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Scaling up is essential to attract investment

WORLDWIDE: The offshore wind sector stands at a crossroads. In several regions, most notably Europe's North Sea, developers have proven that generating renewable electricity at sea is technically viable.

A substation is installed at 1GW London Array
A substation is installed at 1GW London Array

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Thanks in no small measure to technical know-how gained from decades of offshore oil and gas exploration, the global offshore wind sector currently generates 3.3GW of electricity annually and is looking ahead to 5GW installed capacity by 2012, 16GW by 2014 and 80GW by 2020.

With such large projected growth, the offshore wind sector should be flying high. However, one fact must be faced. Offshore wind remains one of the most expensive forms of electricity generation and unless costs are brought down the prospects of turning the industry's rapid growth plans into reality are highly uncertain.

Few would disagree that the price of offshore wind electricity generation must be reduced, but how? The answer is scale. Greater scale will reduce the price of energy, but can only be achieved if investors are convinced that regulatory and market certainty is solid enough to outweigh the inherent risks that come with offshore development.

There are three pre-conditions to attracting investment in offshore wind, according to Venkie Shantaram, a partner at global consultancy McKinsey & Company. First, the current lack of long-term regulatory certainty within key markets, notably the UK. This must be replaced with a lasting policy framework that supports private investment in offshore wind. Second, grid connectivity problems must be addressed. Third, supply-chain bottlenecks cannot be allowed to grow.

"Investors need to receive the right signals in the long-term regulatory framework in order to fund scale and so bring down the cost of electricity. With utilities highly leveraged and unable to fund more offshore projects from their balance sheets, the next £100 billion (EUR160.6 billion) of offshore investment in Europe will need institutional investors," says Shantaram.

Some markets have been more successful in developing effective offshore wind policies - and sticking to them - than others. Shantaram identifies Germany as having introduced a stable framework for investors through the creation of an offshore-wind infrastructure industry with regulated returns.

The second prerequisite to finance is cost-effective grid connectivity. "Investors need certainty that we can overcome the technical challenges of deeper water and far-shore development. A central issue here is availability and deployment of HVDC (high-voltage direct-current) cables," says Shantaram. "We need to know that offshore wind farms can be connected to shore cost effectively."

The third area of concern for investors is the offshore supply chain, specifically its capacity, robustness and flexibility. If costs are to be driven down, it is essential that potential delays are identified and prevented. "Our analysis shows that cables and installation vessels are in a competitive arena with telecoms. With turbines, there are only three or four truly global suppliers, as we don't expect Asian competition in the supply chain to come in time for North Sea Round 3 (the UK's proposed 32GW of offshore projects by 2020)."

The offshore supply chain will also have to be flexible enough to negotiate regional shifts in activity. For example, a sharp increase in offshore megawatts being built in German waters is expected after 2014, with a simultaneous downturn in the UK. This would represent the reverse of current trends. "In 2012, we expect 1.6GW to be installed offshore in UK waters and nothing in Germany," says Shantaram. "In 2014, we will see 500MW installed in UK waters and 2.6GW in German waters." Shantaram also wonders whether Germany might prove more effective at bringing costs down, thanks in part to an indigenous supply chain.

Scaling up

With rapid expansion of installed capacity - the clear goal of the offshore wind sector - a great deal of attention is now focused on the UK's Round 3 as it represents the most ambitious building programme to date. "The sheer scale of Round 3 presents completely different challenges - it's a long way out. With both Dogger Bank in the North Sea and the Irish Sea projects, the common factor is getting your head around the size of them. Dogger Bank is going to be 13GW and Centrica's plans for the Irish Sea are 4.5 GW," says Marcus Trinick QC, who specialises in planning and environmental law at UK-based law firm Eversheds. Trinick has worked on offshore wind projects since 1999.

Is Trinick confident these Round 3 projects will be built given the current economic climate? "There is serious commitment from Forewind, Dogger Bank's development consortium, and from Centrica," he says. "They are spending a lot of money taking these projects forward and I see no sign of faltering."

Trinick agrees that the key to offshore wind's future success is deploying greater scale to bring down costs. "People think offshore wind farms are scary to build, but they are fairly simple structures compared with, say, a nuclear power station. And the track record of the oil and gas industry building and operating installations at sea is good. These are doable, fundable projects," he says.

