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EuropEan offshorE wind
Project cost and financing outlook
Sponsored by
Produced in conjunction with
forEword
Invest Northern Ireland is pleased to sponsor this research on the constraints facing the offshore wind industry in Europe. Indeed, there are a number of obstacles to success which must be overcome if installation targets in Europe are to be met by 2020. This report is the result of a survey of leading players in the offshore wind supply chain who have shared their opinion on the constraints and challenges within the sector.
With workforce shortages highlighted as posing the greatest threat to the success of the sector, there is an urgent need to train and multi-skill the current and future workforce to ensure ongoing availability of construction and engineering talent. Northern Ireland as a region sees this as being key to success and has actively worked with universities and industry to create an experienced, skilled workforce with a strong pipeline of new recruits. For example, on average around 1500 graduates qualify with degrees in engineering, technology and construction-related degrees every year. The region’s colleges have also launched courses to create technicians for the onshore and offshore wind industry and the future pipeline is further enhanced by over 3000 in engineering, manufacturing- and construction-focused apprenticeships.
Cost is another perceived challenge facing the industry today and there is a major drive underway to try to reduce costs. Findings in the report indicate that costs will start to fall sharply within five years and this is good news.
Keeping cost under control whilst ensuring quality does not suffer is a focus within the industry. Northern Ireland has an advantage in this area. It is often cited as a location which has operating costs that are highly competitive and significantly lower than the rest of the UK and Western Europe, especially in regards to labour and property costs. This has helped to provide a stable environment for companies to manufacture and assemble different components for the sector. Invest Northern Ireland believes that the future for the offshore wind industry is very positive and this optimism is reflected in the findings of this report.
Best Wishes,
Paul Morris,
Business Development Director,Invest Northern Ireland
Clean Energy pipeline
A division of VB/Research Ltd.50-52 Wharf RoadWenlock Business CentreGr. 06LondonN1 7EUEngland
www.cleanenergypipeline.com
© 2012 VB/Research Ltd. All rights reserved.
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ContEnts
Executive Summary.....................................................................................................................
{ Major obstacles must be overcome if Europe’s favoured alternative energy source is going to succeed
{ Innovation in project installation will underpin cost reductions { High turbine prices are surmountable { Funding issues eclipse everything else { Grid connection delays emerging as the major hurdle
Offshore wind is top of the agenda.............................................................................................
The potential for cost reductions................................................................................................
{ Installation costs { Foundation costs { Grid connection costs { Turbine costs
Understanding supply chain constraints...................................................................................
{ Workforce shortages pose the greatest threat { Long-term charters could resolve vessel shortage { Investment in high voltage cable manufacturing needed now to avert bottlenecks
Five reasons to be optimistic about financing..........................................................................
1. The UK financing lull is temporary 2. Asian investors want to play in European waters3. New acquirers are emerging4. EMR has been well received5. Round Three financing won’t take place for 3-5 years
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Major obstacles must be overcome if Europe’s favoured alternative energy source is going to succeed
European governments increasingly view offshore wind as an all-curing panacea. Offshore wind is tasked with enabling governments to meet ambitious long-term renewable energy generation targets, decreasing dependence on imported fossil fuels and stimulating economic growth. Germany is betting heavily on offshore wind, after choosing to wean itself off nuclear power, with an ambitious target of 10 GW of installed offshore wind capacity by 2020. The UK has gone even further, setting its installed offshore wind capacity target at 18 GW over the corresponding period.
A survey recently conducted by Clean Energy pipeline in conjunction with Invest Northern Ireland, which canvassed the opinion of leading players in the offshore wind supply chain, reveals the extent of the challenge. Approximately 80% of survey participants believe that securing project debt financing will be a significant obstacle to Europe meeting its offshore installation targets. Over two thirds also consider supply chain bottlenecks to be a significant issue. On the flipside, respondents do not regard either hurdle as insurmountable. In fact there is tremendous optimism that costs will decrease significantly throughout the supply chain over the next five years.
Innovation in project installation will underpin cost reductions
Survey respondents forecast a decrease in overall project costs of 6.1% to Eur2.28 million per MW over the next five years and 16.5% over the next ten years (in constant prices). This will be driven predominantly by decreased costs in wind farm installation, turbine foundations and turbine towers, which are expected to decline by 4.5%, 4.8% and 4.7% respectively in the next five years.
The fact that wind farm installation costs are predicted to decrease by 4.5% over the next five years is particularly encouraging, given that
ExECutivE summary
they account for approximately one quarter of total offshore wind project costs. Installation costs are defined as the cost of transporting all turbine and auxiliary equipment to a site as well as onsite turbine erection. Surveyed respondents cited innovation in installation processes (72%) and the emergence of dedicated offshore wind installation vessels (66%) as the two principal factors driving cost reduction.
Encouragingly, many companies are already starting to design dedicated offshore wind installation vessels capable of installing turbines and laying underground connection cables. For example, French ship-builder Louis Dreyfus Armateurs SAS has established a partnership with shipyard STX-France to build a dedicated vessel for laying offshore power cables.
High turbine prices are surmountable
Some 60% of survey respondents consider high turbine costs to be a significant obstacle that must be overcome for Europe to meet its offshore wind installation targets. Turbine costs are particularly important as they represent c.40% of the total cost of developing and constructing offshore wind farms. Importantly, the majority of survey respondents (61%) believe this is an obstacle that is likely to be overcome, while a further 19% believe this issue will certainly be overcome.
By far the most costly components of offshore wind turbines are towers and blades, which combined account for approximately half of total turbine costs and about a fifth of total project costs. In the next five years, survey respondents predict that turbine tower and blade costs will fall by 4.7% and 3.6% respectively. Technology innovation and economies of scale are expected to be the major drivers behind this decrease.
