The offshore wind market is finding its feet across the globe, with major projects completed and under construction in the UK, swiftly gathering momentum for renewables under the Obama administration in the United States, increasing focus and investment in China, and new projects planned in Germany, Belgium and other European countries.
From virtually nothing in 2000, the industry today can boast 1.5 GW of installed offshore wind capacity, of which 334 MW – more than one fifth – was installed in 2008 alone, see Figure 1, (below). An additional 1.5 GW is currently under construction, and Douglas-Westwood forecasts more than 5 GW will be in the water by 2012.
Figure 1. Graph shows the installed capacity per country per year since 1990
Offshore in Europe
The United Kingdom, in particular, has assumed the mantle of leadership in the industry. With seven operating wind power plants sporting 530 MW of capacity, the UK leads the industry by far. And that gap will grow. The UK has six projects totalling 1.2 GW under construction, and looks to add another 900 MW by 2012.
The offshore industry can trace its lineage to the Danes, for it was Denmark which first championed offshore wind in scale. From 2001–2003, Denmark built 500 MW of offshore wind with its groundbreaking Horns Rev and Nysted projects. After taking a pause to gain experience in the operation and integration of wind power into its energy portfolio, the Danes will be back from 2009, and we expect them to add nearly 1 GW of capacity by 2012.
Germany looks to move from a testing and field trial phase to construction of operating wind farms in the next few years. From 2004–2008, the country installed only three offshore turbines — all near shore. These include a 4.5-MW prototype turbine at Ems Emden in 2004 and a 5-MW turbine installed at Hooksiel in 2008. But Germany is moving past the prototype stage, and its first significant project, the 60-MW Alpha Ventus wind farm, is currently under construction and is expected to be operational by the end of 2009. Germany is will continue to become a key player, and is expected to install 1.4 GW by 2012, second only to the UK globally. Table 1 (below) shows all operational offshore wind farms commissioned by June of 2009.
The US and China
In the United States, the Obama administration has breathed life into the offshore wind industry. During the Bush administration, access to offshore lands was precluded by an inter-agency dispute. This current administration intervened to resolve the conflict, with the Minerals and Mining Service (MMS) awarded jurisdiction to lease the outer continental shelf for offshore wind where much of US offshore wind is slated. The agency opened its doors to receive applications at the end of June.
China starts from far back, but is coming on strong. The country excels in low cost manufacturing, and the potential for foundation, turbine and component export beckon. The potential US market alone could exceed US$10 billion (€7 billion) in the next decade, and Chinese steel is being used for foundations for the Greater Gabbard project off the UK.
China installed its first offshore wind project in 2007, a modest 1.5-MW facility placed by the China National Offshore Oil Corp (CNOOC) on one of its oil platforms. In April 2009, installation work began at the 102 MW Shanghai Donghai Bridge project in the East China Sea, the country’s first commercial offshore wind farm. The project will be powered by thirty-four 3-MW Sinovel turbines installed on gravity-based foundations, with the turbines to be erected as a complete unit in a one-lift installation — similar to the Beatrice Demonstration project off Scotland. The project costs are expected to be around $340 million (€240 million) and final commissioning is expected in 2010. Development in China is moving quickly and the country is expected to become a major offshore player within the next decade.
The Role of Government
Development of the offshore wind industry at the national level is generally incremental, starting with one or just a few prototype turbines, migrating to pre-commercial-scale farms typically of 10–60 MW, on to small commercial-scale projects generally in the 150-MW range, and finally arriving at full commercial-scale projects of several hundred megawatts. The London Array, long-struggling but with improving prospects, could be the first project in the gigawatt range — the first 630-MW phase should be complete by 2013. This national learning curve typically requires five years or more, and the role of the government is both critical and changes over time. There is no better example than the United Kingdom.
