Market forces
Adam Westwood of Douglas-Westwood Ltd looks at the market status of offshore wind.
Offshore wind activity is at an all time high. The next two years will see significant year-on-year growth in terms of capacity installed from projects currently under construction. However, the industry is struggling with the costs of development, which have more than doubled in five years. There is now over 1.5GW of offshore wind capacity installed worldwide, with 334MW installed in 2008. At the time of writing there was a further 1.5 GW under construction offshore. Many projects due online between now and 2013 are otherwise engaged in tendering activity, pointing the way to continued growth ahead. Over €21.5 billion in capital expenditure is expected to be spent in the offshore wind industry between 2009 and 2013. By comparison, the previous five years saw a total spend of €€1.8 billion. The huge rise in expenditure is down to two main factors. Firstly, a sharp increase in offshore wind project activity, and secondly, considerable cost increases in the industry.
Forecast
Annual expenditure is forecast to peak at almost €€6.2 billion in 2011, a particularly busy year for the sector. Activity here has been driven largely by projects off the UK. Temporary increases in the number of Renewable Obligation Certificates (ROCs) allocated to offshore wind projects have spurred on projects. At this time we also see the first major commercial activity
off Germany. Despite an enormous amount of planned capacity, the country has been slow to see market development but this is now changing.
Financial
Cost increases in the industry have been significant. From £1.1m/MW (1.3m/MW) on the first UK projects in 2003, to over £3m/MW (4.2m/MW) for projects reaching financial close today; the cost increases have caused much concern.
The largest market for the 2009 to 2013 period is the UK, where expenditure totaling some €10.7 billion is forecast. Behind the UK is Germany, where almost €5.7 billion is expected to be spent on projects coming online in the next five years. The next most significant markets are Denmark (€2.1bn) and Belgium (€1.8bn).
Almost 6.6 GW of new offshore wind capacity is expected to be brought online in the 2009 to 2013 period. In 2009 we will see 730 MW completed, and a similar level of activity will occur in 2010. From 2011 through to 2013, project completions increase markedly with rates increasing to over 1.8 GW in 2011, then reducing slightly to around 1.6 GW in 2012 and 2013.
Global
Of great significance, however, is the current construction of China's first commercial scale project. The 115 MW project is being built using a 'one lift' system similar to that used on Scotland's Beatrice Demonstrator project. It also marks the entrance of Sinovel as a supplier of turbines to the offshore wind industry.
The recent legislative changes in the US are very encouraging and will enable leading projects to start moving forward within the next five years. There is much optimism within the US market but a greater sense of realism is needed with regard to development and construction timescales. We would point to the supply chain as the crucial area where more preparation and investment is required. This includes procurement, installation and logistics (ports, etc.).
Whilst activity is increasing, it is at a lower rate than earlier market expectations. From 2011 rates of installation will plateau for two years due to cost and financing problems that are being increasingly
felt. Temporary changes to the UK's market mechanism (ROCs) have helped push projects through with much higher costs than would otherwise be viable.
Whilst this appears to be good news for the UK, in terms of growing
its offshore wind capacity, we have concerns over the effect it is having on costs where greater downward pressure is needed.
BWEA's recently published report on the UK's offshore wind outlook features lower forecasts to its previous updates, particularly at the end of the period. Its capacity forecast for 2009 to 2013 is in-line with DWL's with differences seen down to the online dates of some projects.
Costs
Concerns over cost have grown to new heights in the last year. They have risen from around £1.2m/MW (€1.4m/MW) five years ago, through to over £2.5m/MW (€3m/MW) on projects under construction, with costs for projects under tender soaring to between £3 to 3.5m (€3.6 to 4.2m) in many cases.
Turbine prices saw a significant hike during 2007 and 2008. This was in part driven by huge onshore wind demands as the industry had the best year yet, with massive growth rates seen. Offshore, prices were further increased by past turbine problems, but fundamentally by a lack of competition amongst manufacturers offshore. With just Siemens and Vestas supplying in the 3 MW turbine class, and demand high, prices responded accordingly. Whilst not yet commonly used, Repower is still the only significant supplier of 5MW class turbines, with just Multibrid starting to scale up production.
Sharp commodity price increases also hit the industry, particularly for steel and to some extent, copper.These have, however, fallen recently.
With the Pound falling sharply against the Euro, UK projects have been hit hard, effectively experiencing a 20 per cent price hike. Installation costs have also reached new highs. Offshore activity has not been higher, and the installation fleet is still relatively small - especially in terms of dedicated vessels.
The installation situation is now changing with a growing number of contractors entering the industry - just recently we have seen the entrance of Seajacks and there are exciting new additions coming from Beluga Hochtief Offshore and Master Marine to name a few. It must be remembered, however, that many of these players have the ability to work in offshore oil & gas and will do so if day rates offer greater potential in that sector.