Funding issues eclipse everything else
Securing the necessary project finance to fund the construction of capital-intensive offshore wind farms is the industry’s greatest concern
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– over 80% of survey respondents believe that obtaining project debt or equity financing will be a significant obstacle.
However, it should be noted that the vast bulk of offshore wind capacity that will be brought online in Europe before 2020 will consist of the projects outlined in the UK’s ‘Round Three’ tendering process. Since successful bidders for these projects were only announced in early 2010, none need to raise financing for at least another three years. The hope is that the general economic climate will have improved by then. This probably explains why the majority of survey respondents believe that financing obstacles will more than likely be overcome in the next five years.
It is also encouraging that Asian investors have shown interest in investing in the European offshore wind sector. The Bank of Tokyo-Mitsubishi is the eighth largest provider of project debt financing to European offshore wind projects, having allocated $185 million to three wind farms in the last three years. Japanese trading company Marubeni’s 49.5% acquisition of the 172 MW UK Gunfleet Sands offshore wind farm suggests that Asian investors may contribute equity financing to the European offshore wind sector as well. Over 85% of survey respondents agree that investment from non-European sources is essential if developers are to raise the necessary financing to build out the government’s targeted offshore wind capacity.
Grid connection delays emerging as the major hurdle
After financing, securing grid connection in a timely manner is considered to be the most significant obstacle that must be overcome in the next five years for Europe to meet its offshore wind installation targets. Over 75% of survey respondents consider problems surrounding grid connectivity to be a major hurdle. However, unlike the issue of high turbine prices, there is no consensus that this is a hurdle that will be overcome. This issue is particularly severe in Germany, where there are genuine concerns that the offshore wind industry may grind to a halt after 2015 due to a lack of investment in the German offshore grid network and a deficiency of undersea cables.
In light of these delays, E.ON has been unable to commit investment to two projects, one in the North Sea and one in the Baltic. For the time being this issue seems to be limited principally to offshore wind farms in Germany.
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offshorE wind is top of thE agEnda
Many European countries are increasingly prioritising offshore wind above other energy sources to meet long-term carbon reduction targets, stimulate economic growth and decrease dependence on expensive imported fossil fuels. To put this into context, according to the National Renewable Energy Action Plans of all EU member states, in which countries set out their 2020 targets for renewable energy generation, just over 43 GW of offshore wind capacity will be installed in European waters by the end of the decade. This represents a quantum leap on the c.4 GW that is operational today.
Given this forecast expansion, it is perhaps unsurprising that there exists a high degree of uncertainty as to whether the supply chain can support the substantial increases in demand for different types of equipment and services that is expected to materialise in the next few
years. Over two thirds of respondents indicate that supply chain bottlenecks are a significant obstacle that must be overcome within the next five years if Europe is to meet its offshore wind installation targets. Respondents also consider adverse project financing conditions (81%), delays in securing grid connections (75%) and the high cost of turbines (60%) to be significant obstacles to Europe meeting its offshore wind installation targets.
Encouragingly the industry appears confident that these hurdles can be overcome over the next five years to the extent that it will be possible for Europe to meet its ambitious installation targets. Some 85% of survey respondents are confident that turbine prices will fall to levels at which they are not prohibitive over the next five years, while 72% are positive that supply chain bottlenecks can be resolved.
0% 20% 40% 60% 80% 100%
Cost of turbines
Securing necessary planning permission & consents in a timely manner
Supply chain bottlenecks (shortage of blades/cabling/steel/installation vessels etc)
Securing project equity financing
Securing grid connection in a timely manner
An uncertain policy environment
Securing project debt financing
What are the most significant obstacles that will need to be overcome in the next five years if Europe is to meet its offshore wind installation
targets?
Very significant obstacle Significant obstacle Minor obstacle Not an obstacle
What are the most significant obstacles that will need to be overcome in the next five years if Europe is to meet its offshore wind installation targets?
Supply chain bottlenecks (shortage of blades/cabling/steel/installation vessels etc.)
Securing necessary planning permission & consents in a timely manner
Turbine costs
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While the majority of survey participants are confident that delays to securing grid connection for offshore wind projects will be resolved over the next five years, there are likely to be significant regional variances. For example, in Germany there are real concerns that the development of offshore wind projects may be pushed back a year due to grid connection delays caused by under-investment in substation infrastructure and a shortage of undersea cables.
E.ON Climate & Renewables recently stated that it will no longer commit investment to two pre-construction phase offshore wind projects after experiencing a 15-month delay in connecting its Amrumbank West project in the North Sea. Mike Winkel, CEO, described the situation in Germany as “catastrophic”. Similarly, RWE Innogy CFO Hans Buenting has warned that Germany may
not meet its offshore wind installation targets unless grid connection delays are resolved.
In response to these delays TenneT, the Dutch power grid operator that is responsible for ensuring offshore wind projects in German waters can access the grid, has called for an entirely new organisation to be formed to manage offshore wind grid connection.
The following sections of this report analyse the most significant obstacles that must be overcome if Europe is to meet its offshore wind installation targets:
• Installation, foundation, grid connection and turbine costs;
• supply chain bottlenecks; and• financing constraints.
0% 20% 40% 60% 80% 100%
An uncertain policy environment
Securing project debt financing
Securing grid connection in a timely manner
Supply chain bottlenecks (shortage of blades/cabling/steel/installation vessels etc)
Securing necessary planning permission & consents in a timely manner
Securing project equity financing
Cost of turbines
How confident are you that the obstacles identified in the above question will be overcome in the next five years?
Obstacle will almost certainly be overcome Obstacle is likely to be overcome
Obstacle is unlikely to be overcome Obstacle is very unlikely to be overcome
How confident are you that the obstacles identified in the above question will be overcome in the next five years?
Supply chain bottlenecks (shortage of blades/cabling/steel/installation vessels etc.)
