Installation costs inhibit offshore wind expansion

OFFSHORE: Winds offshore are generally stronger than onshore, partly compensating for the higher capital costs. But this does not reduce offshore wind-generating costs to onshore levels.

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At the start of this year average offshore installation costs — at around €3,000/kW — were almost exactly double those onshore. Taking higher productivity offshore into account, this translates to a 50-75% difference in generation costs. That disparity may get smaller but is unlikely to disappear altogether.

Lowering generation costs can be achieved through accelerated development, which cuts installation costs, and increases investor confidence by lowering risk premiums. Exploitation of higher wind speeds further offshore is also desirable, but that brings an extra cost for building in deeper water further from shore.

Productivity offshore needs to be roughly double that onshore to deliver electricity at the same price — this is rarely likely to be the case. The difference between productivity on- and offshore is usually modest: in 2009, the UK offshore capacity factor — the ratio of actual energy produced in relation to the nameplated output — was 33.7%. An onshore figure of 26.9% suggested offshore was 25% more productive.

In Denmark the differential was bigger: offshore wind delivered a 35.4% capacity factor in 2010; onshore it was 19.7%, giving an apparent offshore advantage of around 80%. But this may be misleading. Productivity data compared on the basis of energy production per square metre of rotor area show onshore wind delivered 714kWh/m2 of rotor area, with offshore at 1,173kWh/m2 — 64% more. Longer term, Denmark has high hopes for offshore wind and expects more than 1.3GW installed by 2020, delivering an average capacity factor of 45.4%, by going further offshore and to more windy sites. This is 63% higher than the 27.8% expected onshore factor.

Better by half

Across the EU as a whole, taking data from submissions to the National Renewable Energy Plans, the average capacity factors anticipated are 23.8% onshore and 36.5% offshore, making offshore productivity 54% higher. The biggest gap is in Italy, where the onshore figure is expected to be 17.1% and the offshore figure is almost double, at 33.6%. At the other end of the spectrum, Poland and Sweden expect offshore to deliver the same as, or slightly lower than, onshore, see Offshore table, left.

With offshore installed costs double that of onshore's, wind speeds need to be higher to realise the same generation cost, see the Wind Speeds table above.

If offshore installation costs can be reduced, mainly through accelerated development, then required wind speeds drop. However, as wind speeds of the magnitude shown in the Wind Speeds table are rare, cost parity may be difficult to realise, although less so at lower onshore speeds.

The German Wind Energy Institute has measured an average wind speed of 9.9m/s at 100 metre height at a mast near the Alpha Ventus wind farm, in the North Sea. Wind speeds of this order can produce output capacity factors around 50%. With relatively low German onshore wind speeds producing capacity factors around 15-25%, offshore wind generation costs are likely to match onshore winds there sooner than they do elsewhere.

Possible reductions in offshore costs

While timing is uncertain, there is a general expectation that accelerated development will bring down the cost of offshore wind possibly faster than onshore, so closing the gap in generation costs.

The pursuit of higher wind speeds is a goal of most offshore developers: a 10% increase in wind speed results in a 20% increase in electricity production. But this involves moving further offshore, with higher costs for longer cables and maintenance, as personnel take longer to travel to the turbines. Deeper waters further offshore may also push up the cost of foundations. This may eventually be limited by floating turbines, but there is little data yet on these. Going to deeper waters means that capital costs, alone, will not be a reliable guide to offshore cost trends. The influence of water depth and distance from shore on installed costs is illustrated in the High Winds diagram overleaf.

Larger turbines are likely to lead to lower costs and the announcement by the Fraunhofer Institute, the German government-funded research centre, about a facility to test blades for 180-metre diameter turbines suggests that the practical limits on size that have long been discussed are not yet constraining development.

Learning curve

The greatest potential for offshore cost reduction comes from increased deployment, which brings savings through the phenomenon referred to as "learning by doing" or "experience curves". This simply means that the greater the production, the more the cost falls, and the more that is made, the better the efficiency and quality. This is observed in a wide range of technologies, from consumer durables to aircraft. With wind energy there was a steady downward trend in installed costs from around 1985 to 2005. A number of studies suggested that the "progress ratio" for onshore wind was around 90%. That means that a doubling of production led to costs falling from, say, €1,000/kW to €900/kW. However, onshore and offshore price trends were disrupted from around 2007 because of rapid increases in the price of steel and other key components, plus a shortage of turbines, which enabled manufacturers to improve low margins. Turbine prices increased by about 20%, pushing up offshore installation costs by around 50%. Commentators are now cautious in projecting future cost reductions.

Other factors in the move towards larger installations may bring reductions, as some costs will stay the same for producing more megawatts: specialist equipment hire, site investigation costs and bank fees. Recent reports suggest a fall in installation costs of 25% to 40%.

Generation costs

Offshore generation costs may fall as investors become more confident, enabling the risk premium to fall, especially in the UK and the US, which have fully liberalised energy markets. UK offshore wind has a 1% risk premium compared with onshore wind. A government analysis suggests this premium is unlikely to fall in the near future, but that is more to do with the institutional framework than the technology. In North America, a premium on the embryonic offshore market may remain for a few years until experience grows.

There is strong expectation that all wind generation costs will fall in the future, with the onshore-offshore gap likely to narrow, but not disappear — although a recent US report suggests there may be parity soon after 2020.

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