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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 Asia.
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.
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 industry. 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.
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