Size matters

Offshore wind turbines are growing fast. MHI Vestas officially launched their 9.5 MW turbine with 164 m rotor diameter in June at the WindEurope Offshore Conference. For many of the participants, this was a bit of a disappointment, since they were hoping to get news of even bigger turbines. The two candidates to release such news were Siemens Gamesa and Senvion. But both were reluctant to discuss any details of their future turbine types – if any. Senvion told they are working on “something bigger”, but no dates neither exact figures were mentioned.

Husum Wind Fair 2017 will be held next week. Rumors are already circling around whether one of the two companies will show up there with a new turbine model having a double-digit generator nameplate capacity. There are grounds for such expectations, especially after Siemens Gamesa’s recent decision to integrate Adwen within the group’s offshore operations. The Adwen 8 MW prototype turbine with 180 m wing span is now in operation, and it’s pretty obvious that 8 MW is not the optimal nameplate figure for a 180-m diameter offshore turbine; the MW-figure should rather be in the range of 10 to 12 MW. And it’s equally obvious that to keep – or win back – the pole position for the coming sales negotiations, Siemens Gamesa should publish something clearly bigger than 9.5 MW, and they should do so pretty soon. If not in Husum, then perhaps in their new Strategic Plan, to be announced on 15 November.

In the latest German offshore auction earlier this year, DONG and EnBW made their winning bids based on the assumed financial figures for 13…15 MW turbines, which they expect to be on the market by 2025. Obviously, experienced offshore heavyweights won’t make their bets without having a close dialogue with the leading turbine suppliers. So, although the suppliers don’t admit it, they already have the next generation of even bigger turbines on their drawing boards.

Doubling the turbine nominal capacity makes a huge difference for the construction and operation of offshore wind farms. A turbine twice as powerful does not cost twice as much. And, more importantly, although it needs a bigger foundation, the foundation will definitely not cost twice as much. For sure, bigger turbines need bigger installation vessels with higher daily rates – but the number of installations will be halved. The result: shorter installation times per MW, more manageable weather risks, and all in all, more degrees of freedom in the construction planning. Also the number of service visits per MW will be halved, which makes a huge difference in demanding offshore conditions: Easier service planning, less downtime, and thus more kWhs per installed MW. And many, many more upsides for the project economy.

Bigger turbines can be built cost-efficiently in deeper waters, and with an increased spacing between turbines, the micrositing can be improved in terms of wake losses, soil conditions, and environmental constraints. For ice infested waters, the increasing turbine size is especially good news: as the wind loads increase, the significance of ice loads on the foundation cost decreases. Areas with more severe ice conditions located further offshore will suddenly become viable for construction. This in turn should make the public acceptance less of an issue and could thereby decrease the permitting risks.

But there are also challenges: Matching the time span of project development with the speed and uncertainty of technology development is a tricky task. How should you plan and permit your project, a process taking minimum five years and possibly up to ten years, when you don’t know how big – and thus, how many – turbines will be built once the permits are finally in place? You don’t want to end up having permits for a turbine that was phased out from production two years ago – a scenario which e.g. the French offshore developers may be facing in the future.

New offshore markets are opening up in the USA, China, India, etc. With 10 to 15 MW turbines, the zero-subsidy market is now within reach. Offshore wind may become a global and truly commercial market in 5 to 10 years. But to succeed, developers must first overcome the planning dilemma. Spatial planning and impact assessment processes should be made in a flexible manner to manage the uncertainties related to size and siting of individual turbines. Stakeholder dialogue is the key: all involved authorities and specialists should work together towards the common goal – even when shooting a moving target.

For a market characterized by long lead times from initial planning to implementation, technical revolution is not just a blessing but also a challenge. Size matters, and unfortunately not only for the better.

Perfect time to come to Finland!

…And I don’t mean the snow, Aurora Borealis and Santa Claus. I mean wind power. Last week, the Finnish government published the new national energy and climate strategy, setting the targets for 2030 and a vision for 2050. And I’ll help you to recognise why it could be good news for you.

The main headings of the strategy are what has by now become “the usual stuff”: getting rid of fossil fuels, increasing the share of renewables, promoting electric vehicles etc. So you’d guess this paper is good stuff for wind – until you take a closer look. The strategy relies heavily on bioenergy, and more specifically on biofuels. So heavily that the government plan is criticised for endangering both the Finnish biodiversity and the forest industry – our two greatest national treasures after the collapse of Nokia’s mobile phone business.

Regarding wind power, the strategy is unambitious at best, and close to hostile at worst: There will be a new, “technology neutral” auction system for promoting investments in power generation from renewables, but the goal is only for 2 TWh increase in annual production, and the system will only run until 2020. After that: complete silence – a peculiar thing as such for a strategy setting goals for 2030. The government namely believes that after 2020 wind power will no longer need any state support. But the government also thinks that despite of wind power becoming competitive, it’s share in the Finnish energy mix will not increase by 2030. So it’s competitive but nobody wants to invest in it – funny, isn’t it?

Also, the auction system will not be started just like that: first, the “health effects of wind power need to be thoroughly studied”. This sentence in the strategy paper is one of the greatest achievements of the “True Finns”, a populist party now in the government coalition for the first time (and for the last, as some would add). Rumours of “the wind turbine syndrome” are spreading wildly in the Finnish social media, and True Finns are both planting seeds and harvesting the crop.