With regard to turbine costs we are seeing onshore turbine prices coming down this year and offshore a reduction is expected. The financial crisis is having an impact on wind projects due to lower levels of lending and, subsequently, demand for turbines is falling. Commodity prices have fallen from their peak and this will allow savings to be made, not just in the turbine component of projects.
On the other hand, we are seeing projects moving further offshore into deeper waters, which have cost implications for hardware, installation, logistics and operations & maintenance. Major cost-reduction is a long-term target, albeit one that must be addressed starting at once. The emphasis needs to be on high quality projects that can be built at reasonable cost.
Whether the costs we are seeing have now peaked remains to be seen, but with turbine prices seeing downward pressure there is optimism that stabilisation is now starting to occur. The supply chain is increasing in capability and in most aspects there is more competition. Arguments in favour of further cost increases focus on more expensive future projects due to water depth.
Significant
Offshore wind projects, to date, have almost exclusively been built through balance sheet financing. The first significant exception to this is the Princess Amalia project (formerly known as Q7) off the Netherlands, which was completed in 2008.
The role of utility companies in project development and ownership has become de-facto. Whilst there have been some notable successes in privately developed projects, particularly in the UK, the market is now almost fully utility driven. Utility involvement has grown due to the increasing capital required to move projects through development and requirements for utilities to source energy from renewable resources.
This helped a lot of recent projects to be built through the willingness of the utilities to fund construction through their balance sheets. However, due to the ongoing financial 'crisis' the willingness (or ability) of utilities to fund projects has vanished. The high costs being experienced in the industry are a further turn-off for utilities. This has led to even the largest utility companies
seeking project financing for their developments.
The response from banks and private equity has been less than enthusiastic. The current financial climate means investors are naturally cautious. The fundamental problem right now is that the cost of offshore wind farm projects is in most cases too high to attract investment. Whilst early UK projects can demonstrate an excellent rate of return, current projects are far from attractive, with many failing to demonstrate even a 10 per cent rate of return.
2008 saw plenty of activity in acquisition of projects, with companies such as Vattenfall moving to expand their portfolio. We expect more movement through 2009 as some players look for ways out of projects where rate of return is below initial expectations, and others seek partners to share costs and risk on large developments. This extends to major players such as Centrica who is expected soon to announce partners for some of its very large UK portfolio.
Within the UK, the number of ROCs awarded per MWh of offshore
wind generated was set to increase to 1.5 ROC/MWh from April 2009. The Budget increased this to 2 ROC/MWh for the 2009/10 financial year, and this will reduce to 1.75 ROC/MWh for 2010/11 before returning back to 1.5 ROC/MWh. This is designed to offer developers greater financial reward for their projects.
The timing of the changes to the Renewables Obligation will limit what projects will benefit from it. The projects in dire need of assistance
fall outside of this temporary ROC increase and the benefit to them is limited. The fundamental requirement going forward is for sustainable cost reduction.
Whilst the increase will bring financial benefit to project owners,
it also sends mixed signals to investors. Fluctuations to market mechanisms can increase uncertainty amongst investors who must assess the long-term potential for a project.
We expect to see a rise in the number of projects stalling and being abandoned. There are too many projects under development that cannot feasibly be built at present due to cost/financing problems. This will put greater emphasis on site selection in the future. We are also seeing some projects returning to a turnkey contracting strategy, a move intended to lower risk in the eyes of financers.
Supply Chain
Turbine prices are now showing some fall within the onshore market, and there is much hope that offshore will follow suit. A reduction in steel prices is a particular driver here. Despite an excellent 2008, onshore, 2009 is expected to show a lower growth rate due to the global economic slowdown. Clipper and Siemens are two manufacturers to have cut jobs already in 2009.
However, we still point to a lack of competition within the offshore sector amongst manufacturers, with just Siemens and Vestas producing significant numbers of turbines in the most common capacity class (3 to 4 MW). Repower and Multibrid are the only real players in the 5 MW class. Repower's new 6 MW turbine, the Repower 6M is poised for installation onshore Germany at the time of writing. The company is also set to announce a contract for delivery of 250 turbines.
One of the most important and most constrained aspects of the industry has been installation vessels. Whilst project delays have helped offset some supply/demand imbalance, there still remains a three-year lead-time on vessels. Acquisitions by A2Sea, new vessel orders from MPI, and market entry from companies such as Seajacks bolster the installation fleet, but larger projects are increasingly requiring multiple vessels. More vessel orders are expected in 2009, with several contractors looking at a 'feeder-vessel' approach, which would see mini-fleets of separate transportation and installation vessels working alongside each other.
Conclusions
So is market take-off occurring? The past five years have been characterized by stop-start activity with few projects completed each year, and many projects being delayed. This characteristic has previously constrained levels of investment into offshore wind by the supply chain. As such, constraints have been felt in turbine supply, installation vessels, etc. With a more visible stream of activity, including significant levels of tendering for up to four years in advance we have seen response through the supply chain.
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