Securing necessary planning permission & consents in a timely manner
68%of respondents indicate that supply chain bottlenecks are a significant obstacle that must be overcome within the next five years
thE potEntial for Cost rEduCtions
The offshore wind industry is confident that significant cost savings are achievable in the future. On average, survey respondents expect the cost of developing and constructing offshore wind farms to fall to Eur2.28 million per MW in five years and Eur2.03 million per MW in ten
years, a 6.1% and 16.5% decrease respectively compared to the cost today. These savings will be delivered by the declining costs of wind farm installation, foundations and turbine towers, the cost of which are expected to fall by 4.5%, 4.8% and 4.7% over the next five years respectively.
5%
8%
12%
12%
9%
7%
13%
13%
21%
Less than €1m/MW
€1m-€1.3m/MW
€1.3m-€1.6m/MW
€1.6m-€1.9m/MW
€1.9m-€2.2m/MW
€2.2m-€2.5m/MW
€2.5m-€2.8m/MW
€2.8m-€3.1m/MW
Over €3.1m/MW
What will be the cost of developing and constructing offshore wind farms five years from now (in € 2012 constant)?
What will be the cost of developing and constructing offshore wind farms five years from now (in € 2012 constant)?
14%
14%
5%
12%
7%
15%
15%
11%
8%
Less than €1m/MW
€1m-€1.3m/MW
€1.3m-€1.6m/MW
€1.6m-€1.9m/MW
€1.9m-€2.2m/MW
€2.2m-€2.5m/MW
€2.5m-€2.8m/MW
€2.8m-€3.1m/MW
Over €3.1m/MW
What will be the cost of developing and constructing offshore wind farms ten years from now (in € 2012 constant)?
What will be the cost of developing and constructing offshore wind farms ten years from now (in € 2012 constant)?
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Installation costs
If the cost of developing and constructing offshore wind farms is going to decrease significantly in the future it is vital that cost savings can be realised during the installation process. This comprises the transportation of turbines, foundations and other equipment to the offshore site as well as turbine erection.
On average, survey respondents forecast a 4.5% decrease in installation costs over the next five years. This is particularly significant as installation costs account for approximately one quarter of the total cost of developing and constructing offshore wind farms, making it the largest single expense after the capital cost of turbines, which account for approximately 40% of total project costs. Even if no other cost reductions are achieved across the supply chain, the total cost of constructing and developing offshore wind
farms could decrease by 1.1% if survey respondents’ predictions regarding installation costs are correct.
Innovation in installation process and the emergence of dedicated installation vessels are expected to be the main drivers of this cost reduction. These factors were deemed as ‘strong’ drivers by 72% and 66% of survey respondents respectively. Innovation in installation processes might take several forms, such as the development of new machinery that allows turbines to be installed in choppier waters, more cost effective ways of laying subsea cables or even more efficient ways of transporting workers to a site location. New methods of installing offshore wind farms that increase the percentage of work undertaken onshore will also drive substantial cost savings,
10%-15% increase
15%+ increase 4%
1%
10%
4%
22%
11%
25%
6%
2%
15%5%-10% increase
0%-5% increase
No change
0%-5% decrease
5%-10% decrease
10%-15% decrease
15%-20% decrease
20%+ decrease
How do you expect the cost of installing offshore wind projects to evolve in the next five years on a per MW basis (in € 2012 constant)?
given that any process undertaken in an offshore setting is 10x more expensive than if it is completed onshore.
It is interesting to note that survey respondents are pessimistic about the potential for floating wind turbines as a means of reducing installation costs. In recent months a number of established operators in this sector have announced plans to develop floating wind turbines, the primary advantage of which is that they significantly reduce installation costs. Indeed Japanese conglomerates Mitsubishi and Marubeni
announced plans to conduct a $154 million scoping study for a floating offshore wind farm to be built off the coast of Fukushima in March 2012. Norwegian energy giant Statoil announced plans to develop a 12 MW floating offshore wind farm off the coast of Maine, USA, in late 2011. While certain large corporates seem interested in this technology, survey respondents are clearly unconvinced.
0% 20% 40% 60% 80% 100%
Increasing sophistication of weather measurement tools, meaning installation resources can be allocated
more efficiently
Increasing use of floating wind turbines easing installation processes
Further development of port infrastructure
Increasing use of lighter wind turbines easing installation processes
Natural cost savings through experience as the sector matures
Increasing deployment of higher capacity turbines
Economies of scale
Emergence of dedicated offshore wind installation vessels
Innovation in installation processes
What will drive your forecast decrease in costs during the next five years?
Strong driver Minor driver Not a driver
What will drive your forecast decrease in costs during the next five years?
Emergence of dedicated offshore wind installation vessels
Cost savings achieved through experience as the sector matures
Increased use of floating wind turbines
Increased use of lighter wind turbines
Increased sophistication of weather measurement tools, meaning installation resources can be allocated
more efficiently
Increased deployment of higher capacity turbines
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4.5%projected decrease in installation costs in the next five years
Foundation costs
On average, survey respondents expect foundation costs to decrease by 4.8% over the next five years, making it the component within the supply chain that is expected to decrease in cost most significantly. Like installation processes, foundation costs are significant, accounting for approximately 20% of total offshore wind project costs. A 4.8% decrease in foundation costs alone will reduce the cost of developing and constructing an offshore wind farm by 0.96%.
Technology innovation is expected to be the most significant factor, considered by 67% of survey respondents as a strong driver, followed by economies of scale (61%).
