Offshore wind activity is at an all-time high. The next two years will see significant year-on-year growth in capacity installed. However, the industry is struggling with development costs, which have more than doubled in five years.
There is now more than 1,500MW (megawatts) of offshore wind capacity installed worldwide, with 334MW installed in 2008. At the time of writing, a further 1,200MW is under construction offshore.
The majority of activity is still Europe-focused. The UK leads with 598MW installed and, together with Germany and Denmark, will form the three most significant markets over the next five years.
However, farther afield, and of great significance, is the current construction of China’s first commercial-scale project – for several years we have been forecasting that China, a major player in onshore wind, would enter the offshore arena. The 115MW project is being built using a “one-lift” system similar to that used on Scotland’s Beatrice demonstration project. It also marks the entrance of China’s Sinovel to the offshore wind industry.
While global activity is increasing, it is, however, at a lower rate than earlier industry expectations. And, looking ahead, we believe that, from 2011, rates of installation will plateau for two years due to cost and financing problems that are being increasingly felt.
So is there market take-off?
The past five years have been characterised by stop-start activity, with few projects completed each year and many projects being delayed. This characteristic has previously cramped investment into offshore wind by the predominantly onshore wind supply chain.
Accordingly, constraints have been felt in offshore turbine supply, installation vessels and related services. But with a more visible stream of activity emerging, including significant levels of tendering to four years ahead, we have seen a positive response through the supply chain.
But concerns over cost have grown to new heights in the last year. For offshore wind, they have risen from about £1.2million per installed megawatt on the first UK projects, through £2.5million per MW on projects in-build and up to £3million per MW for those under tender.
What has caused these increases?
Turbine prices saw a significant hike last year. This was, in part, driven by huge demands for onshore installations, as the industry had its best year yet, with massive growth worldwide.
Offshore, prices were further increased by past turbine design problems, but fundamentally by a shortage of manufacturing capacity restraining effective competition. With just Germany’s Siemens and Denmark’s Vestas supplying in the 3MW turbine classand demand high, prices climbed.
While not yet commonly used, Repower (Germany) is still the only significant supplier of 5MW-class turbines, with just Germany’s Multibrid as a potential competitor at present. UK-quoted Clipper is reportedly developing a 10MW unit.
Installation costs have also reached new highs. Offshore activity has not been higher and the installation fleet is still relatively small – especially in terms of dedicated vessels.
The fall in the value of sterling against the euro has also hurt UK activity. Indeed, British projects, which are dependent on European-supplied turbines, have been hit hard, effectively experiencing a 20% price hike.
Commodity price increases also hit, particularly steel and, to some extent, copper.
A final point is that, unlike onshore wind, offshore wind projects have, at times, been competing for the same people and, in some cases, installation services as the offshore oil&gas sector.
Offshore wind projects, to date, have almost exclusively been built through balance-sheet financing. The first significant exception to this is the Princess Amalia project (formerly known as Q7), off The Netherlands, which was completed in 2008.
The role of utility companies in project development and ownership has become de facto. This helped a lot of recent projects to be built through utilities funding construction through their balance sheets.
However, due to the credit crunch, the willingness (or ability) of utilities to fund projects has vanished. Costs are a further turn-off for the utilities. This has led to even the largest seeking project financing for their offshore wind developments.
The response from banks and private equity has been less than enthusiastic. The current financial climate means investors are naturally cautious. The fundamental problem right now is that the cost of offshore windfarm projects is, in most cases, too high to attract investment. While early, lower-cost UK projects can demonstrate an excellent rate of return, current projects are far from attractive, with many failing to demonstrate even a 10% rate of return.
Within the UK, the number of Renewable Obligation Certificates (ROCs) awarded per MWh (megawatt hour) of offshore wind generated was set to increase to 1.5ROC/MWh from April. The Budget increased this to 2ROC/MWh for the 2009-10 financial year, and this will reduce to 1.75ROC/MWh for 2010-11 before returning back to 1.5ROC/MWh. This is designed to offer developers greater financial reward for their projects.
The timing of the changes to the Renewables Obligation will limit which projects will benefit from it. The reality is that the projects in dire need of assistance fall outside of this temporary ROC increase timeframe and the benefit to them is limited. The fundamental requirement going forward is for sustainable cost reduction.
While the ROC increase will bring financial benefit to project owners, it also sends mixed signals to investors. Fluctuations to market mechanisms can increase uncertainty among investors who must assess the long-term potential for a project. Projects installed for 20-year-plus lifetimes need more than a three-year political view.
We expect to see a rise in the number of projects stalling and being abandoned. There are too many sites under development that cannot feasibly be built at present due to cost/financing problems. This will put greater emphasis on site selection in the future.
The installation situation is now changing, with more contractors entering the arena – just recently, we have seen the entrance of Seajacks, and there are exciting new additions coming from Beluga Hochtief Offshore and Master Marine, to name just three.
It must be remembered, however, that many of these players have the ability to work in offshore oil&gas, and will do so if day rates in that sector are better.
With regard to turbine costs, we are seeing onshore turbine prices coming down this year, and offshore, a reduction is expected. The financial crisis is having an impact on wind projects due to lower levels of lending and, subsequently, demand for turbines is falling. Commodity prices have fallen from their peak and this will also allow savings to be made, not just in the turbine component of projects.
By comparison, the situation for wave and tidal current stream is harsher. The investment community has expected big things from the sector, but many early investors face uncertainty. While progress is being made in some aspects of the business, the past year has seen as many failures as successes.
With even “leading” devices experiencing technology failures, there are growing concerns over existing investments. It is crucial to get the first successful “array style” projects in the water demonstrating reliability and survivability.
Meeting claimed time scales is also important, yet rarely achieved.
The basic fact remains that generating grid-connected power offshore is – and for many years ahead will be – more expensive than onshore.
Manufacturing and installation costs may have ceased rising for now and the latest generation of 5-10MW turbines offers greater efficiency, but the future of offshore renewable energy will be a function of a continuing commitment by Government. Will the next UK Government be more or less committed to green energy?
The UK missed out badly on the development of the now huge global onshore wind business (more than 27,000MW was installed last year) due to a de facto view that alternatives were not worth developing by a nation which had huge North Sea oil&gas reserves.
But those balmy oil&gas reserve-rich days are long gone. What remains, however, is that the UK has one of the world’s best offshore wind, wave and tidal resources – so will the politicians be able to do a better job developing an offshore renewable energy industry that they did with onshore?
Adam Westwood is renewable-energy manager at business analyst Douglas-Westwood
Recommended for you