According to an expert study recently conducted by National Institute for Health and Welfare, a few per cent of the population living close to Finnish wind farms actually suffer from noise. A huge number of people say they suffer from symptoms such as headache, dizziness and heart problems – and still, these figures are exactly similar to those living in areas with no wind farms around. But here’s the beef: About 20 % of the population living around wind farms say they are worried of the possible health impacts of wind turbines. And this exactly is the target group for True Finns. Never mind the facts, this is politics!

Rumours of Wind Turbine Syndrome spreading like wildfire, unambitious government, no official targets beyond 2020… so why would this be the perfect time to enter the market? That’s exactly why: Thousands of megawatts of projects in the pipeline that are almost ready for construction, some extremely frustrated developers who’d be glad to exit or partner up – and the next elections coming in less than 2.5 years from now. The next government will reformulate the 2030 energy strategy for sure – and this time without True Finns, if you ask me. At that point, the market value of ready developed projects will rocket in a nanosecond.

I don’t say it’s now or never. But if you have patience to wait and finetune your assets for two extra years before getting return on your investment, I believe you can make some pretty good shopping right now.

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.

The Third Industrial Revolution is here

One of the absolute highlights of the WindEurope 2016 Summit, held in Hamburg 27th – 29th September, was the keynote speech of Jeremy Rifkin, a popular social thinker and bestselling author who is an advisor to European Union and to heads of state around the world.

Mr. Rifkin first presented the audience the definition of “industrial revolution” in a nutshell: an industrial revolution is characterized by basic innovations in three important sectors; communication, energy and transportation.

The first industrial revolution was based on the printed newspaper, coal and steam engines, and steam ships and railways. The second one started with the breakthrough of telegram and telephone, oil and internal combustion engines, and cars. Now we are in the middle of the third industrial revolution – and perhaps looking at it too close for most of us to recognise this: The drivers of the third industrial revolution are digital communication, renewable energies, and electric vehicles.

All these are tied together: The digital information technology is a crucial factor for the success of wind and solar energy technologies, smart grids, and flexible electricity markets. It is equally important for the technology development of electric vehicles and their recharging infrastructure. And the entire rationale behind the transition to electrified transportation is the need to rid ourselves of fossil fuels – which will be enabled by renewable energies.

A common nominator for all three ingredients of the third industrial revolution is that they provide us the desired outcome at a very low marginal cost. This will have a huge impact on global economy in the coming decades: Consumers will become “prosumers”, producing and directly sharing services at low or zero marginal cost. It started with eBay, Airbnb, mobile apps etc. And the opportunities for replication will have no limits once the Internet of Things and 3D printing are in everyday use.

The old businesses, built on the paradigms of the second industrial revolution, need to find ways to cope with the transition – they need to become part of the global service-and-sharing economy in order to survive. The dinosaurs fighting against the change can only delay their own extinction.

We are already witnessing the transition in the energy sector: Wind and photovoltaics are becoming mainstream sources of electricity in a number of markets. Due to their low marginal costs, the electricity markets have lately witnessed a steady drop in average spot market prices, making it increasingly difficult to invest in new conventional power plants and to keep the existing capacity running at sufficient capacity factors to make their operation profitable.

The developing economies will probably experience the full force of the Third Industrial Revolution: Many of the poor rural communities now lacking a proper energy and communications infrastructure may turn into hotspots of the Brand New World Economy with the aid of the internet and second-hand smartphones, low marginal cost stand-alone renewable energy systems to electrify them, and the clever young people finding creative ways to utilize the new opportunities. Some of the most severe global social and economic challenges may be solvable with a negative addition to global greenhouse gas emissions. Win-win-win!

Humankind has seen industrial revolutions before – and they always seem to come as a surprise to people and businesses living amidst them. Luckily we have visionaries like Mr. Rifkin to make us recognise the things that are too close to our eyes for us to see.

recognise the market drivers and opportunities – recognise the challenges and risks!

The energy market is facing a rapid and challenging transition. Greenhouse gas emissions need to be reduced to near-zero level on a global scale within a few decades. Electricity will be increasingly replacing fuel-based energy usage in transportation and heating sectors, and a continuously growing share of all new electricity production capacity being built each year is based on renewable energy sources having very low marginal costs.

In 2015, wind power already accounted for 44 % of all new power installations across Europe and covered more than 10 % of Europe’s electricity demand. The costs (both CAPEX and OPEX) of wind energy – both onshore and especially offshore – are on a steep learning curve. The cost of photovoltaics is plummeting, potentially making PV the cheapest option for new electricity production in a number of markets sooner than anybody could have expected.

Vast numbers of communities in developing economies will be leapfrogging from outdated diesel generators and kerosene lamps straight to intelligent, renewable energy based modular power systems.

Energy sector actors need to revise their expectations for the future and reshape their strategies to succeed in the rapidly changing business environment. National and global policies need to be quickly adjusted to enable a smooth and efficient transition to a new energy market.

The change is inevitable, but the ride will surely be less bumpy for those who plan their actions along the transition with foresight and skill.

recognis consulting will help you to recognise the drivers and utilise the opportunities in the rapidly evolving markets of renewable energy. And, equally important: to recognise the challenges and manage the risks inevitably embedded in all business plans and transactions.