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Offshore: Research finding - Confidence key to lower cost

The cost of building offshore wind projects could decline by 15-20% within five years, provided companies have the confidence to invest in the sector, establishing economies of scale and increasing competition.

This is a key finding of a study published by the British Wind Energy Association (BWEA), one of two studies by consultants Garrad Hassan exploring offshore wind delivery in the UK over the next five years.

"The message is pretty simple. Confidence: that is all we need," said Andrew Garrad of Garrad Hassan, who presented the results of both studies at BWEA's offshore conference in London in June.

Construction of some 5.5 GW of offshore wind is expected in the UK by 2015, meaning 0.6 to 1 GW would be added every year. This is despite current building costs which, in the UK, range between £3.1 million a megawatt of capacity - around double the cost of projects built between 2000 and 2005. There are a number of reasons for the hike, says Garrad. "There have been withdrawals of various suppliers; there has been a sudden realisation by wind turbine manufacturers that they weren't making enough money so the prices went up; and then there was the collapse of sterling." With over 80% of the value of a UK project being imported, the exchange rate has had a huge effect on British projects. The boost in financial support for offshore wind announced in the government's April budget had an immediate effect, and is keeping the rate of installation on track.

But Garrad warned of a looming "gap" in activity around 2013. This is unhealthy for the maturing market. "To instil confidence in the industry, in the supply chain and in the banks we need to fill that gap." This could be done by removing barriers to projects being built under the second round of site licensing for offshore wind projects in the UK, by building extensions to Round 1 and 2 projects (page 34) or by accelerating Round 3, he said.

Key factors

The study found that of all the factors influencing future costs, the wind turbine market, the installation vessel market and exchange rates were the most significant. "The critical mass of the turbine market is important," said Garrad. At best the offshore business will be 10% of the global wind market - though higher in the UK and other crowded northern European countries, he said. "We need to make sure we attract turbine manufacturers' attention to address this market properly in technology and in terms of volume." But most price reduction will come through increased volume rather than through technology developments, he added. "And volume comes with confidence."

Increased confidence will also help decouple the supply chain from existing industries. So far offshore wind has ridden on the back of other sectors such as onshore wind, as well as oil and gas, competing with them for attention. Boosting confidence in the market will encourage suppliers and contractors to invest in a dedicated supply chain for offshore wind.

"So we have to have in place a regulatory environment and an incentive system that will allow the industry to be confident they should invest in this business," Garrad said. "If you do that, prices will fall as they did in the onshore business as a result of volume."

Meantime, increasing UK content in offshore wind farms is crucial. "We are exposed to currency risk," Garrad explained. He said installation of around 20 GW of wind power generation capacity by 2020 will require £60 billion of investment. "We can't seriously expect our government to allow that £60 billion to be spent abroad; we need to have a large chunk of it spent here."

BWEA chief Maria McCaffery said the reports suggested the current high costs of offshore wind are a short-term spike. "But we won't get past that spike until more manufacturers enter the market." But, she said, they need confidence to invest. "And we need government to act to build that confidence, to send out a clear signal that reassures investors that this is not a flash-in-the-pan opportunity but a real, long-term commitment."

A record 912 people attended the two-day event in Queen Elizabeth Hall, Westminster, with nearly 90 companies exhibiting.

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