RECharge

13. januar 2017 - 10:40

New lows mean new highs for offshore wind in 2017

ONES TO WATCH 2017 | Record cost declines, a wave of new tenders and the wide range of players entering the market will lead to a booming year for offshore wind, writes Bernd Radowitz in Berlin

This year is set to be a landmark year for offshore wind: tender volumes in Europe are due to skyrocket, with close to 5GW being auctioned in Germany, the UK, the Netherlands and probably France, while the US will finally see a first offshore tender that includes a power off-take deal.

Offshore wind is becoming more mainstream, with a wider range of companies getting involved — including oil majors — and, driven by a culture of cost-reduction, is ultimately more competitive than ever.

Construction activity is also up again, and 2017 could be a record year in terms of installed capacity, with 3GW being commissioned in Europe.

The engine in this offshore boom is prices. After plunging to new lows in 2016 that the industry would have deemed impossible until very recently, prices at this year’s tenders could provide further benchmarks.

The steep downwards price trend has put offshore wind in direct competition with onshore wind and gas-fired generation, and governments are already adapting energy policies accordingly.

“If the electricity price develops as we expect, in seven-and-a-half years’ time, subsidies will no longer be required for the production of electricity from offshore wind farms,” an enthusiastic Dutch economics minister, Henk Kamp, announced when a consortium including Shell won the 680MW Borssele 3 & 4 tender with the second-lowest bid ever in offshore wind at €54.50 ($57.65) per MWh.

The low price means that expected support expenditure for the project will be only €300m, instead of the €5bn originally anticipated.

Risky business?

Rock-bottom offshore wind prices are being helped by low steel prices and minimal interest rates, while a lack of other large infrastructure investment opportunities has led to more financiers becoming interested in the sector.

Winning tender prices have been so low that industry watchers have speculated that the low bids are risky, potentially loss-making bets that only the biggest companies in the sector — such as state-owned Dong Energy and Vattenfall — are able to take. Due to their already large offshore wind portfolio, both companies can secure favourable prices from suppliers through economies of scale that may not be available to smaller offshore developers.

Vattenfall, which successfully bid for the 600MW Kriegers Flak array off Denmark at the lowest price so far reached in offshore wind — €49.90/MWh — is likely getting a very low single-digit return on the project, says Sydbank analyst Morten Imsgard. The utility may also be able to bid lower as it is fully state-owned, he adds.

The buffers that developers always built into budgets for things that might not go to plan seem to have been eliminated in an attempt to reduce costs and be more competitive. As a consequence, developers can no longer afford to have difficulties during installation. That is a risk not everyone is willing to take, and it makes entry into the offshore game very hard for newcomers.

“Others need a solid pipeline to get costs down. You may have to pay for projects to secure a pipeline,” Imsgard says, adding that some companies may even bid below cost just to get a foot into the door.

That could be the case in Shell’s return to the sector, according to some industry observers. The oil major clearly has the deep pockets to make a risky bet — even in 2015, a crisis year for oil & gas, it still had revenue of $264.96bn.

“If they [oil companies] are willing to pay for the access to the industry, they can get it. If you are a new player to enter offshore wind, you have to pay the price of losing money in three or four projects. Recent prices have made that very clear,” Imsgard says.

Shell has told Recharge that it plans to enter upcoming offshore tenders in the UK and Germany. It had been an early investor in the sector — and still owns half of the 108MW Egmond aan Zee wind farm in Dutch waters, which was commissioned in 2006 — but then paused its offshore wind activities until this year’s Borssele tenders.

"Shell has the deep pockets to make a risky bet — even in 2015, a crisis year for oil & gas"
 

Consultancy IHS expects “the next CfD [Contracts for Difference] tenders in the UK, and first offshore tenders in Germany, to provide further benchmarks for offshore wind pricing”, senior analyst Magnus Dale tells Recharge.

But he also points out that centralised tenders for fixed offshore zones, in which the state carries transmission costs (as in the Netherlands and Denmark), were factors contributing to prices going down.

In the upcoming German and UK tenders — the largest in 2017 — conditions will be very different. Bidders in the UK and Germany have to have their developments pre-consented, the locations are usually further out to sea, and transmission costs are not paid by the state — all of which make the projects more expensive and unlikely to reach the record lows seen in the Netherlands and Denmark.

“But prices will also go down there. We expect the German and UK offshore tenders to be very competitive,” says Everoze partner Colin Morgan. “For the next UK tender, we expect a strike price of around £80-90 ($99.50-112).”

