Offshore wind: The Next Big Thing
Offshore wind has been beyond the horizon for energy planners everywhere but the North Sea, until the last few years. That’s no longer the case: offshore wind is becoming a major piece of the energy future for multiple countries and jurisdictions. Bloomberg reports offshore wind financings in 2019 came close to a whopping $30 billion, and in September 2019, the UK saw bids for offshore generation at under $0.05/KwH, cheaper than coal and natural gas alternatives. It’s a whole new water world out there.
Among the offshore wind projects reaching financial close in Q4 of 2019 alone were the 432MW Neart na Gaoithe array off the Scottish coast at $3.4 billion, the 376MW Formosa II Miaoli project off Taiwan at $2 billion and the 500MW Fuzhou Changle C installation in the East China Sea, at $1.5 billion. And in November Vattenfall was announced the winner of the Holland South Coast Phase II project, having already won Phase I; the 1.5 Gigawatt project will be Europe’s first subsidy-free offshore wind farm.
What happened? Only five years ago, offered prices for offshore wind tended around $0.15-0.20 a kilowatt-hour, well-above the price for competing sources and requiring government subsidies to proceed. Now larger and more efficient turbines, bigger projects, access to better offshore wind resources, and more developed supply chains have been driving prices down rapidly. Capex per MW of offshore wind capacity dropped from 4.5 Euros in 2015 to 2.5 Euros in 2018, a decline in costs of over 20% a year, according to Wind Europe. This has enabled the advantages of offshore turbines to come through: wind is much stronger off the coasts, and unlike wind over the continent, offshore breezes can be strong in the afternoon, matching the time when people are using the most electricity. Offshore turbines can also be located close to urban demand centers along the coasts, eliminating the need for new long-distance transmission lines
Offshore wind has already become the next big thing on the US East Coast. In November, New Jersey Governor Phil Murphy signed an executive order backing a goal of 7.5 GW of offshore wind by 2035, and said he expects that offshore wind could provide New Jersey with half of its electricity. Those figures would probably represent $15 billion of investment in New Jersey alone. In December, Connecticut awarded an 804 MW project with an (undisclosed) offset price “lower than any other publicly announced offshore wind project in North America,” expected to generate the equivalent of 14 percent of Connecticut’s total electricity supply. New York state announced in early January a 1 GW procurement of offshore wind in 2020, after 2019’s award of 1.7 GW of capacity, and announced a 9 GW offshore capacity target for 2035. And in early January Virginia’s Dominion Energy awarded a $7.8 billion, 2.64 GW offshore project – the largest currently on the drawing board in the US — to Siemens Gamesa.
The Land of Giants. With the average capital costs of offshore wind projects now easily in the $3-7 billion each range, the competitive landscape in the industry has evolved very differently than for the solar and onshore wind sectors. Solar in particular was characterized in its early days by many dozens of developers, at times trying to launch projects with capital costs of less than $50 million on a shoestring and selling them on to raise funding for their next investment. Not only are offshore wind turbines far larger than their onshore counterparts, but offshore wind players are far larger as well. The biggest current developers are Dong Energy in China, Scandinavians Ørsted (today’s market leader) and Vattenfall, and Iberdrola. All these have Balance Sheets with equity in the $100 billion-plus category. Vestas, Siemens Gamesa, and General Electric lead among turbine suppliers. An interesting sign of the times was the recent announcement from EDP of Portugal (itself partly owned by Three Gorges of China) and Engie that they would join forces in developing offshore wind projects, in order to gain the scale needed to compete.
Financing amounts are sufficiently forbidding that most developers have been financing projects on Balance Sheet, and until recently little commercial project finance debt has been available, outside of the policy banks in China for Chinese projects. The bulk of third-party financing for offshore wind has largely been in the form of ownership syndications and post-construction refinancing. The large scale of projects, while a major hurdle for many banks and smaller developers, is conversely an advantage for institutional investors such as pension funds and insurance companies, who have large minimum investment thresholds. These institutional investors have more typically invested in wind and solar through portfolio purchases rather than single project financing, as for example this week’s purchase of 50% of Total’s wind and solar portfolio by Caisse des Depots in France. From late 2018 European banks began to enter the UK offshore market with large amounts of non-recourse debt; as this model gains traction, it may allow smaller developers to become more active. As the sector is becoming more established, one can also expect the gradual development of a merchant risk-based financing model.
Offtake models have also been affected by the large scale of offshore wind developments. Corporate renewables, an increasingly big – and often well-priced – source of demand for solar and onshore wind projects, has not been a factor yet for offshore. In December, Ørsted announced the largest-ever corporate offshore wind deal, with German chemical company Covestro, for 100 MW.
What’s next? Tenders are planned in many countries, and are spreading beyond initial markets of Europe, the US and China. Vietnam, already with 99MW of offshore wind in place, is looking at what could become the world’s largest offshore wind farm with a capacity of 3,400 MW. ESMAP, a unit of the World Bank Group, published a study in October 2019 looking at eight non-OECD markets: Brazil, India, Morocco, the Philippines, South Africa, Sri Lanka, Turkey, and Vietnam. The ESMAP study estimated these eight markets alone have a technical capacity of over 3 Terrawatts – that’s 3,000 Gigawatts – for offshore wind. Globally, Wood Mackenzie expects 128 GW of offshore wind capacity to be built between 2020 and 2028, while Bloomberg New Energy Finance forecasts 188 GW of capacity to be installed by 2030. Those projections would imply capital investment in the sector in the range of $300 billion over the next decade. China is forecast to remain the largest country market, but with about half the global share that it has seen in solar (25% vs 50%).
Nonetheless, it may be difficult for offshore wind to gain more than a fraction of the geographic diversification that onshore wind, and particularly solar, have achieved. Many emerging markets are too small to consume the output of even a single offshore wind farm – at least in offshore’s current form. Construction timelines will also be an issue: an attraction of solar for lower-income, electricity-deficient countries is that solar farms can be financed and built fairly quickly, bringing new generation capacity on stream in a year or less after a country’s decision to proceed. An offshore wind farm typically takes five to ten years to develop. One possible model for smaller markets, for instance West Africa, might be multiple country offtakes.
A big factor in the longer-term development of offshore wind will be the feasibility – and cost – of floating wind farms. 99% of offshore wind farms to date are bottom-anchored, a big factor in the cost and scale of projects, and a limit on geographic deployment. Floating wind farms can in principle be deployed across many more areas, and could be built at a smaller scale. Indeed, the ESMAP emerging markets study puts 2/3 of identified potential offshore wind technical capacity in the floating, rather than fixed, category. IRENA’s late 2019 “Future of Wind” study forecasts floating platforms to make up a more modest 5-15% of total offshore capacity. Yet to date less than 50 MW of floating capacity is operational, so time will have to tell on this part of the technology. We’ll have to see how the winds blow…