4C Offshore – Energy Security

Is the cheap offshore wind era over?

Sky-high oil & gas prices, supply chain problems, and the Ukraine-Russian War, are the greatest risks for industry today

These risks are increasing the inflation rate at a global level. Consumer prices are rising at their fastest pace in 30 years with UK economists predicting inflation will reach 9% in April 2022 and some even predicting may increase further given UK manufacturers saw an 11.9% year-on-year growth in March 2022 amid surging commodity prices, the fastest on record.

Central banks are under great pressure to boost interest rates to fight increasing inflation. The Fed raised the target for the fed funds rate by a quarter-point to 0.25%-0.5% during its March 2022 signalling ongoing rate hikes ahead. The central bank’s tight monetary policy to curb inflation leads to a higher cost of borrowing.

Due to Covid restrictions the offshore wind industry has struggled with supply chain issues, consequently wind turbine manufacturers reported losses and thin margins in 2021 as they face challenging short-term market dynamics caused by logistics bottlenecks, intense price competition, rising input costs, and restructuring costs. This is exacerbated by their clients, the developers, securing offtake PPAs for their projects yet still to fix rising supply costs, making some parts of their portfolio, primarily onshore wind, unviable.

The Ukraine-Russian War and China entering another Covid lockdown in March continue to destabilise market dynamics. Hence, it is inevitable that offshore wind industry prices will increase.

“We have not seen such high prices since 2015, unfortunately, it is not temporary, we should get used to it now,” a source from Vestas said. Offshore wind is one of the cheapest and safest sources of electricity with the capital cost per MW for offshore wind declining 20% in the 2015-2021 period. Should we fear offshore wind inflation?  Despite increased prices, offshore wind remains competitive with fossil fuels and in the long-term relative costs of offshore wind prices will continue to decline.

The primary concern – energy security

The European Union is imposing significant sanctions on Russia but is unable to free itself of a dependency on Russian energy that provides them with 40% of its natural gas, 25% of oil, and 46% coal making an EU-wide boycott extremely difficult.  Nevertheless, in March 2022 the EU Commission proposed to make Europe independent from Russian energy and President Ursula von der Leyen said: “The quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent and master our energy system.”

Offshore wind is now a ‘solution for energy security’. A major global shift from hydrocarbons is expected as we enter a new geopolitical context and Governments are already reacting.

The German government passed the ‘Easter Package’ which aims for almost a doubling to 80% renewables in total electricity consumption by 2030. The package envisages the offshore wind part reaching 30GW by 2030, 40GW by 2035, and at least 70GW by 2045.

The UK laid out a new Energy Security Strategy including a new ambitious plan of up to 50GW by 2030 including up to 5GW of floating wind. The Netherlands ramped up its offshore wind target as well adding 10.7GW by 2030, almost doubling the previously planned capacity.

France’s re-elected President Macron has promised to improve French energy security through a nuclear boost and a new target of 40GW of offshore wind by 2050.

Are the accelerated targets achievable?

To answer this, it is important to understand the lifecycle of offshore windfarms particularly the planning and construction process. Each country has a different process but on average, developing a windfarm to the financial close is five to seven years. Construction of a windfarm takes two to three years on average.

To achieve such ambitious targets, it will take government action, legislation and stakeholder pressure to change the consenting process. However, it is challenging to change laws that may shorten the consenting process at the cost of the environment and convince local communities they benefit from this.

Is the offshore wind supply chain and the grid ready for this rapid shift? It will be challenging over the short to medium term. 4C Offshore’s analysis shows that the supply of turbines, installation vessels, cables and foundations will be tight in the 2024-2026 period, leading to delays that can have a knock-on effect on future projects. Grid coordination and connection are big challenges for many countries, impacting on their ability to deliver 2030 targets.

Whilst accelerated targets for 2030 are unlikely, there is still time for 2050 targets. Policymakers, developers, and the supply chain must communicate and cooperate effectively to overcome bottlenecks and risks to deliver more offshore wind.

Understanding the market

4C Offshore is a consultancy and market research organisation specialising in the global offshore wind and subsea cable markets. Since 2009, 4C has provided unparalleled insight into key industry trends and demands, emerging technologies, and market context. The subscriptions include databases, reports, and interactive tools covering key market players, past and future trends, and supply-demand analysis.

The company offers a range of tailored intelligence services as well as bespoke research and analysis, GIS, exclusive industry news, and subsea engineering expertise.

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