Offshore wind: How low can you go?

Three press releases by two major offshore wind farm owners and operators totally surprised the industry during the past few months. First, DONG Energy came out on 5th of July with the news that it had won the public auction for Borssele 1 and 2 wind farms (2 times 350 MW) with an all-time record low bid of 72.7 EUR per MWh for a 15-year contract with the Netherlands’ Ministry of Economic Affairs.

The smoke had barely dissolved when Vattenfall released the news on 12th of September of winning the Danish Near Shore Tender with 64 EUR per MWh for 13 years. The tender was for two wind farms of 350 MW total capacity on the west coast of Jutland.

And last week, on 9th of November, Vattenfall made it again – this time winning the auction for the Danish part of the huge Kriegers Flak shoal in the Baltic Sea. The offshore wind industry members had hard time believing their eyes when they saw the latest Vattenfall figures: the 600 MW wind farm investment should be covered – hopefully with a decent profit to the owner – with a mere 49.9 EUR/MWh income!

All three projects should be up and running in 2020, and they will be built with the next-generation turbines in the 8 MW size range. The above stated cost figures don’t include the offshore substations and cables to mainland. But even so, they are shocking numbers compared to what the industry is used to.

Offshore wind has traditionally been seen as one of the more costly and less mature branches of the renewables business. Since the early experiments of the 1990’s, offshore wind farm construction and operation have been relying on lofty support from the taxpayers. The growth of turbines and project sizes was hoped to bring the costs down, but for a number of years the cost curve was stubbornly pointing upwards, to everybody’s disappointment and frustration.

It seemed that a number of unfavourable factors more than compensated for the potential savings brought by the growing volumes and learning-by-doing. These included the increasing water depths and ever longer distances to coastline and construction hubs, as well as the contractors’, insurers’ and lenders’ policies of strict risk mitigation – meaning higher margins and safety margins on margins.

While the modest sized nearshore experiments of the 1990’s and first years of 2000’s were built on shallow waters and with project structures mainly copied from the onshore wind power industry, the “next wave” of offshore wind farm construction was totally different: Water depths of 40 meters, sea fetch of 100 km, and project setups borrowed from the offshore oil and gas industry. Needless to say, offshore oil and gas have a totally different risk profile to that of onshore wind. The result: remuneration levels approaching 200 EUR/MWh, and raising eyebrows within the political and financing circles.

Starting around 2011-12, cost reduction was gradually recognised as the only long term survival strategy for the business. In 2014, DNV-GL published their “Offshore Wind – A Manifesto for Cost Reduction”, declaring “a war on cost” and summing up a number of previously launched public and industry initiatives on turning the cost curve back to where it should be pointing – towards Southeast.

Earlier this year, IEA Wind Task 26 published their study on the future cost and technology trends of on- and offshore wind, based on the survey of 163 World’s foremost experts. According to the experts’ expectations, the LCOE of fixed-bottom offshore wind should decrease 30 % from the 2014 baseline level of 127 EUR/MWh by 2030. But now, after the latest press releases from DONG and Vattenfall, it seems the industry is heading far beyond the 2030 cost reduction target already by 2020!

Didn’t the experts see it coming? Do DONG and Vattenfall know something the rest of us don’t? It’s highly unlikely they have miscalculated their numbers – after all, they are among the most experienced players on the market.

Many smaller companies are now understandably worried of the long term impacts the shockingly low bid prices could have on the market. If the cost targets are not met, how can it be explained to politicians? And if they are met, how can it be explained to project finance providers who are used to much higher remuneration levels? Will there be any space left for mid-sized investors in the market, or will the ones with the thickest purse take it all? And while players like DONG and Vattenfall can certainly benefit from their big pipelines and purchase power in the price war, could they also voluntarily accept some losses from a key project, if this would help them to push opponents out of the boxing ring? Will the winner take it all – even if winning means having some losses?

Offshore wind will be getting less expensive, for sure. And it has to. But how fast, and how low, can it go from today’s level? The supply chain shouldn’t be squeezed too tight, the lenders must get their money back, and the owners must stay confident. DONG and Vattenfall should know what they are doing. If they don’t, who does? After a few years we will all know if things went as planned. In the meanwhile, let’s keep our fingers crossed and try to sleep well.

Discussing the future of wind power with Dr. Andrew Garrad

Last week I had the pleasure of meeting with Dr. Andrew Garrad at WindFinland 2016, this year’s hottest wind energy event in Finland. He was the keynote speaker of the event, which I was hosting.

For those of you who don’t recognise the name, Dr. Garrad has been among the wind industry leaders and visionaries for decades. He established the consulting company Garrad Hassan & Partners back in 1984, having at that time already worked in the wind energy R&D for five years. Garrad Hassan nowadays forms the backbone of the wind energy expertise of DNV-GL, one of the leading global expert service provider companies. Dr. Garrad has, throughout his career, been one of the key individuals shaping up the development of the wind industry – from early stage experiments to a global mainstream energy provider.

I first met with Dr. Garrad 20 years ago when I visited the Garrad Hassan office in Bristol, UK. Being a young enthusiastic wind energy consultant, I was eager to establish contacts to – and seek cooperation opportunities with – the Big Names of the business. And indeed, he was willing to listen and we did develop some business ideas together – but that’s not the point of this story.

Back in 1996, wind turbines were in the size range of 500…600 kW and had rotor diameters of around 40 meters. A wind farm of 10 to 15 MW was considered big – and the global cumulative installed wind power capacity had just exceeded 6.000 MW. And due to the continuous recruiting, the Garrad Hassan office had become crowded and they were looking for a more spacious one for their staff of over 50 people.

New onshore turbines built today are typically in the range of 2.5 to 4 MW – with up to 140 m rotor diameters – and offshore turbines are even bigger. A 100 MW onshore wind farm project is business as usual and turbine purchase deals exceeding 300 MW are not uncommon. By the end of 2016, the global installed wind power capacity will likely exceed 500.000 MW. And the global headcount of DNV-GL wind energy experts is now well over 1500.

The one word that best describes the history of wind industry is “growth”; growth of turbines, growth of projects, growth of finance transactions, growth of business volumes, growth of jobs. I asked Dr. Garrad if he expects the growth to stop one day – and what if it does. Regarding the turbine size, he said all forecasted upper limits have always been exceeded, and he therefore no longer believes in absolute size limits – except that any structure taller than 1.5 kilometres will collapse due to its own weight. Regarding the growth of markets, it seems the market is always growing someplace: although the market volume may be reaching a plateau in Europe, it has only started taking off in e.g. Latin America and Africa.

The long term future of wind power looks extremely bright, and the growth will continue in the coming years and decades. There’s one exception, though: The cost of producing electricity from wind. It’s declining. It’s been declining through the years and decades. And it will continue to decline – thanks to the growth of all other parameters. And the declining costs will enable the growth of all other parameters to continue. Dr. Andrew Garrad has all reasons to enjoy the fruits of his lifelong efforts to develop the wind power technology and business.