Significant innovation in turbine foundation design has already taken place in recent years. The majority of European offshore wind farms deploy conventional monopile foundations, which are relatively inexpensive and perfectly suited to
projects situated in waters up to 25 metres deep. However, offshore wind farms are increasingly deploying more advanced space-frame foundations, which include tripod, tripile and jacket designs. These designs are used for offshore wind farms situated in deeper waters. Space-frame foundations accounted for approximately 25% of the total European offshore wind foundation market in 2011, compared with c.5% in 2008, according to the engineering consultancy GL Garrad Hassan. These new designs are not necessarily cheaper than conventional monopole structures, but they do enable wind farms to be installed further out at sea.
Many early-stage companies are currently developing new innovative foundations designed to reduce costs much further. For example, UK-based Xanthus Energy is developing an alternative low-cost concrete foundation structure for offshore wind turbines, which it claims will reduce
5%
11%
14%
21%
19%
4%
11%
9%
5%
2%
10%-15% increase
15%+ increase
5%-10% increase
0%-5% increase
No change
0%-5% decrease
5%-10% decrease
10%-15% decrease
15%-20% decrease
20%+ decrease
How do you expect the manufacturing cost of offshore wind turbine foundations to evolve in the next five years on a per MW basis (in € 2012 constant)?
the cost of installing an individual turbine by £100 million, rising to £200 million for larger projects.
Interestingly, significant innovation in foundation technology may not necessarily be required to reduce costs on a per MW basis. If higher capacity turbines, which are currently being
developed by all major turbine manufacturers, can be supported by existing foundation structures, then foundation costs on a per MW basis will decline automatically. In fact, higher capacity turbines were considered by 57% of survey respondents to be a strong driver behind a decrease in foundation costs.
0% 20% 40% 60% 80% 100%
Decreasing raw material costs
Geographical concentration of foundation supply chain
Natural cost savings through experience as the sector matures
Increasing deployment of higher capacity turbines
Economies of scale
Technology innovation
What will drive your forecast decrease in costs during the next five years?
Strong driver Minor driver Not a driver
What will drive your forecast decrease in costs during the next five years?
Increased deployment of higher capacity turbines
Cost saving achieved through experience as the sector matures
Geographical concentration of foundation supply chain
Decreased raw material costs
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4.8%projected decrease in foundation costs in the next five years
ExplaInInG THE CaSE FOr FlOaTInG FOUndaTIOnS
Clean Energy pipeline spoke to Xanthus Managing Director Lewis Lack to understand the potential for alternative turbine foundations to reduce offshore wind project costs.
The design
The company’s technology offering is centred on two designs. The first is the SeaBreeze foundation, which is assembled with the wind turbine onshore and has built-in levelling systems to ensure it can be installed with no seabed preparation. The company states that a SeaBreeze installation can be accomplished at depths of up to 60 metres within ten hours.
The deepwater design, Ocean Breeze, is a floating foundation that can operate at depths of up to 200 metres and beyond, which means it is more suitable for large Round Three projects that will be built further off the coast.
The advantage
Lack claims that Xanthus’ foundations will take one million pounds off the cost of each wind turbine installation, which converts into £200 million or more savings for the large Round Three projects.
One major potential benefit of the Xanthus design is that it is concrete-based rather than steel. This is significant because steel resources are likely to be stretched by the sheer magnitude of material needed for foundations in Round Three and the rest of Europe. “The concrete sector is very keen to push our solution,” said Lack. “The supply chain for steel plate is under pressure and we don’t think we are so vulnerable in that state.”
The state of play
To date, Xanthus has performed tests using a series of scaled models in Ireland. Lack said he is confident that the solution is ready for operations at scale, and now aims to prove the full-scale design through collaboration with an industrial partner, ideally a wind turbine manufacturer. This commercial partner will also play a role in establishing Xanthus’ production facility once the demonstrator model is successful.
Grid connection costs
On a less positive note, there is little optimism that grid connection costs will decrease significantly during the next five years. On average, survey respondents only predict a 1.4% cost reduction, which would translate into a 0.2% decrease in the total cost of bringing offshore wind farms online, on the basis that grid connection accounts for 15% of total project costs.
There are multiple reasons why grid connection costs per MW are expected to remain relatively constant. The primary reason is that as offshore wind farms are built further out to
sea, so the volume of cable required to transport electricity from the point at which it is generated to a substation will increase. For particularly large offshore wind farms, an offshore substation may also be necessary. In effect, any cost reductions generated through technology innovations are likely to be matched by increased cable and substation costs.
3%
5%
10%
9%
14%
24%
13%
15%
4%
3%
10%-15% increase
15%+ increase
5%-10% increase
0%-5% increase
No change
0%-5% decrease
5%-10% decrease
10%-15% decrease
15%-20% decrease
20%+ decrease
How do you expect the cost of offshore grid connection to evolve in the next five years on a per MW basis (in € 2012 constant)?
To find out about what Northern Ireland has to offer your companycontact Paul MorrisInvest Northern Ireland,London Office T: +44 (0)20 7222 0599 E: [email protected]
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Turbine costs
Capital expenditure on offshore wind turbines accounts for approximately 40% of the cost of developing and constructing an offshore wind farm. As a result, any cost savings that can be
achieved in the turbine supply chain have a significant impact on the overall cost of bringing a project online.
3%
10%
10%
19%
23%
17%
13%
1%
3%
1%
10%-15% increase
15%+ increase
5%-10% increase
0%-5% increase
No change
0%-5% decrease
5%-10% decrease
10%-15% decrease
15%-20% decrease
20%+ decrease
How do you expect the cost of manufacturing wind turbine towers to evolve in the next five years on a per MW basis (in € 2012 constant)?
5%
7%
9%
16%
17%
22%
11%
9%
3%
1%
10%-15% increase
15%+ increase
5%-10% increase
0%-5% increase
No change
0%-5% decrease
5%-10% decrease
10%-15% decrease
15%-20% decrease
20%+ decrease
How do you expect the cost of manufacturing wind turbine blades to evolve in the next five years on a per MW basis (in € 2012 constant)?