The UK has awarded offshore wind projects in a rounds-based system. Britain’s first licensing round took place in 2002 and its third round was launched in 2008. These rounds have seen progressively more self-confident government involvement, with the government assuming a greater proportion of upfront expense, effort and risk over time. In the early stages of national development, most of the upfront commitment falls to the project developer, which must choose the site, perform resource measurement, environmental studies, address multiple stakeholder concerns (aviation, shipping and military issues, for example), secure permits and interconnect rights to the transmission grid, and absorb related costs and investment of time. This creates a high barrier to entry as developers face multiple rounds of expense and risk over many years without certainty the project will ultimately succeed. For example, in the US, Cape Wind is generally regarded as an object of wonder in the industry.
In Britain, over time, the government and the Crown Estate (which is responsible for coastal waters and the sea bed) has taken an ever increasing role, zoning the offshore area, performing meteorological assessments and environmental impact studies and requiring priority interconnection from utilities. This makes sense in many regards.
Zoning is difficult to achieve on a plot-by-plot basis, as it often reflects broader issues such as shipping lanes, fishing grounds or migratory bird’s paths that are not easily managed outside a regional context. For example, fishermen may cede a portion of their grounds if compensated elsewhere, something that no individual developer can grant.
Further, by absorbing the cost of the meteorological studies, the government can assume the risk of early investment without incurring a loss of time waiting for other studies and stakeholders issues to be resolved. Similarly, environmental issues are often best considered regionally, as migratory birds are best studied over a path rather over a specific site.
In many ways, the US is now grappling with issues Britain faced in Round 1. While the MMS has gained authority to lease the outer continental shelf for up to 25 years, most other costs remain the domain of the developer. This includes the acquisition of a short-term lease for and the costs associated with meteorological studies, as well as costs associated with environmental impact studies. This last point rankles the offshore wind community, as the MMS covers these same costs for the oil and gas industry. Under the Obama administration, offshore wind may expect, at a minimum, non-discriminatory treatment over time.
The United States is also peculiar in that offshore wind is, for practical purposes, run by the individual states and not on the federal level. Therefore, government support can vary enormously by jurisdiction. For example, the state of New Jersey provided grants to three developers to cover the cost of installing meteorological towers, thereby assuming significant upfront costs.
Rhode Island, motivated to avoid the strife of Cape Wind in neighbouring Massachusetts, has embarked on an extensive effort to zone its entire coastal waters, including federal waters. Delaware has directed its Delmarva Power, the leading utility in Delaware, to sign a power purchase agreement with Blue Water Wind, an offshore wind developer.
In sum, the development environment can vary materially from state to state. Some states with limited population or financial resources, for example Maine, would prefer that offshore wind be handled either federally or regionally. How this question will be resolved is unclear, but the answer will be decisive for the development of offshore wind in the United States.
Subsidies are integral to offshore wind. The capital costs associated with an offshore wind project are twice those of onshore wind, and ongoing operations and maintenance costs are estimated to be some 3–5 times that of land-based farms. Offshore wind is an expensive business, and increasingly so. In the UK £1.2 million/MW ($1.94 million/MW) has been installed on the first UK projects, to over £2.5 million/MW ($4 million/MW) on projects under construction, with costs for projects under tender soaring to between £3–£3.5 million ($4.8–$5.7 million/MW) in some recent cases.
To make the numbers work, the government must help. In almost every case of successful development, the form of assistance has been a feed-in tariff. Feed-in tariffs, or ‘market mechanisms’ as they are rather euphemistically called, are payments for power generated at much higher than market rates and are usually guaranteed through the foreseeable project financing associated with a wind farm, generally 15–25 years.
In an ideal case, these tariffs provide a predictable revenue stream to the project adequate to cover debt service, operations and maintenance, with enough left over to insure that the equity holders have an ongoing interest in the successful and professional management of the project.
Sometimes such tariffs are granted directly, as in Germany. Sometimes they are granted de facto through the use of renewable energy credits trading under one of many similar names, such as renewable obligation certificates, for example. Such tariffs are widely accepted in Europe but considered anathema in the United States, perhaps because they seem to lack sufficient commitment to competition. But that is, in the end, what financiers want. As one leading renewables banker stated, ‘We’ll consider anything, but at the end of the day, we’re pretty much looking for a feed-in tariff.’
