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Boundary Pushers: Making the business case for offshore more compelling

Offshore wind has made great strides in recent years. Projects announced in Europe in 2017 have achieved record-low prices, well under €100/MWh.

In the latest auction round in Europe – the UK’s second contracts for difference (CfD) competition announced in September 2017 – Dong Energy secured the Hornsea Project Site Two for a strike price of £57.50/MWh. EDP Renovaveis (EDPR) also secured a contract, with minority joint venture partner Engie, to build 950MW of the Moray Offshore Wind Farm East project. These prices put the offshore wind industry 3-4 years ahead of schedule.

In the past, offshore wind capital expenditure (Capex) costs were much higher, due to smaller turbines, limited track record in terms of performance, offshore substation inclusion, a high-risk profile and higher cost of capital.

Today’s offshore wind turbines are more than double the capacity, compared with machines installed several years ago, whilst in many offshore wind markets, offshore substations and export systems have largely been taken out of wind project Capex.

As the industry has matured, the cost of capital has come down, unlocking wider sources of equity, such as pension funds, seeking long-term infrastructure assets to invest in, as well as cheaper debt from banks for project financing.  

The reduced risk profile of offshore wind has helped the industry access cheaper capital. Wind farms with fewer, larger machines also mean fewer foundations and substructures to build and fewer cables to install.

Pre-2010, when offshore wind Capex was high, the total Capex saving of deploying fewer higher-rated turbines would have been modest. But now that it is much lower overall, the relative share of installation is substantial, which has a much larger positive impact on levelised cost of energy (LCoE).

But bigger turbines, such as the MHI Vestas V164-8.0 MW machines installed at Dong’s Burbo Bank Extension and Walney Extension, also lower operational expenditure (Opex) costs, which brings down LCoE further.

Fewer machines need servicing, resulting in significant savings when transport, time at sea and maintenance costs are factored in.

According to Thomas Karst, chief sales officer at MHI Vestas, turbine innovation acts as a key driver for the rest of the supply chain. The rest of the industry has to innovate too.

With bigger turbines capable of generating more power, it is essential that all the components around transmission – switchgear, transformers, array cables – are able to support a more robust and efficient energy transmission platform such as the 66kV standard.

"When potential investors see how these kinds of innovations directly impact the scalability and business case for offshore wind, it’s reasonable for them to consider the opportunity. We are seeing this happen around the world and with an increasingly diverse range of investors," says Karst.

One such investor is Denmark’s Lego Group. After investment in two offshore wind farms, since 2012, Lego is able to balance 100% of its energy use with energy from renewable sources. The company’s latest investment is a 25% stake in Burbo Bank Extension.

As the offshore wind industry has matured, fewer, large developers have honed their experience, learning from past successes and mistakes to develop and build wind farms with greater efficiency.

Investors draw confidence from developers that have amassed project experience, have strong pipelines in place to better negotiate costs, and have established relationships with trusted supply chain partners.

As the latest offshore wind price announcements in the UK are proving, the industry is moving rapidly towards subsidy-free energy, part of a wider trend where renewable energy generally – on and offshore wind and solar photovoltaics – is becoming increasingly competitive.

Private sector commitment to investing in sustainable energy gets shareholder backing when it makes economic sense, as the growing roster of the RE100 club is proving.

Members, which include Ikea, AB-InBev, Diageo, Facebook and Bank of America, have all expressed commitments to sourcing 100% of their electricity from renewables in the coming years.

But despite the increasing competitiveness of offshore wind, for some it is still too capital-intensive. Norwegian renewable energy producer Stadkraft is divesting its holdings in offshore wind assets, including Dogger Bank, in favour of other opportunities such as investment opportunities in low cost solar, hydro and onshore wind in Latin America.  

On the other hand, no new industry retains all of its earlier entrants and as it has evolved offshore wind continues to attract new ones. Offshore wind may have lost Stadkraft but the sector also gained a new player in the form of Royal Dutch Shell. In December 2016 a consortium, comprising Shell, Eneco Holding, Van Oord and Mitsubishi, won the contract to build two wind farms off the Dutch coast with a combined capacity of 680MW.

The oil and gas conglomerate sees the big ticket potential of offshore wind as projects and zones have continued to increase in size.

2017 will be remembered as the year when offshore wind demonstrated it can afford to develop profitable projects for lowest prices yet, subsidy-free in some cases. But investors shy from uncertainty. If the industry is to continue to build on progress so far, a long-term policy horizon that guarantees capacity requirements is critical.