Expanding beyond predictability1 November 2008
A new report from Rabobank suggests that offshore wind is changing before our eyes, proceeding at a rapid pace from a series of pilot projects to a mature industry that will require a ten-fold rise in investment levels by 2015.
Offshore wind installed capacity stood at a mere 1% of the global total of installed wind power at the end of 2007. Existing offshore windfarms can to all intents and purposes be classified as pilot projects which have allowed turbine makers, windfarm developers and utilities to gain experience. However, a report* from the major investment bank Rabobank, the first bank to commit to a full-recourse project financing for an offshore wind farm (the Q7 project, officially opened in June 2008 and then renamed to Princess Amalia wind farm) suggests that this situations is changing very rapidly.
Several commercial-scale projects have come online this year in western Europe, the focal point for offshore wind development. In the years to come, the amount of commissioned capacity in Europe will grow fast, says the report, and is expected to reach levels of 2.7 GW in 2010, 20 GW in 2015 and 39 GW in 2020. At an estimated investment level of r4m/MW, the total investments needed for new offshore wind farm installations in Europe are expected to rise from around r1.4 bn in 2008 to a level between r15 bn and r20 bn annually in the period 2015 to 2020.
Factors influencing growth
In Europe many offshore wind farm projects are now in various stages of development, with more projects still being announced. To put this into perspective, no offshore wind farms, other than a few single test turbines, are to be found anywhere else in the world.
Many factors are influencing the way the market will develop until 2020, the most critical being legislation and subsidies, grid access, value chain bottlenecks and location.
Offshore wind is a relatively expensive way to generate electricity. Industry estimates in 2008 vary widely, between r50/MWh and r300/MWh, reflecting the dependence of costs on project-specific factors, such as wind characteristics, distance to shore and water depth. For onshore wind, costs are much lower, generally between r40/MWh and r80/MWh. However, the costs of offshore wind electricity generation can be expected to drop in the future due to the effects of increasing experience, technology development, and project upscaling. Rabobank believes that, while onshore wind is already cost-competitive in some cases, offshore wind will also get there in the longer term.
However, the demand for offshore wind energy in 2008 is still mainly governed by government policies stimulating or even forcing the use of renewable energy (see Table 1).
The European Union obliges its member states to commit to targets for renewable energy use that vary per member state (depending to a large extent on natural resource availability), and every state is free to decide how it will hit the target. This has led to a broad range of different approaches and to very different investment climates within the various countries.
Currently, only France, Germany and Ireland operate a true feed-in-tariff for electricity generated by offshore wind farms. A FiT forces utilities to buy any renewable electricity, at a fixed price, for a fixed duration. The German FiT was increased from r140/MWh to r150/MWh in June 2008. Ireland’s rate of r140/MWh, fully inflation corrected, and guaranteed for 15 years, is certainly inviting. The French FiT, at r130/MWh, is guaranteed at this high level for the first 10 years only. A simple model comparison, including the effect of inflation correction where applicable, shows that for a good wind site (3 900 or more full load hours per year), Ireland has the most attractive system. For a bad site (2 800 or less full load hours) the French system is, strangely, the most attractive.
Italy, Sweden and the UK currently operate green-certificate systems, in which the government sets a target for renewable electricity to which all electricity vendors must adhere. If they fail, they have to pay a fine, with the level of the fine effectively functioning as an upper price limit for the green certificates.
A good grid connection is usually far distant, and therefore expensive, and few inerconnnectors exist to help spread the supply by trading.
In some European countries with active policies on offshore wind, the government has until now paid for grid connection by giving specific subsidies (Belgium, Denmark). Only in Germany are grid owners truly forced to pay for the grid connection costs, through the so called 'Feed-in-Iaw' legislation. However the governments of the Irish Republic, Northern Ireland and Scotland recently announced they will be looking into the options to build an offshore power grid in the Irish Sea while, the Dutch are to study the pros and cons of building an offshore power grid. However Rabobank does not expect grid conditions to become a physically limiting factor for offshore wind development in most Western-European countries.
Short term: 2008-2010
Rabobank's research clearly shows an increase in installation pace. Prediction – an installed capacity of 2.8 GW by the end of 2010 representing a compound annual growth rate of 37 %.
During this time the European market should take off. Prediction – 20 GW in 2015 representig a CAGR of 47 %. For comparison, the installed capacity of onshore wind in Europe is predicted by the EWEA to grow at a CAGR of around 8 % from 76.5 GW in 2010 to 112.5 GW in 2015, and total electricity generation at a CAGR of 2 %.
Long term: beyond 2015
More difficult to predict, with several forces at work – uncertan costs, availability of heavy equipment, a drift further offshore, availability of sites, availability of floating turbines, and the possibility of repowering old sites. Based on offshore wind projects planned and announced, Rabobank believes that Europe will see 39 GW of offshore wind installed by end-2020.