4.7%projected decrease in the cost of manufacturing blades during the next five years
The most expensive components of offshore wind turbines are blades and towers, which together account for roughly half the capital cost of a turbine and 20% of the cost of an entire offshore wind farm. Encouragingly, survey respondents predict significant reductions in the cost of both components. During the next five years survey participants predict that the costs of manufacturing blades and towers will decrease by 4.7% and 3.6% respectively. Assuming these cost decreases are achieved, turbine costs will decrease 2% even if the cost of other turbine components, such as gearboxes and power converters, remains constant.
Technology innovation and economies of scale are expected to be the most significant drivers of cost reductions for both blades and towers. The European Wind Energy Association (EWEA) estimates that demand for offshore wind turbines will reach 3 GW per year in 2015 and 7 GW by 2020, significantly greater than the c.1 GW worth of turbines purchased in 2011. This growth should drive economies of scale.
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0% 20% 40% 60% 80% 100%
Low-voltage cabling manufacturing capacity
Power converter manufacturing capacity
Turbine blade manufacturing capacity
Turbine gearbox manufacturing capacity
Steel fabrication capacity
Turbine foundation manufacturing capacity
High-voltage cabling manufacturing capacity
Availability of installation vessels
Availability of a trained construction and engineering workforce
Where in the European offshore wind supply chain do you believe there are the most serious capacity issues that must be resolved in the next five years if
Europe is to meet its offshore wind installation targets?
Severe shortage Some shortage No issue
Availability of a trained construction and engineering workforce
undErstanding supply Chain Constraints
For Europe to meet its offshore wind installation targets it is imperative that there is significant investment across the supply chain to ensure that there are no capacity bottlenecks. The offshore wind supply chain not only includes turbines and associated components, but also vessels used to install and maintain turbines and an adequately trained workforce to undertake specialised engineering, maintenance and project management.
Given the rapid rate at which wind farms across Europe will have to be installed between now and 2020 relative to the current installed base, it is no surprise that the industry is concerned about potential supply chain bottlenecks. Over two thirds of surveyed respondents consider supply chain bottlenecks to be a significant obstacle that must be overcome during the next five years if Europe is to meet its installation targets.
Where in the European offshore wind supply chain do you believe are the most serious capacity issues that must be resolved in the next five years if Europe is to meet its offshore
wind installation targets?
18 19
0% 20% 40% 60% 80% 100%
Availability of a trained construction and engineering workforce
Availability of installation vessels
High-voltage cabling manufacturing capacity
Turbine foundation manufacturing capacity
Power converter manufacturing capacity
Turbine blade manufacturing capacity
Steel fabrication capacity
Turbine gearbox manufacturing capacity
Low-voltage cabling manufacturing capacity
How confident are you that the potential shortage identified in the above question will be overcome in the next five years?
Shortage will almost certainly be overcome Shortage is likely to be overcome
Shortage is unlikely to be overcome Shortage is very unlikely to be overcome
Availability of a trained construction and engineering workforce
Workforce shortages pose the greatest threat
Developing and constructing offshore wind farms requires skilled labour, ranging from project managers and construction engineers through to operations and maintenance technicians. The EWEA estimates that the European offshore wind sector could employ almost 170,000 individuals by 2020. While a large number of these individuals will require minimal training, the need for a dramatic rise in qualified personnel certainly cannot be underestimated.
This is the area of the supply chain that most concerns respondents – 47% believe
there will be a severe shortage of skilled labour while a further 46% think there will be at least some shortage. Unlike other supply chain bottlenecks, where there is a general consensus that a deficiency can be overcome, there is no certainty that labour shortages will be rectified during the next five years.
A number of European agencies have initiated training programmes designed to address this issue to ensure that they extract as many economic benefits as possible from offshore wind development. For example, in 2000 the German Wind Energy Association,
How confident are you that the potential shortage identified in the above question will be overcome in the next five years?
InTErVIEW: SUpply CHaIn rEqUIrES ClarITy On raTE OF OFFSHOrE WInd dEplOyMEnT TO jUSTIFy InVESTMEnT
October 2011
Tata Steel, the world’s seventh largest steel manufacturer, believes that further clarity is needed on the size and timing of UK Round Three offshore wind development if the supply chain is to commit capital to the sector.
“It is not obvious how attractive the CFD FiT’s (contract for difference feed-in tariffs) will be,” Russell Codling, Marketing Manager for Energy and Power at Tata Steel Europe, told Clean Energy pipeline. “That will determine the rate of growth in the market.
“We have the EU required numbers of what the minimum will be, which suggests 13 GW in UK waters by 2020. But if I look at the planned dates of development for individual projects then there may be 30 GW by 2020. We need to know where in between it will be.”
According to Codling, it is equally important to have visibility on the timing of installation of Round Three offshore projects, so that the supply chain can plan when to ramp up capacity. “The government needs to say we will have this volume of capacity by this date and this volume by 2020,” he said. “We want to serve this market but I don’t know when to invest. It could be this year or next year.”
If this insight is not provided, Codling believes the supply chain will not evolve to the degree at which economies of scale can be achieved, which will result in offshore wind falling out of favour with the public due to high development costs and resulting higher electricity rates.
In recent years, Tata Steel has invested significantly in steelworks capable of serving the UK offshore wind sector. Earlier this month it announced that it is investing £2 million in a tube manufacturing facility in Hartlepool to meet growing demand from the offshore wind energy industry. This was followed by an announcement that it will invest a further £4.5 million at its Yorkshire, UK-based operations.
The company’s steel is deployed extensively across the offshore wind supply chain, from drive shafts, gearboxes and generator housings. It also operates a wind power plate profiling facility in Scunthorpe, which profiles steel structures so that they are ready for fabrication. It sells these structures directly to wind turbine manufacturers and to fabricators.
