The Netherlands has shown how to drive the cost of offshore wind down to previously unimagined levels: by “taking the risk out of projects”, they managed to achieve a historically low price. This paves the way to turning the European North Seas into a giant power generating region, writes freelance journalist Eric Marx for World Energy Focus. The European offshore wind model could be an example to the rest of the world.
While auctions in sunny countries like the United Arab Emirates achieve record-low solar power costs (3 cts/kWh), a windy European country, the Netherlands, has just broken a world record with an unprecedently low cost for offshore wind. In July, a tender for two offshore wind farms in the North Sea (Borssele 1 and 2), representing a combined 700MW of output, was awarded to Danish utility Dong Energy at €72.70 ($94.50) per MWh. This easily surpassed the Danish wind farm Horns Rev 3, awarded in 2015 to Sweden’s Vattenfall AB at a then-record-low cost €103 per MWh. According to the Dutch Ministry of Economic Affairs, additional connection fees for the offshore wind park are around €14/MWh.
Offshore wind has always been the most expensive kind of renewable energy. The latest levelised cost (LcoE) figures from Bloomberg New Energy Finance put offshore wind at $174/MWh, significantly more than onshore wind (average of $83), solar PV ($122) and coal or gas (which in a country like Germany have LCOEs of $106 and $118/MWh respectively). This makes the Dutch figure all the more impressive, even with connection fees included.
“There were a number of reasons for the low bid but the key one is that the Dutch government took a lot of the risk out of this project”
“With Borssele 1 and 2, we’re crossing the levelised cost of electricity mark of €100 per MWh for the first time and are reaching a critical industry milestone more than three years ahead of time,” Samuel Leupold, executive vice president and head of wind power at Dong Energy commented. Dong and the rest of the industry say the winning Borssele tender demonstrates the great potential of offshore wind. Indeed, they insist grid parity is in sight, proclaiming 2025 as the target date for offshore wind to finally competing on its own, without large subsidy support.
Yet the question remains: can this cost reduction pace be sustained? Or is the Borssele project an outlier owing its low price to exceptional circumstances?
Dong, the world’s biggest developer and operator of offshore wind farms, might have put in a low bid to capture the market in order to muscle out the competition. There were also cyclical factors at work, such as low steel prices, access to low interest rates, and an oversupply of installation vessels. In addition, Borssele 1 and 2 are sited close to shore (22 kilometres) in shallow waters, affording planners lower logistical and transmission costs.
But experts agree that the key factor in bringing the price down was the business model used by the Dutch government. “There were a number of reasons for the low bid but the key one is that the Dutch government took a lot of the risk out of this project,” says Oliver Joy, the political affairs spokesperson at WindEurope, the European association of wind power producers. It shows, says Joy, what’s possible when technological innovation combines with clear regulatory signals.
To begin with, the Dutch put on the table a systematic roll-out plan of considerable size, with five auctions of 700MW a year up until 2020. The first Borssele tender is, by itself, now the largest offshore project in Europe, surpassing the London Array (630MW), off Kent in the outer Thames Estuary in the United Kingdom.
With 11 GW installed, Europe still accounts for more than 90% of all offshore wind installations in the world
Moreover, the Dutch government offered developers a 15-year subsidy period, five years longer than what is currently offered in the UK. The appointment of a single grid operator, Tennet, to build one standardised transmission system helped embolden contractors to take on more risk. And the Dutch government further simplified the process by performing all the environmental and geological studies before offering up the auction.
The Dutch model, based on the example of Denmark, identifies who can build the cheapest capacity on an already-developed offshore wind site, says Jerome Guillet of Green Giraffe, a company that specializes in renewable energy financing. “It limits project risk by merging into a single point the decision-making on the permits and contracting.”
Offshore wind is on track to becoming a mainstream power, but only if it can further drive down costs. The industry believes this is possible. Michael Hannibal, CEO of Offshore Wind at Siemens’ Wind Power and Renewables Division, makes the point in the week following the Borssele announcement, his attitude buoyant for the good news it portends for the industry in Europe and beyond. “It is positive to see this downward trend, because this is what we have been promising,” says Hannibal, citing a 2025 goal that would see the industry deliver offshore energy at a price of €80 per MWh.
Siemens will soon approach an average €100 price point, ahead of its own 2020 target date, and has long played a role internationally in markets like China where it has a licensing agreement with Shanghai Electric to deliver 4 MW turbines. Japan is also viable, says Hannibal, with the help of floating platforms developed in Europe in deep-sea locations off Portugal and Scotland.
With 11 GW installed, Europe still accounts for more than 90% of all offshore wind installations in the world, with the remainder located largely in China, followed by Japan and South Korea.
The offshore wind industry makes relentless efforts to bring costs down, for example by increasing the size of turbines. Yet conditions are also becoming more challenging
Siemens entered the Japanese waters in 2015 with a semi-offshore 3MW turbine, but it’s in China where the market is more evolved, having passed the 1GW mark at the close of 2015. China now stands as the fourth largest market globally, a testament to governmental support, but also in Hannibal’s estimation a reflection of the viability of the European offshore model.
The key, says Hannibal, is “predictable” long-term support. “Look at the incentive regime behind Borssele,” adds Hannibal. “It stretched over many years … and that’s really what we are requesting, predictability.”
The “central scenario” from the European Wind Energy Association (EWEA) shows that by 2030 offshore wind capacity in Europe can be expanded to 66 GW, able to deliver 5% of total European electricity demand. For the countries around the North Seas, the contribution of offshore wind to their electricity mix would be considerably higher.
The offshore wind industry makes relentless efforts to bring costs down, for example by increasing the size of turbines. Yet conditions are also becoming more challenging. In order to find suitable areas, new capacity has to be located farther out to sea.
Of new deployments in the UK, Germany, Denmark and the Netherlands, an estimated 40% will be installed far offshore, according to forecasting by the Dutch research program on Far and Large Offshore Wind energy (FLOW).
FLOW was created, in part, to accelerate “far offshore” deployments, and according to its director, Ernst van Zuylen, the five-year R&D effort is succeeding. “We were surprised by the Borssele outcome,” says Van Zuylen, but even for projects sited in more challenging waters he predicts average costs in the €7 cent kWh range before 2030.
This would be an island in the middle of the North Sea, which would connect far offshore wind farms and transmit the electricity over direct current cables to the surrounding countries
Suction bucket jackets and concrete gravity-based foundations could reduce the need for hydraulic drilling of costly steel in waters deeper than 50 meters. There are now floating platforms for housing maintenance crews, as well as floating turbines, per six 5MW turbines being tested by Statoil 24 km off the coast of Scotland.
Still further gains could be had in linking several offshore wind farms with onshore grids in different countries. The Dutch offshore grid operator, Tennet, is now pushing several programs in this direction, including a meshed grid concept that has the backing of nine North Sea partner countries, as well as a hub-and-spoke island dubbed “Wind Connector”.
This would be an island in the middle of the North Sea, which would connect far offshore wind farms and transmit the electricity over direct current cables to the surrounding countries. But that’s probably still a few decades ahead. What is clear after the latest results is that the North Sea countries will continue to pursue their offshore wind ambitions vigorously. They may serve as inspiration to the rest of the world.
This article was first published by World Energy Focus, a free monthly magazine published by Energy Post. You can register here to get free access.