A European success story: the globalisation of offshore wind

Dominic Szanto, Director and Head of Offshore Wind, JLL Energy and Infrastructure

Although the first offshore wind farm was constructed in 1991, it has taken over twenty years for the industry to truly mature.  By the end of 2017, there were over 18 gigawatts of wind turbines generating enough energy to power 16 million homes across Europe.  All but a tiny fraction are operating in the key hubs for offshore wind: the UK, Germany, Denmark, Belgium and the Netherlands.  Offshore wind has accounted for worldwide investment of over $48 billion in the last three years and has seen costs reduce from nearly $200 per megawatt-hour to around $70-80.  This cost reduction has primarily been a result of the vast scaling-up of the industry: each wind turbine now typically generates four times more energy per unit than a few years ago.  Offshore wind is also, in the main, less subject to local opposition.

And it is now set to take the world by storm.  Almost every industrialised nation faces the same challenge: how to cope with growing energy demands and at the same time meet their decarbonisation commitments at an affordable price. Offshore wind is increasingly seen as a panacea. Despite being more complex and slightly more expensive than onshore wind and solar PV, offshore wind allows growth at scale and speed whilst being broadly benign to public opinion.

Taiwan: springboard to Asia.

Relying almost entirely on import, Taiwan places a high priority on developing new sustainable, affordable and independent energy supply as well as phasing out of nuclear energy.  As an island, Taiwan has an excellent wind resource which, coupled with the cost reductions in the industry, has led the Taiwanese government to set a target of 5.5 gigawatts of wind power by 2025, which alone represents capital investment of up to $9 billion.

Learning from the successes of Europe, Taiwan provided a feed-in tariff which provides the operators of offshore wind farms with a fixed unit price for electricity, which both underpins investor return and provides certainty for the consumer.  This has led to the majority of the experienced offshore wind operators in Europe, such as Ørsted, innogy and Equinor, opening up offices in Taipei.  Financial investors such as Copenhagen Infrastructure Partners and Macquarie have all entered the Taiwanese market, seeking higher returns than are now available in super-competitive European offshore wind.

As much as Taiwan is being seen as an entry point for European investors, so Europe is being seen as an entry point for Asian investors.  In the last year, two major offshore wind auctions have been won by Asian utilities: Hong Kong’s China Natural Resources and Japan’s J-Power have both made acquisitions in the UK market, both with the aim of gaining know-how to construct and operate offshore wind in their own territories.

China and India: endless opportunities

At over 150 gigawatts, China has more installed wind power than anywhere in the world, however this still represents less than 4% of energy requirements.  Chinese wind turbines from manufacturers such as Goldwind and Sinovel dominate equipment supply, making wind power an almost completely indigenous industry.

However, there is enormous untapped potential for offshore wind in the South China Sea, not just in China but in other countries with adjoining coastline such as Vietnam and the Philippines.  There is therefore a commercial rationale for experienced European manufacturers and operators developing offshore wind in the area, allowing the creation of a mature supply chain and the same critical mass which reduced costs so effectively in Europe.

India has enormous potential for offshore wind and is planning its first offshore wind farm project for operation from 2021. When the Government of Gujarat called for expressions of interest in developing a 1 gigawatt project (at a likely cost exceeding $3bn) it received over thirty responses from national and overseas developers.

USA: the ultimate prize?

Offshore wind in the USA had a stuttering start, with the 460 megawatt Cape Wind project struggling to overcome local opposition and the only operational project being the 30 megawatt Block Island wind farm off the coast of Rhode Island. However there was a paradigm shift with the New York auction in December 2016 which was highly competitive and resulted in Equinor paying $40m for the commercial lease for the Empire Wind project.

There is now a pipeline of some 8 gigawatts of projects off the east coast of the USA, with all the major European operators either already having projects awarded or competing aggressively to gain them.  Trump’s – at best – ambivalence towards renewables has not affected support at a state level, most recently with California passing legislation targeting 60% renewable electricity by 2030 and 100% by 2045.

There are two key challenges for the US market to overcome:

Supply chain: the reduction in the costs of offshore wind in Europe has been driven by a combination of technology and experience, the latter in the shape of experienced construction companies.  The Jones Act requires good transported by water to US ports to be carried on US-flag ships, crewed with US citizens. This can only be overcome by the presence of a large pipeline of projects allowing companies to invest.

Water depth: the US Eastern seaboard has water depths comparable to Europe, with significant areas of <40m allowing ground-mounted installations.  However the Western seaboard, with California being by far the largest market, reaches >100m water depth less than 1 km from shore, making floating turbines the only practical solution. This is currently prohibitively expensive and only economic with significant subsidy, although all the major operators are investing heavily in technology which will bring costs down dramatically.

As with all sectors, growth in development is only possible with continued political, public and commercial will. Despite the massive cost reductions, there is still a role for national and regional governments to play in supporting the sector.  It is clear, though, that offshore wind is here to stay.

To discuss offshore wind, contact Dominic Szanto at JLL (dominic.szanto@eu.jll.com)

Contact
Dominic Szanto
Head of Offshore Wind, JLL Energy & Infrastructure
T: +44 (0) 7989 494 171
E: dominic.szanto@eu.jll.com