To retain the global lead European companies have in offshore wind, the EU should develop an industrial policy that will guarantee a steady pipeline of projects, writes independent energy expert Mike Parr. This would ensure continued investment by companies in cost reduction and technology improvements. Failure to do so could mean the offshore wind sector would suffer the same fate as the European solar PV industry.
Recent results in the offshore wind sector show that, finally, costs are declining:
Reasons for the decline in prices include a new generation of much larger turbines and more efficient construction processes. Administrative techniques such as auctioning shovel ready projects (Denmark, The Netherlands and soon Germany) also appear to help with “price discovery”. Expressed another way, when there are 28 consortia bidding for a contract (as is the case for Borssele III and IV) pricing becomes much keener.
Fits and starts
Europe is, at the moment, the global leader with respect to offshore wind both in terms of project developers, owner/operators, and equipment suppliers. The top 11 owner/operators are all European (with Dong leading the pack). In terms of wind turbine suppliers Siemens (65%) is number 1, followed by Vestas (21% ), Senvion (6.6%) Bard (5%) and other European players. The only non-European suppliers are GE and Samsung and they are not active in the EU.
There is a reason for this. The EU was amongst the first to develop offshore wind projects. During the past 16 years it has, albeit with fits and starts, stuck with building projects and thus developing the technology. As of end 2015 there was 11GW of commissioned and firm projects. By 2020 another 16GW will be added.
However, markets outside of the EU will add 13 GW by 2020, according to figures from Bloomberg New Energy Finance (BNEF). In the period 2020 to 2025 the EU plans to add only a further 7GW, with 15G W of “maybe” capacity sitting on top of this. The rest of the world will add 21 GW (2020-2025).
EU offshore wind policy sees member states all “doing their own thing”. There is no attempt to ensure a steady stream of projects
The comment “fits and starts” or “feast and famine” thus continues to apply to EU offshore developments. This is no way to encourage what is, at the moment, a world leading industry sector.
The EU needs an industrial policy for offshore wind that recognises that project volumes deliver two things.
First, project volumes lead to declines in the MWh cost of offshore wind. Second, steady and significant volumes of EU offshore projects keep both equipment suppliers and project developers at the leading edge of technical and organisational developments.
Competition for projects (28 bidders per contract!) focuses minds on areas such as construction costs and wind farm yields. In turn this will help both equipment manufacturers and wind farm developers to maintain their positions as leaders in this area. It will also ensure that the bulk of R&D activity remains focused in the EU. Other areas where EU companies and organisations are leaders include incremental improvements in wind farm performance and optimisation software for wind farms both on and offshore. A steady and clear stream of projects provides justification for on-going investments in these areas.
First mover advantage
In terms of market trajectory it is tempting to compare offshore wind to PV. In PV, the EU enjoyed first mover advantage which led to the emergence of manufacturing companies (and equipment manufacturers). Sadly this advantage and its early promise was eroded as Chinese suppliers vastly expanded their manufacturing capacity leading to a decline of EU cell and module manufacturers (although German companies still hold prime position with respect to the supply of equipment).
However, offshore wind is different from PV at a number of levels. For example, wind turbines and their installation have a different production process compared to PV panels. The latter lend themselves to mass production techniques which are a blend of semiconductor and consumer electronics. 8MW wind turbines, perhaps for obvious reasons, do not use either set of production techniques. Furthermore, the high levels of quality demanded in an offshore environment play to EU engineering strengths.
The recent auction results from Denmark, with world beating prices, did not result in a great deal of enthusiasm at a political level
Currently, EU offshore wind policy sees member states all “doing their own thing”. There is no attempt to ensure a steady stream of projects. There is no thought given to the fact that this is an area where a group of EU companies lead the world and perhaps a modicum of planning at an EU-level could help the industry retain its number 1 position.
There are also political problems. The recent auction results from Denmark, with world beating prices, did not result in a great deal of enthusiasm at a political level. The Danish Ministry of Energy Utilities and Climate, which still has to make a final decision on coastal wind power when it negotiates its 2025 plan, said ” regardless of Vattenfall’s low bid, building the two wind parks will be costly for the country”.
Such statements are unfortunate. They show a lack of imagination and an assumption that power prices will remain low. On the other side of the North Sea, UK wholesale prices average around €51/MWh with a probability that prices will rise in the medium term because the British (or would that be the English?) have no energy policy worthy of the name. Danish offshore wind via an HVDC interconnector to the UK would go some way to helping the British over their imagined energy problems whilst making a profit for the Danes.
Moving to EU energy policy, the EU faces three related problems relevant to offshore wind: the ongoing failure of the EU ETS, an over capacity of old fossil stations (in places such as Germany) and a total (political) inability to address these linked problems.
The EU ETS should have priced out fossil stations and priced in renewables. It has not and in the view of people such as the CEO of EON, it never will (Dong holds a similar view). The reverse side of high renewable energy subsidies are low wholesale electricity prices. This is due in part to low EU ETS prices coupled to, once again, a failure to retire old fossil stations. Politicians are the only ones who can break this log-jam. If they can do this whilst also keeping up momentum on offshore build-out, there is a very good prospect that wholesale prices and offshore prices will converge.
A properly-scaled fossil retirement programme would lead to wholesale electricity price rises. Anything in the range €50-70/MWh would all but eliminate the need for subsidies for on or offshore wind in North Western Europe
Unfortunately, in countries such as Germany, owners of old fossil stations are holding off closing them because they think that if they hold on for a bit longer, other stations will close, and they will be able to squeeze a few more GWh of (profitable) power out of their assets. Thus the bigger picture (an EU industrial base with world-beating industries such as offshore) is sub-subsumed by short-termism and lobbying by industries which should have had the vet called in some years ago to have them humanely put down.
Knock heads together
A properly-scaled fossil retirement programme would lead to wholesale electricity price rises. Anything in the range €50-70/MWh would all but eliminate the need for subsidies for on or offshore wind in North Western Europe. That surely is a worthy goal. Not forgetting, that in Germany, for example, RES subsidies are running at around €60/MWh. A small rise in wholesale prices will thus have a disproportionate impact on subsidies which would be vastly reduced, if not eliminated.
The EC and its Commissioners cannot, on their own deliver on the above. But they could and should knock heads together at member state level and try to get the politicians to think more strategically
I have been reliably informed that recent offshore projects, even with relatively low wholesale prices (see box) have a subsidy contribution that accounts for less than 6% of overall project cost. In the context of a new and growing EU industry sector, which is world-leading, this is tiny and could be eliminated if politicians focused on the future, not the past.
The EC and its Commissioners cannot, on their own deliver on the above. But they could and should knock heads together at member state level and try to get the politicians to think more strategically. These same politicians are supposed to, amongst other things, ensure an economic framework that delivers good, well paid jobs for EU citizens. The actions suggested above will do that for an industry sector with a very promising future.
Mike Parr is Director of energy consultancy PWR which undertakes research in the area of climate change and renewables for clients which include a G7 country and global corporations. See his author archive on Energy Post.