The capacity and robustness of the supply chain is a concern for Trinick, as it is for many offshore wind insiders. "There is a frisson of concern about the supply chain, because we need a lot of kit out there. For example, offshore projects would be built faster if there was access to more vessels. And there is an HVDC cable shortage."

Beyond the UK, the German offshore market appeals, as does the prospect of a plan to connect UK offshore wind to the continental European electricity market. "What is exciting about the UK market is the prospect of linking UK offshore wind to a North Sea grid on a load-management basis. It's common sense to want to be able to play the European electricity market," he says. From Trinick's perspective, greater interconnectivity between European electricity grids would not just benefit offshore wind, but would also allow gas and nuclear-generated electricity to be traded more freely, improving the overall availability of electricity across Europe.

Grid connection represents a huge challenge for the offshore wind sector. Taking the UK as an example, Trinick describes the process of "connecting offshore wind to the onshore grid using the onshore local planning system with overhead lines" as something akin to water torture. In many regions, part of the solution will be to do as much offshore as possible, thereby minimising onshore grid connections and the visual impact and other issues that onshore work brings with it. This would include undergrounding transmission through direct-current cables inland as far as possible before the converter station point, suggests Trinick.

Moving further offshore

Ensuring that offshore wind developers can be confident of projects progressing to schedule will be vital as offshore expansion accelerates, argues Malcolm Garrity, head of offshore wind with energy engineering consultancy, G3 Baxi. Having managed the 8GW of UK Round 1 and 2 projects, Garrity believes a key and often unacknowledged factor in establishing a strong supply chain is developers' persistence and eventual success in navigating lengthy and bureaucratic consenting processes. If suppliers can see that projects are winning consent they will feel that it is safe to invest in equipment, personnel and training.

"The offshore wind industry can take many lessons from the oil and gas industry, but it is not simply a cut-and-paste process," says Garrity. "It is essential that oil and gas methodology and skills are looked at, examined and then adapted to deliver the needs of offshore wind." Garrity's colleague Janet Laing, energy director at G3, agrees, noting that the reaction of the oil and gas industry can sometimes be one of "do things our way and you will succeed". Nevertheless, Laing identifies a host of areas where the offshore sector can call on decades of oil and gas know-how. "Planning, site selection, geology, regulation, safety, construction, structures, electrical supply and supply-chain management - of all these perhaps the most important is health and safety," she says.

The pivotal point at which the wind-energy industry as a whole moves beyond its established onshore focus to an exciting but higher-risk future offshore is, in fact, not the move from onshore to current shallow water, close-to-shore operations. The real step forward is the move out further from shore and into deeper waters. "The progression is really in three phases - first onshore, then near shore, than far shore," says Garrity.

Far-shore wind, already evident from Germany's venture into the southern North Sea and soon to begin with UK Round 3 projects, is a very different prospect to what Garrity calls the "port-and-harbour" approach that has been evident in the early phase of offshore wind development. "Port-and-harbour techniques and equipment will not suffice when we go out to deeper and more distant sites, into hostile waters where dashing back to port in bad weather is no longer practical."

Most of the emerging offshore markets are classed as deep water far shore. "China, post-nuclear Japan, the US Atlantic, the Gulf of Mexico, the Canadian Great Lakes, the Pacific coast of Chile, the French and Iberian Atlantic - these are all areas with a good wind resource, but with deep water that will require floating turbines and offshore oil and gas expertise," explains Garrity. He has doubts about some other mooted markets, such as some parts of Asia - hampered by hurricanes and typhoons - and north-east Europe's Baltic Sea, which is constrained by a relatively poor wind resource.

Most commentators agree that the regions ripe for early offshore wind development are the North Sea and the Chinese coast, with uncertainty continuing to dog the prospects of the Baltic and US Atlantic regions. Considering the North Sea, the biggest single factor that would support greater offshore scalability would be the construction of a grid capable of integrating far-shore wind farms with the rest of European power. "The grid is the glue that will hold together our decarbonised power system," according to the chief executive of the European Climate Foundation, Johannes Meier. "We must be more efficient to deliver this in the most effective way, and the grid needs to get smart," he says.

Future risk

Could offshore wind fail to take off simply because investors think the risks are not worth taking? The short answer is yes. If government support for offshore wind is not forthcoming, or not maintained, and if costs cannot be brought down and kept down, then the high costs of offshore wind will remain a deterrent for many investors. It is by no means certain that offshore wind will triumph and achieve the scale necessary for it to become cost effective and competitive on a global basis.