The greatest area of potential within the supply chain for steel manufacturers is in foundation structures, since this is the component which requires the greatest volume of steel. While Round One and Round Two wind farms have deployed monopiles, Codling said that Round Three farms will need to be built on jacket and tripod foundations, which have higher load and depth thresholds.
Tata Steel has announced plans to expand its operations to serve the jacket and tripod market, although is waiting for clarity on the rate of UK offshore wind development before it commits capital. “We have a much larger diameter tubular plant to serve the jackets and monopiles market,” said Codling. “We announced last year that we plan to make a £30 million investment in this area and are evaluating the right time to execute.”
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in collaboration with various government bodies, founded the Education Centre for Renewable Energies, which provides a number of specialised training courses. A partnership between government and industry associations in the UK has also established a similar training centre.
Europe employs a vast workforce in the oil and gas sector, which possesses skills that can be transferred to the offshore wind sector with minimal training. However, while oil and gas could prove a fertile recruitment ground for the offshore wind sector, the current high price of oil means that there are unlikely to be massive layoffs in the sector. As a result, the offshore wind industry is going to have to compete with the traditional energy sector on pay and working conditions to attract skilled labour.
long-term charters could resolve vessel shortage
Over 90% of survey respondents believe that there could be a shortage of offshore installation vessels in the next five years, making it the second greatest potential issue within the supply chain. Worryingly, there is little confidence that this shortage can be rectified in the next five years, with 44% of survey respondents stating that this issue is unlikely to be resolved.
One of the main reasons why survey respondents do not believe that this shortage will be overcome is the lack of financing available for special purpose installation vessels. The financing structure of offshore installation vessels is typically highly leveraged given the substantial capital outlay involved. However, banks often want to see long-term charter arrangements in place that demonstrate a vessel’s ability to generate long-term stable revenues before providing financing.
While operations and maintenance vessels are frequently able to secure long-term charters to match the lifetime of an offshore wind farm, charters for installation vessels are typically limited to the construction phase of an individual site, which is normally around two years. Until
offshore wind developers are prepared to commit to longer periods, it is likely that the development of dedicated-offshore installation vessels will be limited to corporations with large balance sheets.
Advances in foundation technology that reduces the requirements for heavy on-vessel lifting equipment are another reason why there is a general hesitancy to develop and finance special purpose offshore wind installation vessels. For example, gravity-based foundations, which can be manufactured onshore and then pulled out to sea, are becoming increasingly popular. Once in position, gravity-based foundations are made heavier by pumping in sand and rocks, which reduces the workload of the installation vessel. If this type of foundation becomes mainstream, then operators of vessels dedicated to offshore wind may find that demand for their services diminishes.
There is also concern that there will be a shortage of vessels capable of providing offshore wind operations and maintenance services. It is estimated that approximately 40 maintenance vessels are needed in UK waters alone between now and 2020. While wind farms currently in operation will be able to be served by conventional shore-based workboats due to their close proximity to ports, many planned offshore wind farms will require a vessel that is constantly at sea.
Investment in high voltage cable manufacturing needed now to avert bottlenecks
The huge volume of offshore wind capacity that is planned between now and 2020 will require significant volumes of high-voltage transmission cable. It is estimated that the manufacturing capacity of high-voltage direct current subsea cable stands at approximately 1,000 km per year and that the annual capacity of high voltage direct current cable stands at 700 km per year, which combined would provide for up to 3.5 GW of offshore wind capacity per year, according to analysis by the wind and marine energy technology consultancy BVG Associates.
90%+of survey respondents believe that there could be a shortage of installation vessels in the next five years
Even if the full 3.5 GW worth of high voltage cables could be produced every year between now and 2020, this would only result in enough being manufactured to meet demand for 28 GW of offshore wind capacity, significantly less than the 36 GW that is forecast over the next eight years. Unsurprisingly, 37% of survey respondents believe there will be a severe shortage of high-voltage cable manufacturing capacity over the next five years, while a further 45% believe that there will be at least some shortage.
jOHn aldErSEy-WIllIaMS, CHIEF ExECUTIVE OF SEaEnErGy plC
March 2012
Will there be a deficiency of offshore wind installation vessels between now and 2020?
There will very probably be a deficiency in the short term. Although in the longer term, an interesting emerging technology is the self-installing turbine, on which a buoyant foundation can be tugged out from where you built it and self-installed on the seabed. For these types of turbines you would not need an expensive purpose-built installation vessel. I would be cautious about building an installation vessel as you would have to wonder how long the market for it would last.
One hurdle that needs to be overcome if this issue is to be resolved is around financing. One of the key issues for any company building vessels is how bankable they are. One of the attractions of an offshore O&M vessel relative to an installation vessel is that much longer charters of between five and 25 years are available. That is much more bankable than a charter lasting a year or two to build a wind farm.
Somebody in offshore wind needs to be ready to let a charter that underwrites the contract of building a purpose-built vessel. Banks are concerned that if the wind market disappears then a vessel will not have a purpose. The temptation then is to try to make a vessel that is a jack of all trades. You can only afford to build a purpose-built tool if you have enough work to make it worthwhile.
Will there be a skills shortage?
We believe that there could be a capacity issue here and that is one of the reasons why we have designed our vessels to make the best use of technicians’ time; by ensuring a high level of accessibility in all weather conditions, and reducing time wasted in long journeys from shore. That way you simply need fewer technicians. It is also important to provide them with excellent working conditions.
The model in our minds is that technicians should work two weeks on and two weeks off, in a similar way to the offshore oil and gas industry. That means that the accommodation on your vessels needs to be high quality to attract high-quality technicians.
In some cases the technicians have refused to work on these ships as the conditions are too poor. It is important to make sure that the food is good and that there are things such as a cinema and a gym.
