Europe has set itself ambitious climate and energy targets: A third of the continent's electricity needs are to be met from renewable energy sources by 2020. Offshore wind power places a pivotal role in the mix. In their new study entitled "Offshore Wind Toward 2020 – On the Pathway to Cost Competitiveness", the experts at Roland Berger Strategy Consultants state that they expect Europe to have installed offshore capacity of 40 GW by 2020.
In the same year, global investment to ramp up offshore wind power will have reached around EUR 130 billion. Yet huge challenges still lie ahead for the industry: Wind farms are growing in size all the time. They are moving further and further offshore. And they are being constructed in ever deeper waters. These factors are driving up the cost of investment and making projects more complex. If it is to compete with other forms of energy, the offshore wind industry must therefore sharply cut the cost of energy generation. A reduction of around 30% between now and 2020 would allow electricity generated from offshore wind power to be sold at an average price of 9 euro cents per kWh. But that will require technological innovation, new financing models and a stable political framework.
"The offshore wind industry will become increasingly important in the years ahead, because transforming the energy system without this one central pillar would be difficult to imagine," says Marcus M. Weber, Partner at Roland Berger Strategy Consultants. "That makes it all the more important for the industry to quickly achieve cost-cutting industrialization effects, and for the government to stake out a reliable framework."
Offshore wind power marches on
The market for offshore wind power will continue to grow in the coming years. Between now and 2020, the experts at Roland Berger expect to see the global investment volume rise to EUR 130 billion. Europe is leading the charge, with its countries having set themselves ambitious goals. But that will take some heavy investment. While around EUR 7 billion a year is currently being invested to expand offshore wind power, this figure is set to double to more than EUR 14 billion by 2020. The Roland Berger experts predict that, in the same period, Asia's investment volume will rise from EUR 1.6 billion a year today to as much as EUR 5 billion a year.
"Yet this global growth in offshore wind power will be accompanied by major challenges," Weber stresses, explaining that "tomorrow's offshore wind farms will be bigger and further away from the coast." While the offshore wind farms currently in operation have an average capacity of around 200 MW, the average for the future wind farms being approved today has risen to around 340 MW. "The trend toward larger wind farms is helping to sharply reduce production costs," Weber notes. In new projects, wind farms are also moving further away from the coast – from an average of 60 km today to as much as 100 km. At such distances, the water can be as deep as 45 meters.
Cutting costs – A must for the industry
In practice, the offshore wind industry is still struggling to rein in its high costs. The wind turbines themselves account for about a quarter of the total cost of an offshore farm. Maintenance and repairs form the biggest single cost block (28% on average). And it is here that experts see further potential to cut costs and make offshore wind power more competitive. "Larger wind turbines, new kinds of foundations, more efficient small production runs for the turbines and special jack-up vessels have a vital part to play," Weber says.
One kilowatt hour of electricity generated from offshore wind power currently costs around 14 euro cents. However, if the industry manages to reduce the cost of producing offshore wind power by around 30% between now and 2020, an electricity price of 9 euro cents per kWh would be feasible. This would be another important step on the offshore wind power industry's way toward achieving a competitive cost level.
Long planning periods and high-risk investment demand new financing models
Large-scale projects such as offshore wind farms require the companies involved to have deep pockets and plenty of staying power. From initial planning through approval and financing to completion of the installations, wind farm project development typically takes seven to ten years. "As things stand, companies investing in the offshore industry still have to shoulder comparatively high risks," Weber says.
Today, 70% of the world's offshore wind farms are financed directly by major power utilities. Strategic investors (19%) and financial investors (11%) rarely participate in offshore projects. In the future, however, energy companies will no longer be able to stump up all the cash needed for such huge investments on their own. "Power utilities are increasingly getting financial institutions such as banks and insurance companies – and local government utilities too – on board as minority investors in offshore projects," Weber states. "This helps them tie up less capital and reduce their own strategic risk." However, if this approach is to gain ground, the offshore industry requires a stable political framework. Only then will investors be willing to back efforts to expand offshore wind farms. Weber sounds a clear warning: "If people have no confidence in the long-term prospects for this technology, the industry will struggle to survive in the years to come."