Doubt about the short-term prospects of offshore wind remains widespread. Global consultancy KPMG recently published a report, Thinking About the Affordable, which argues that Britain and other European nations can achieve their 2020 carbon-reduction targets without prioritising offshore wind. Instead, a combination of nuclear and gas-fired power stations is the best short-term solution, says the report.

Central to the KPMG report's conclusions is the assumption that a large proportion of the next generation of nuclear power stations, planned for the UK but not yet built, can be deployed quickly despite the nuclear industry's own expectation of drawn-out technical and consenting processes. Unsurprisingly, the arguments presented in KPMG's report have been refuted by industry association RenewableUK.

But the very fact that KPMG can cast doubt on wind power as the best available low-carbon energy technology proves that the argument for deep-water, far-shore offshore wind is not yet won. The offshore wind sector will only win the argument definitively when it has succeeded in achieving scale. But to do this it needs investors. Investors won't move ahead without a regulatory framework with a firm commitment to grid connectivity. Investors will also demand a robust supply chain. Yet the latter won't develop until projects are agreed and ready to go. If care isn't taken, a vicious circle can develop, where each part of the sector looks for another to take the next crucial step forward.

Offshore wind has a huge role to play in Europe and beyond, but only if it can be connected to big, flexible, regional electricity-distribution systems. Now is the time for the offshore-wind sector to be bold and to think big - and to secure the political and practical support it needs to win investment.

UK MILES AHEAD - THE TOP 20 OPERATIONAL OFFSHORE WIND FARMS

Project Capacity Country Online
(MW) since

Thanet 300 UK 2010
Horns Rev II 290 Denmark 2009
Rodsand II 207 Denmark 2010
Lynn 194 UK 2008
Walney I 184 UK 2011
Robin Rigg 180 UK 2010
Gunfleet Sands 172 UK 2010
Nysted 166 Denmark 2003
Bligh Bank 165 Belgium 2010
Horns Rev I 160 Denmark 2002
Princess Amalia 120 Netherlands 2008
Lillgrund 110 Sweden 2007
Egmond ann Zee 108 Netherlands 2006
Donghai Bridge 102 China 2010
Kentish Flats 90 UK 2005
Barrow 90 UK 2006
Burbo Bank 90 UK 2007
Rhyl Flats 90 UK 2009
North Hoyle 60 UK 2003
Scroby Sands 60 UK 2004

Source for all tables: Windpower Intelligence

ADDRESSING THE MONEY ISSUE - UK GOVERNMENT PRIORITISES OFFSHORE COST CUTS

Offshore-energy practitioners the world over agree that the cost of electricity generated by wind at sea must come down. In the UK, the recent creation of an offshore-wind cost-reduction task force is an attempt to do just that.

Led by Andrew Jamieson, chair of industry body RenewableUK, the task force will set out a path and action plan to reduce the cost of offshore wind from £170/MWh (EUR195/MWh) today to £100/MWh by 2020.

The task force will report to the UK Department of Energy and Climate Change and devolved administration ministers by the spring. Members of the task force include turbine makers Gamesa, Alstom UK, Siemens Wind UK and Vestas Offshore; UK consultancies the Energy Technologies Institute and the Carbon Trust; energy companies Centrica and Dong Energy; developers Mainstream Renewable Power, Smart Wind and Technip Offshore Wind; renewables consultancy GL Garrad Hassan; projects firm Sinclair Knight Merz; law firm Eversheds and Lloyds Banking Corporate Markets.

Just before the task force first met in October, UK energy minister Charles Hendry said that barriers with the potential to impede the viability and deliverability of offshore wind in the UK must be removed.

GERMANY ENTERS THE FRAY
THE TOP 10 OFFSHORE WIND FARMS UNDER CONSTRUCTION

Project Capacity Country Completion
(MW) scheduled

London Array I 630 UK 2012
Greater Gabbard 504 UK 2012
Borkum West II 400 Germany 2012
Bard 1 400 Germany 2012
Sheringham Shoal 315 UK 2012
Lincs 270 UK 2012
Walney II 184 UK 2012
Ormonde 150 UK 2012
Thortonbank II 148 Belgium 2013
Datung Laizhou II 50 China 2012

UK STEPS UP - TOP FIVE PROPOSED OFFSHORE PROJECTS

Project Capacity
(GW)

Dogger Bank 9.0
Norfolk Bank 7.2
Irish Sea 4.2
Hornsea 4.0
Firth of Forth 3.5

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