On a positive note, the industry is generally confident that this capacity deficiency will be overcome – 74% of survey respondents stated that the shortage of high-voltage cables will be rectified over the next five years.
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Will the offshore wind sector be able to attract technicians from the oil and gas industry?
As an oil platform runs down it still needs as much or even more maintenance. So the idea that oil technicians will become available as oil production declines is slightly misconceived although there will obviously be some from the relatively few fields that do actually get decommissioned. But with oil at over $100 per barrel, operators are finding every way of keeping these assets running for as long as they can.
However, we do find that we are getting lots of CVs from newly minted graduates that don’t want to work in oil and gas but want to work in wind because it is seen as a sunrise rather than a sunset industry and they philosophically see it as the right thing to do.
What can drive down the costs of installing offshore wind farms?
Installation costs can come down significantly. There are some innovations out there, some bits of technology that can make the process more effective. There are also philosophical changes that are required. A productive hour offshore costs almost ten times a productive hour onshore. So the more you can get built and ready to run when it is still in the yard, the more you will save.
The other piece is about optimising the whole process so that it is more like a manufacturing supply chain. We need to really find economies of scale rather than looking at farms on a case by case basis. A big part of this would be to extend the building season into the autumn and ideally all year round. Then you would not have a big build up of turbines ready to install in the summer. That is a lot of capital tied up.
Where are the current inefficiencies around operating and maintaining offshore wind farms?
It is important to optimise the use of technician hours so that you are not paying them their hourly rate while they are waiting for them to get to their worksite. Even for a wind farm that is very close to shore, say 15 miles from its harbour, you are only getting eight hours productive work out of a 12-hour shift. That is very expensive as it effectively adds a 50% surcharge to your cost.
Also, current workboat technology is limited to operating at waves below 1-1.5 metres high. Even on a very benign site such as Sheringham Shoal in the North of Norfolk site, which is one of the nicest from a wave perspective, the waves are higher than one metre about 30% of the time. So again that is three hours out of ten where you can’t get your technician on the turbine at all, but you are still paying for his shift.
We have developed a system that will be able to operate at wave heights of up to four metres, which increases accessibility to over 99% of the time. So it’s all about optimising the use of the technicians you have and making sure that the hours you pay for are productive hours.
Will there be a shortage of vessels for operating and maintaining offshore wind farms?
There will need to be a lot of vessels because there will be 8,000 turbines in UK waters if our 40 GW target is to be achieved. Given the maintenance requirements of these turbines you will need one vessel for every 100 to 200 turbines. So there is a market for a good 40 of these vessels in UK waters alone, and there are not any of them yet.
For Round One and possibly Round Two UK projects the shore-based workboat solution can continue, and there is plenty of capacity to manufacture these. There is capacity to build the larger ships similar to the one we are developing at the moment, which will be required for Round Three projects.
“One of the key issues for any company building vessels is how bankable they are.”
john aldersey-Williams, SeaEnergy plc
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fivE rEasons to bE optimistiC about finanCing
Securing the necessary project financing to fund construction of capital-intensive offshore wind farms is the industry’s greatest concern, which is not surprising given the current macroeconomic climate. Some 80% of survey respondents believe that obtaining project debt or equity financing will be a significant obstacle. The lack of recent offshore wind financing activity suggests that these concerns might be justified – European offshore wind project financing totalled $5.4 billion in 2011, a 26% decrease on the $7.3 billion recorded in 2010. Only 12 projects secured financing in 2011, compared to 19 in the previous year.
Nonetheless, the majority of survey respondents are confident that the financing hurdle will be overcome. There are five primary reasons to be optimistic on this matter:
1. The UK financing lull is temporary
The 26% year-on-year decrease in offshore wind project financing was almost entirely caused by an absence of large UK deals, which has kept activity buoyant in recent years. Only $378 million was allocated to UK offshore wind farms in 2011, compared with $3.9 billion in 2010 and $2.3 billion in 2009.
This decrease in activity does not reflect a reluctance to back offshore wind, but rather a natural hiatus resulting from the lumpy way in which offshore wind development is managed in the UK. Most ‘Round Two’ UK offshore wind projects unveiled in 2003 have already secured financing. However, the 32 GW of projects being developed under ‘Round Three’ will not be financed for another three to five years.
0% 20% 40% 60% 80% 100%
The fact that most European offshore wind farms are being developed in countries with relatively low long-term borrowing costs means that financing will be available at
reasonable terms for offshore wind projects
The contract-for-difference feed-in tariff system proposed under the Electricity Market Reform process will provide investors with the long-term certainty required to commit
significant capital to the sector
The proposed contract-for-difference feed-in tariff system will decrease market risk but increase political risk as
contracts will only be negotiated when significant capital has already been committed to a project
Project debt financing for offshore wind projects will become significantly less available if banks are forced to
take a haircut on Greek debt
Investment from non-European funds/companies will be essential if developers are to raise the sums of financing required to build out the government’s targeted offshore
wind capacity
To what extent do you agree with the following statements regarding the financing of Round Three UK offshore wind projects?
Strongly agree Agree Disagree Strongly disagree
To what extent do you agree with the following statements regarding the financing of Round Three UK offshore wind projects?
Investment from non-European funds/companies will be essential if developers are to raise the sums of financing required to build out the government’s targeted offshore
wind capacity
Project debt financing for offshore wind projects will become significantly less available if banks are forced to
take a haircut on Greek debt
The proposed contract-for-difference feed-in-tariff system will decrease market risk but increase political risk as
contracts will only be negotiated when significany capital has been committed to a project
The proposed contract-for-difference feed-in-tariff system proposed under the Electricity Market Reform process will
provide investors with the long-term certainty required to commit significant capital to the sector
The fact that most European offshore wind farms are being developed in countries with relatively low long-term borrowing costs means that financing will be available at
reasonable terms for offshore wind projects
InTErVIEW: FInanCInG WIll bE aVaIlablE FOr UK OFFSHOrE WInd dESpITE CUrrEnT TUrbUlEnCE, prEdICTS TOp MaCqUarIE adVISOr
October 2011
The vast sums of capital required to develop the UK government’s targeted 18 GW of offshore wind capacity will be forthcoming despite the current turbulence in the European financial sector as long as a stable policy framework that provides new market entrants with clarity is in place, Simon Wilde, Senior Managing Director and Head of European Power and Utilities Coverage at Macquarie, told Clean Energy pipeline.
