiency. The success of Round 3 projects, especially those in deeper water, which carry significantly higher foundation costs, will be highly dependent on the roll-out of these higher output machines.
Until recently, only a handful of projects were being installed at any one time, consequently demand for installation vessels could be met. Leading installation contractors will be in extremely high demand in the future due to their proven track records and the efficiency of their specialist vessels.
While several new-builds are coming to market in the near-term, there will be a requirement for an accelerated construction programme to satisfy the demands of Round 3. Investment decisions in this area are long-term with vessels green-lit today coming to market around 2016-2017, in expectation of major construction activity.
Despite the major challenges outlined above, the prospects for offshore wind are good, with a truly global market developing with accelerating activity in China and increasing interest in the United States. Douglas-Westwood’s project-based forecasts see more than 11GW of new global capacity being added over the next five years, representing capital expenditure of more than £30billion.
The commercial opportunity is clearly significant and open to a range of supply chain companies, from existing players with first-mover advantage to new entrants in complementary sectors such as offshore oil & gas.
Andrew Reid is MD at analyst Douglas Westwood
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