EXPERT: Offshore wind on target to match fossil fuels

WORLDWIDE: Offshore wind power has been heavily dependent on government support but is now rapidly heading towards being self-sustaining as its costs fall to match those of fossil-fuel sources.

The single greatest obstacle to the mass proliferation of offshore wind generation has been that it is simply cheaper to burn fossil fuels. That is changing.

A group of large and experienced energy companies — among them Statoil, E.on, Dong Energy, RWE, Iberdrola, EnBW, SSE, Statkraft, and Vattenfall — are working to reduce costs of offshore wind to less than €100/MWh by 2020.

With the UK Carbon Trust, they have staked £7.9 million to reach that goal. It is an ambitious target: research published earlier this year by the Internantional Renewable Energy Agency (Irena) showed that offshore wind generation costs are still roughly double those of onshore projects, although analysis of the data revealed that the trend of rising installed costs may have halted.

It may even be declining. The US National Renewable Energy Laboratory (NREL) calculated that the average cost in 2015 was slightly less than the year before.

At least two companies in the group outlined above seem certain that the goal of sub-€100/MWh offshore wind generation is already achievable. In the Netherlands, the latest bidding process for the Borssele concession was won by Denmark's Dong Energy, which put down a groundbreaking bid of €72.70/MWh.

Borssele 1 & 2 are located 22km off the Dutch coast

Another is Vattenfall, which in September won the Danish near shore wind tender for Vesterhav South and Vesterhav North, with an astonishing bid of €63.8/MWh.

These cost prices are almost comparable to those of coal-fired power plants. If they are achievable, offshore wind power can now compete nearly dollar-for-dollar with other power sources, even in the absence of subsidies.

Admittedly the projects are not fully comparable with others as the developers are not paying the capital costs for grid connection, but they put the ambition to achieve €100/MWh generation into a new light.

Survival strategy

If they are to survive in the long run, renewables must become cheaper to the point that they are competitive with other energy sources. The industry is now evolving from one that was heavily dependent on government support into one that is self-sustaining, where profitability can arise from the fundamentals.

Many factors will have a continued influence on the future development of offshore wind. Politics and public opinion will keep playing a role, since governments and especially consumers might be prepared to pay a little extra for cleaner energies and CO2 reduction.

Despite the current slump in their cost, oil and gas are finite resources. So oil prices, as well as the rate at which the world's fossil fuels supply is depleted, will play a role as well. However, changes by and for the industry itself are converging to bring down the cost of offshore wind generation.

It is extremely difficult to provide credible quantitative predictions of the likely reduction in the cost of renewable energy over the next decade, but we have some broad outlines.

Many studies have been published about reducing the levelised cost of electricity (LCOE), a measure of a power source that attempts to compare different methods of electricity generation on a comparable basis.

One of the most influential was the Offshore Wind Cost Reduction Pathways Study, published by the UK Crown Estate in 2012.

Sompo Canopius, head of renewable energy, Maarten Mulder  

The study considered four pathways to cost reduction: slow progression; technology acceleration; supply chain efficiency; and rapid growth.

Three of these approaches, the study found, could lead to a LCOE of less than £100/MWh by 2020. This set the benchmark against which Dong's €73/MWh bid for Borssele made such a high impact.

More likely in practice, however, is that some combination of selected aspects of each of the four pathways set out by the Crown Estate will be adopted for specific projects. In fact, such combinations are already under execution, and are leading to accelerated cost price reductions.

A critical step will be technological progress and industry standardisation for turbines. They have already become cheaper, and once an optimum turbine size in MW is reached, even more standardisation, optimisation of the design, and higher production volumes will result, leading to lower turbine prices.

Standardisation may have even greater cost-reducing implications for turbine foundations. At present too many different designs are being deployed, making the foundations a relatively expensive part of an offshore project. Great cost gains could be achieved through improvements in this basic area.

The supply chain supporting construction, operation, and maintenance is rapidly improving. More purpose-built vessels are now available, the number of useful harbours is increasing, and their infrastructure is improving.

These developments are helping to bring down the cost of power across the offshore wind generation sector.

Risks and rewards

Another advance, and one of particular importance to insurers, is improving risk management, which leads to sustainably reduced overall costs.

Much remains to be gained in this area. Safety standards, risk management, and loss prevention in the oil and gas industry typically operate at significantly higher levels than they do in the offshore wind sector. This is to be expected from a much more mature and knowledgeable industry.

But that experience presents an opportunity. The lessons learned by the oil and gas sector could and should be translated and introduced to the offshore wind industry.

Offshore wind projects are likely to increase in size, along with the industry as a whole. Many studies have been conducted about the future development of offshore projects up to 2020 and even 2030, and considerable growth is expected.

While these projections all seem to be dependent on continued government support, and particularly on the execution of existing international environmental agreements such as the Kyoto Accord, an overall cost price reduction will help to make up for some of the shortfall arising from reduced subsidisation.

In turn, increased scale will lead to operating efficiencies which themselves will further reduce the total cost of generation.

As the number of offshore projects increases, operation and maintenance (O&M) procedures will be improved and rationalised accordingly, leading to efficiency savings and therefore to lower production costs.

Operators of several projects can now optimise maintenance schedules. They may elect to build special vessels, offshore hotels, or even complete offshore artificial islands to accommodate maintenance personnel and equipment.

Siemens chartered two new purpose-built offshore service operations vessels

Other initiatives will include the set-up of cooperative agreements under which the members jointly procure and operate repair and maintenance vessels.

The insurance industry is keeping pace with the growing demand for cover for the offshore wind generation sector, allowing sufficient insurance cover to be available as it realises the diversification benefits of this relatively new utilities business.

However, insurance prices in the offshore sector (and most other areas too) are currently low, as capital availability meets and exceeds demand for insurance.

So, as the offshore wind industry's size increases and the risks that insurers are taking on also grow, insurance prices will probably need to stabilise or increase commensurately.

A readjustment of pricing, will, however, also make insurers better able to assist in bringing down costs.

Policy wordings can be made quite extensive, and designed to support investors and banks by assuming some of the unwanted risks they face when investing in the sector, which should make their money cheaper.

When safety standards, risk management, and loss prevention improve, as discussed above, and vessels become more widely available, spare parts become less expensive, and consequently the number and the extent of losses in the industry decreases, this will have a further positive effect on the cost of insurance.

Taken together, the goal for offshore wind generation of less than €100/MWh begins to seem perfectly realistic.

From there, is seems equally feasible that small, incremental decreases will soon make the technology competitive with coal-fired electricity plants, even without subsidy. That achievement would mean that the huge potential of offshore wind power could finally be realised.

Maarten Mulder is head of renewable energy for international insurers Sompo Canopius