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Support sought to prevent UK offshore wind blowing off course
By Margaret Lee
Spanish wind turbine manufacturer Gamesa recently suspended plans to
design, test and manufacture a prototype 5-MW offshore wind turbine in
the US because of market uncertainty in the country. The development
could have implications for the global wind sector, and with the UK set
on becoming a market leader in offshore wind, it is worth asking
whether or not the economics stack up.
The economic implications of offshore wind are based on analysis of
long-term costs and benefits, the challenges to cutting costs and the
overall contribution that the industry might make to the UK economy. In
order to put the opportunity into perspective, if offshore wind is
exploited to its fullest potential, the amount of steel in the North
Sea would be about the same as is used by the oil and gas industry,
suggesting an industrial opportunity of similar size.
On a levelised cost basis, offshore wind is one of the most
expensive renewables, more than twice that of onshore wind. Critics
claim the high cost will result in an increase in the cost of UK
electricity. Reports have suggested that offshore wind and other
renewables will engender electricity price increases per household of
GBP200 (US$319) to nearly GBP700 (US$1,116) per year by the mid-2030s.
This perception remains strong despite DECC analysis that those cost
increases would predominantly be driven by wholesale costs, network
costs, supplier costs and margins and VAT. Nick Medic, head of offshore
wind at Renewable UK, argues that critics ignore the overall
socio-economic benefits that offshore wind can bring to the UK. He
stressed that offshore wind could act as a long-term hedge against the
volatility of fossil fuel prices, which have seen significant increases
in the last few years.
While at present capital costs of offshore wind remain high, once up
and running there are no fuel costs to consider. Given that the UK
imports half its natural gas, and 75% of its coal, diversifying the
energy portfolio to include offshore wind would provide a domestic fuel
source with a fairly predictable cost. Moreover, the current high price
of offshore wind is driven by the use of new technology, which will
come down the cost curve as more projects are deployed. The
government’s Offshore Wind Cost Reduction Task Force is looking to
bring down the cost of offshore wind to GBP100 (US$159.4) per MWh by
2020. According to a Mott McDonald report, the current cost is around
GBP290-320 (US$462-510) per MWh.
A recent report from the Renewable Energy Association said that in
2010-11 the UK’s GBP12.5 billion (US$19.9 billion) renewables industry
supported 110,000 jobs across the supply chain, and could support
400,000 jobs with a turnover of GBP50 billion (US$80 billion) by 2020.
According to forecasts from the Carbon Trust, there are potentially
up to 70,000 new jobs just in offshore wind. While the number of
projected jobs can vary dependent on the methodology used to analyse
the data, according to Martin Grant, CEO of energy at engineering and
design group Atkins, the jobs created will be new.
The offshore oil and gas sector is buoyant and likely to remain so,
with growing demand for maritime skills. Atkins, along with others
including Renewable UK, is already retraining engineers from other
sectors to enable them to move into offshore wind. Also important is
the sharing and export of UK expertise. The new French president has
voiced support for renewables, Germany’s retreat from nuclear is likely
to drive offshore wind deployment and there is growing interest from
KPMG analysis has projected that Europe needs GBP120 billion
(US$191.3 billion) of investment to reach its existing offshore wind
goals by 2020. The key question is where value will be created.
Research by the Boston Consulting Group said the cost of offshore
wind was around GBP3 million (US$4.8 million) per MW, 40% of which was
the cost of the turbines (currently predominantly manufactured in
Germany and Denmark), 30% of which went to foundations, cabling, etc,
and the remaining 30% to support services. Given that over 80% of wind
power business is generated by 10 global players it is obvious that the
key to capturing inward investment lies in developing local
manufacturing. So the question then becomes the extent to which the UK
can capture overall investment as a hub for the offshore wind industry.
There have been positive moves in that direction. In the first
quarter of 2012, for example, Siemens, Gamesa and Vestas announced
talks to develop manufacturing facilities in the UK, from Kent in
Southeast England right up to Scotland. However, going against the
prevailing trend, South Korea’s Doosan, which announced a GBP170
million (US$271 million) investment in R&D and turbine
manufacturing in Glasgow in 2010, withdrew from the UK owing to what it
called failing confidence in the market.
Doosan’s move appears to have been mimicked by Gamesa in the US. The
Spanish company’s deal with Newport News Shipbuilding in Virginia was
expected to see it design and deploy a 60 Hz G11X 5-MW turbine, with
plans to test it near Cape Charles on the Virginia coast. The company’s
withdrawal from the deal was based on difficulties justifying the
expenditure of capital, as well as engineering and technical resources,
given the lack of maturity in the US offshore wind market. Continuing
difficulties in raising finance have only exacerbated the situation.
Looking away from the US, Gamesa said it believed the authorities in
the UK, Germany, France and China remained firmly committed to offshore
wind, but that the challenge would be in ensuring that these markets
continued to develop.
Timing and certainty
Whether or not manufacturers will set up in the UK depends on market
volume, timing and certainty of market. The question mark in the UK is
that while the industry has visibility up to 2017 under the Renewables
Obligation, there is significant uncertainty about the regulatory
environment after that, especially given the lack of clarity over the
specifics of Electricity Market Reform (EMR).
The 8 GW of offshore wind capacity that is currently under
development in the UK following Rounds 1 & 2 is likely to be funded
and installed. But Round 3 will probably employ larger turbines in
deeper-water areas, thus aggravating risk. There are also significant
costs associated with deepwater turbines (i.e. those that are built in
water depths of 40-50 metres or more), not least of which is the design
of turbine bases that can be mass-produced in order to reduce costs.
The installation of thousands of these turbines is already planned
but there are significant challenges around the design of a robust and
repeatable structure that can withstand the loadings of turbines,
marine towing and installation to the seabed. The impact of increased
costs and higher risk is lower investor appetite, and without clarity
on subsidy support, manufacturers and developers could hold off on any
long-term decisions. In a global economy, investment funds will look to
lower risk opportunities. While the launch of the Green Investment Bank
will help support the roll-out of offshore wind, it is clearly
insufficient to meet UK offshore goals over the long term.
The UK’s Department of Energy and Climate Change (DECC) wants to
have 14-18 GW of offshore wind capacity installed by 2020. But at the
low end, this would mean that at 1.5 GW per year the slow deployment on
the ground that is already taking place might not actually require the
changes necessary for the UK to become a market leader. Some operators
are already saying it is cheaper to manufacture turbines in existing
centres and transport them to the North Sea. If the UK is to capture
more than 20-30% of the potential offshore wind market investment, the
government not only needs to offer clarity on the long-term EMR
framework, but also an effective industrial strategy for the offshore
There are unquestionably potential benefits to UK offshore wind, in
overall socio-economic impact, regeneration and economic
revitalisation, export opportunities and more. But the extent of those
benefits remains dependent on consistent and stable long-term support
from the government. Without such backing, UK offshore wind may become
another missed opportunity.