Market forces |
Jeremy Wilcox is managing director of the Energy Partnership, an independent Thailand-based energy and environment consulting firm 8/27 Sukhumvit Soi 8, Klongtoey, Bangkok 10110, Thailand | T: +66 2 653 1263 | Mobile: +66 860993375 | S: energypartnership
When the wind blows…
Wind is the centrepiece of global decarbonisation strategies, but the offshore wind industry is enduring a difficult year with development projects being halted and developers in the USA seeking to renegotiate power supply contracts. Ironically, a fossil fuel driven energy crisis precipitated by Russia’s invasion of Ukraine is undermining wind power development with high inflation, rising interest rates and demand for turbines outstripping supply; this is hiking prices, with the cost of wind turbines estimated to have increased by 30% in 2023. Swedish utility Vattenfall has halted the first of three phases of the Norfolk Offshore Wind Zone project citing escalating costs for equipment and construction expenses, which it said had climbed as much as 40% this year, and it estimates that the cost for the three phases of the project has risen to £13 billion from £10 billion.
In response to the auction failure, the [UK] government is reportedly preparing to offer significantly higher subsidies for new offshore wind farms.
The UK, which in recent years has been the leader in offshore wind development, seeks to grow offshore wind capacity from 13.7 GW to 50 GW by 2030, which according to ABB will require the installation of a further 24 wind farms with an average capacity of 1.5 GW over the next seven years. Central to meeting this growth will be attracting developers to its renewable capacity auctions. Yet the latest auction in September failed to deliver any new contracts for offshore wind projects, with the price floor of £44/MWh set by government putting off potential wind farm developers, given that inflation over the past year has increased the cost of raw materials, and particularly the steel used in turbines.
global cost reductions … have been driven by
China, which achieved an LCOE of $50/MWh for offshore wind in the first half of 2023
In response to the auction failure, the government is offering significantly higher subsidies for new offshore wind farms. The ceiling for bids from offshore wind companies in the next auction round has been set at £73/MWh (see page 35) and marks a reversal of direction relative to previous tenders, where prices have fallen steadily in recent years with some deals hitting a record low of £37/MWh in 2022. To put that in context, the production cost of nuclear generated electricity in France is around €70/MWh. An auction price floor at £73/MWh seems overly generous. These fixed prices are for future operation, with offshore projects taking up to four years to construct. Continuing technology improvements, greater economies of scale and reduced financing costs with falling interest rates are expected to progressively reduce offshore costs through the remainder of this decade. The upshot being that wind development costs should be appreciably lower five years from now. According to a report by Bloomberg NEF, the global benchmark levelised cost of electricity (LCOE) for offshore wind is now on a par with coal and is the cheapest since 2009. In the first six months of 2023 the costs of new- build offshore wind and storage projects fell by a respective 2% and 12% and the global benchmark costs for onshore wind are down 6% in the 12 months ending June but remain unchanged since the second half of 2022. The caveat to these global cost reductions is that they have been driven by China, which achieved an LCOE of $50/MWh for offshore wind in the first half of 2023. While costs for offshore wind have risen outside China, a highly competitive domestic wind turbine manufacturing market has continued to push down costs in China with offshore wind LCOE typically $21/MWh lower than the rest of the world, according to Bloomberg NEF. Given the expected fall in future costs, and the time required to bring an offshore project to commercial operation, the UK auction model that fixes the power price in advance is seemingly outdated. The UK auction system works well when there is low inflation and
10 | November/December 2023 |
www.modernpowersystems.com
subdued demand for turbines and other offshore equipment. But surging demand for equipment and rising financing costs increase development risks that need to be covered by higher guaranteed power prices. In this scenario an auction aimed at driving down the power price via competitive bidding when the floor is set at around half the current wholesale power price is never going to attract any developer interest.
But despite the UK auction failure and developers either seeking to renegotiate power supply contracts or cease development of current projects, there is strong interest in offshore wind after a recent auction in Germany secured fees of around $14 billion over thirty years from TotalEnergies and BP for the right to develop the seabed. The fundamental difference between the UK and German auctions is that in the German auction companies are only bidding for the right to develop with power prices negotiated later nearer the start of commercial operation.
While the cost of offshore wind will fall over this decade the lessons of 2023 are twofold; invest in the domestic offshore supply chain and develop a more flexible auction system to secure developer interest. For there is no guarantee that there will not be another pandemic, war, or financial crisis this decade or next.
… the lessons of 2023 are twofold; invest in the domestic offshore supply chain and develop a more flexible auction system to secure developer interest
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