Larger turbines

The Borssele 3 & 4 project consortium includes a unit of Japanese industrial conglomerate Mitsubishi, making it unsurprising that the Mitsubishi/Vestas offshore joint venture MHI Vestas has been chosen as turbine supplier for the array. That could be a plus in terms of prices.

“With MHI Vestas as a nominated supplier, the project can be assured of the latest and most cost-effective turbine technology,” points out BVG Associates director Giles Hundleby.

But he suspects that in order to make the economics work with such a low winning bid, the consortium may already be eyeing a larger turbine than MHI Vestas’ upgraded V164 power horse, which will be used in some of the latest offshore projects reaching financial close in 2016 at a nameplate capacity inching towards 9MW.

“This is likely to be more than just the ‘big-rotor’ version of its current 8MW machine that we assumed for Borssele 1 & 2, and our projections still show significant potential for bigger turbines to deliver more levelised-cost-of-energy reduction,” Hundleby adds.

Imsgard also suspects that developers operating with very low bids may be betting on turbines in the 10MW-plus category being commercially available by the time the projects need to place orders.

It is yet hard to say whether such a gamble will pay off.

Siemens is developing a 10MW+ machine, but so far hasn’t said when it would hit the market.

The German conglomerate also has another option once EU competition regulators have given their green light to the Siemens Wind-Gamesa merger, which includes the takeover of Adwen and its 8MW offshore turbine, which can be upgraded to at least 10MW.

MHI Vestas, meanwhile, hasn’t said that it is developing a 10MW+ machine, but its 8.4MW turbine can be upgraded further.

The giant turbines will also require larger installation vessels than are currently available, as A2Sea chief executive Jens Frederik Hansen recently pointed out to Recharge.

Volumes and politics

Offshore tender volumes in 2017 could reach a record of more than 4.5GW in Europe alone as auctions are scheduled in Germany, the UK and the Netherlands, while France is preparing to carry out its long-awaited third tendering round for fixed-foundation offshore wind (France also has a floating wind pilot programme under way).

Yet more tendering volume could come from the 232MW Mermaid, the 224MW Northwester 2 and the 246MW Seastar projects off Belgium, which are scheduled to come on line by 2020, if the government were to opt for an auction model. The Belgian energy regulator is finalising a study of support systems in neighbouring countries, which will help determine how the government will support the three projects, an energy ministry spokeswoman in Brussels tells Recharge.

An auction of at least 400MW is also planned in Massachusetts as part of the US state’s new 1.6GW wind mandate. Unlike New York’s December tender, in which Statoil won commercial development rights to a wind zone, the Massachusetts auction will be for a power-purchase agreement with a local utility.

The lack of a local supply chain means the cost of offshore wind will be more expensive in the US than in Europe, says Thomas Brøstrom, Dong’s general manager in North America. But even at early projects, the US will be able to “tap into [Europe’s] cost-reduction curve” in a substantial way, he adds.

The lack of a solid offshore wind supply chain is also a problem in China, where the top domestic offshore turbine makers are Envision, with a 4MW model, and Shanghai Electric, with 4MW and 6MW gearless machines licensed from Siemens. This means Asia is unlikely to enjoy the kind of cost reductions seen in Europe, which have been largely due to economies of scale through bigger turbines.

Nevertheless, the thirst for clean power in some of Asia’s leading economies — notably China, Taiwan, South Korea and Japan — means that offshore wind is expected to grow in those countries in the coming years. MAKE Consulting, for one, expects Chinese installations in 2017 to exceed 1GW.

While offshore wind volumes look set to expand around the world, there are three elections in Europe this year where the rising popularity of nationalist climate-sceptic parties may have an impact on the sector’s growth.

In the Netherlands, the right-wing anti-immigration Party for Freedom (PVV) led by climate-sceptic leader Geert Wilders — who was once banned from entering the UK because of his anti-Muslim views — has been leading in polls ahead of the 15 March parliamentary elections.

France will elect a new president in the spring, with the first round scheduled on 23 April, and a likely second round on 7 May. Both leading candidates, the extreme-right climate sceptic Marine Le Pen from the National Front and former prime minister François Fillon of the conservative Republicans, are much more pro-nuclear than the current Socialist-led government, which wants to reduce the share of nuclear power in the country’s energy mix from 75% to 50%. There would be less need for offshore wind if nuclear is not scaled down.

Germany will vote for a new parliament in September 2017, with the right-wing populist and climate-sceptic party Alternative for Germany (AfD) expected to enter parliament for the first time. Currently third in opinion polls, the AfD is unlikely to become part of a government coalition, but its growing influence might force centre-right chancellor Angela Merkel’s Christian Democratic Union to adopt more populist policies — such as reducing the unpopular and expensive levy on energy bills that pays for the energy transition.

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