Sometimes such tariffs are disguised as renewables credits. For example, this same banker noted that New Jersey’s OREC’s (Offshore Renewable Energy Credits), once one wades through the convoluted legal language, largely act as a feed-in tariff.
Offshore credits are generally worth more than standard renewables credits, usually 50%-100% more. For example, in April 2009 the UK government announced that it was increasing its renewable energy credit (a renewables obligation certificate (ROC) in the UK) banding for offshore wind projects to 2 ROCs for every MWh of electricity produced, up from 1.5 previously. This applies to projects that reach financial closure within the budget year 2009–2010, and falls back to 1.5 ROCs after 2011.
Enhanced ROC values have had the effect of pushing forward some projects such as the London Array, which was struggling with high capital costs. There is some concern, however, that these measures will reduce investor confidence in the long term due to uncertainty over potential future fluctuations to the mechanism.
Government support can come in other forms as well. In the UK (as elsewhere), the Renewables Obligation requires power suppliers to derive a specified proportion of the electricity they supply to their customers from renewables. This started at 3% in 2003, rising gradually to 10% by 2010, and targeted at 15% by 2015.
The cost to consumers will be limited by a price cap and the obligation is guaranteed in law until 2027. Price caps in retail electricity are nothing new. Retail power prices feature among the most regulated — and politicized — prices in the world. Notwithstanding, price caps shift the cost of subsidized power to the equity holders of utilities and have been linked to utility bankruptcies in the past. While caps may be expedient measures for securing political support for offshore wind, they risk poisoning the well and creating management and investor resistance to utility-supported wind projects.
Of course, offshore wind is also financed through investment and production tax credits in the United States and other countries. The lustre of such schemes fades during recession, but they may be expected to play a role in the future as the economy recovers.
The Supply Chain
Like offshore oil and gas, offshore wind requires an extensive dockside supply chain, including blade manufacture, foundation and cable fabrication, and port and vessel capabilities. Offshore wind farm components are often best manufactured at the quayside and, of course, require offshore installation using specialized vessels, crew and technicians.
Ongoing operations and maintenance also require onshore support facilities and vessels. Dockside facilities are generally of sufficient scale to serve more than a single project, and indeed, serve as a continuing basis for a regional industry. Therefore, where the supply base is established can have long-lasting implications.
For example, even as Britain serves as the poster child for the development of offshore wind, so it serves as a negative example regarding the capture of the economic benefits of offshore wind. Up to 75% of the levelized costs of an offshore wind farm represent support from taxpayers or ratepayers in some form. For a gigawatt-scale project, such public support can literally be measured in the billions of dollars.
Capturing a reasonable proportion of these benefits is a legitimate goal of government. Nevertheless, the nature of the industry in northern Europe has thwarted Britain’s quest to do so. Our analysis suggests that Britain is capturing only 10% of the levelized cost of its offshore projects, with the bulk of expenditure ending up in Germany and Denmark. Britain, as a practical matter, was late to the game.
In the United States, the offshore wind industry looks to be centered in the Northeast coastal states, broadly speaking from Washington DC to Boston, Massachusetts, and possibly on to Maine. Only this region has the combination of major load centres, the income and willingness to commit substantial funding to renewables, a lack of other renewables and excellent shallow to mid-depth water offshore wind resources. However, this region has no material offshore supply chain.
The offshore supply chain for the United States is concentrated almost exclusively around the oil and gas business in the Gulf of Mexico. Therefore, the Northeast’s supply chain will have to be developed literally from scratch, and this process has begun. For example, Deepwater Wind management has stated that the company envisions using Quonset, Rhode Island to stage projects for Rhode Island, New Jersey and New York, building Rhode Island a renewable energy industry which will power the state for years. So the carve-up is underway. Within a year, the deals will have been struck and the benefits largely allocated.
Offshore wind faces many challenges, both in costs and logistics. But in Europe — and in particular, in Britain — the industry has taken hold and is consolidating its role in the UK’s energy portfolio. The United States comes from far back, but anticipates exciting times ahead.