“We believe that 18 GW, which is the UK’s updated target for offshore wind capacity following the review of electricity market reform (EMR), will require £50-£55 billion,” said Wilde. “Multiple sources of financing will be available, subject to a stable policy environment. Clearly the financial markets are facing difficulty at the moment. However the bulk of this 18 GW are Round Three projects that won’t be financed for three to five years. Hopefully the financial markets will have improved by then.”
Wilde predicts that 60%-75% of the required £50 billion-£55 billion will be financed by debt in the form of bank loans and bonds, while the remaining 25%-40% will be equity investment from the big six UK utilities and new equity investors in the form of pension funds, Asian utilities and trading companies.
The debt financing component of nearly all UK offshore wind farms has to date been provided by the European Investment Bank, with limited commercial bank financing. Equity financing has typically been provided by UK and continental European utilities such as Centrica, Dong Energy and Vattenfall.
In order to stimulate investment in offshore wind and attract new investors, the UK government plans to implement a contract-for difference (CFD) feed-in tariff for offshore wind farms, which effectively guarantees more stable returns for investors.
Wilde is confident that the CFD subsidy method will be attractive for investors at the refinancing stage. “CFD definitely removes revenue volatility which is good for all capital providers,” he said. “Debt investors don’t typically like construction risk, so project sponsors provide recourse during construction. There are lots of interesting combinations of debt and equity and providers are tackling how best to fund this industry. I am confident that the financing will be there.”
2. asian investors want to play in European waters
It is unlikely that European investors will have the necessary firepower to finance construction of the significant offshore wind capacity that is expected to be built in the coming years – over 85% of survey respondents believe that investment from non-European funds and companies will be essential if developers are to raise the financing necessary to meet the
government’s targeted offshore wind installed capacity.
It is therefore encouraging that Asian investors are already demonstrating an appetite to invest in the sector. For example, The Bank of Tokyo-Mitsubishi allocated $185 million to three European offshore wind farms between 2009
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and 2011, making it the eighth largest provider of debt financing to the sector during the past three years. The acquisition of a 49.5% stake in the 172 MW UK Gunfleet Sands offshore wind farm by the Japanese trading company Marubeni in September 2011 also indicates that Asian corporates may provide financing. The Japanese industrial conglomerate Mitsubishi has also been active in acquiring offshore wind transmission assets in recent months. In early March it agreed to acquire stakes in two German offshore wind transmission platforms from Dutch power grid operator TenneT for Eur340 million, adding to the stakes it acquired in two similar projects during the prior month.
3. New acquirers are emerging
Utilities must divest stakes in offshore wind farms that are either under construction or operational if they are to free up capital to invest in new projects. For this to occur, a new type of acquirer needs to emerge whose investment criteria matches the long-term stable returns offered by offshore wind projects.
In recent months there have been signs that this is starting to materialise. In February 2012 Danish power producer Dong Energy announced that it had agreed to divest a 50% interest in the Borkum Riffgund 1 German offshore wind farm for DKK4.7 billion ($841 million). The acquirers were Kirkbi AS, the Danish parent company of toymaker Lego and the investment arm of the Oticon Foundation, a hearing aid manufacturer. The transaction is particularly notable as it represents one of the first incidences of an offshore wind farm being acquired by a private company. Pension funds are also increasingly showing an interest in offshore wind. The acquisition of a 50% stake in Dong Energy’s Anholt offshore wind farm, the largest in Denmark, by pension funds PensionDanmark A/S and PKA A/S last year bodes well for the sector as a whole. However, to attract investment from more pension funds (and similar investor types), it is vital that deals are structured such that construction risk is minimised.
4. EMr has been well received
A significant proportion of offshore wind capacity brought online in the coming years will be projects designated in the UK’s Round Three of tenders. Those that commence operation from 2017 onwards will be subsidised under the UK’s proposed contract-for-difference (CFD) feed in tariff, which offers asset owners a more stable income stream by paying a tariff based on the difference between a set strike price for sustainable energy and the average wholesale market price of electricity. The new CFD mechanism is being proposed under the UK’s process of Electricity Market Reform (EMR), which is examining new ways to promote the development of low-carbon energy sources.
Survey respondents are optimistic that the CFD subsidy mechanism will be successful in stimulating investor interest in offshore wind – over 70% agree with the proposition that the CFD FiT system will provide investors with the long-term certainty required to commit significant capital to the sector.
However, the industry is still cautious that the changes proposed under EMR may not provide investors with the certainty required to commit capital to fund construction of offshore wind farms – over two thirds said that while the proposed CFD FiT system will decrease market risk, it will increase political risk as contracts will only be negotiated with a government agency when significant capital has already been committed to a project.
5. Round Three financing won’t take place for 3-5 years
A significant proportion of offshore wind capacity to be brought online in Europe before 2020 will consist of projects outlined in the UK’s ‘Round Three’ tendering process. Since successful bidders for these projects were only announced in early 2010, many are currently undergoing feasibility studies, meaning that none of them need to raise financing for at least another three years. The general hope is that the general economic climate will have improved by then.
“The bulk of this 18 GW are round Three projects that won’t be financed for three to five years. Hopefully the financial markets will have improved by then.”
Simon Wilde, Macquarie
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