Strong tailwinds

Celia Hayes, Douglas-Westwood Jun 14, 2016

Offshore wind is headed toward new highs with the North Sea region serving as the backbone of the global market, says Douglas-Westwood’s Celia Hayes.

Image from iStock.

The offshore wind industry was initially disrupted by a range of technological and financial issues. However, in recent years, activity in the market has ramped up considerably.

Renewables targets in Europe and factors such as energy supply security are driving further growth in renewables investment – realized in offshore wind projects throughout Western Europe.

Consequently, global capacity additions in 2015 doubled relative to 2014 – resulting in a record year for the offshore wind industry. In the past 12 months, the UK and Germany have added more than 3GW to the global market, which now stands at ~12GW of online capacity.

Although 2016 will be a quieter year in terms of additions, other facets of the market are developing this year: January saw the first instance of project decommissioning (Yttre-Stengrund, Sweden), onshore construction for the first commercial-scale floating windfarm (Hywind, Scotland) will begin and, towards the end of the year, and the first commercial wind project will be commissioned in the US (Block Island, Rhode Island).

The Block Island project will likely be closely watched as existing market players assess the potential of the US market. The prospective commissioning of Block Island has re-invigorated interest in US offshore wind, previously dampened by attempts to develop the Cape Wind project.

There is a potential pipeline of over 17.5GW of additions planned for US waters, although the highly speculative nature of many of the proposed projects suggests that only a relatively small portion will likely be online by 2025. As a result, much of the existing offshore wind players will focus on growth in Asian markets and a strong European market – led by projects in the North Sea.

Global Offshore Wind Capacity Additions to 2025 (“Expected” additions represent a portion of currently conceptual projects to go ahead). Source: Douglas-Westwood, World Offshore Wind market Forecast 2016-2025.

The North Sea is synonymous with the growth of the oil and gas industry in Western Europe. However, the region is rapidly developing a greener reputation as the backbone of the global offshore wind industry.

The majority of global activity over the next decade will take place in Western Europe, and in particular the North Sea region. The UK and Germany are expected to lead the charge, accounting for 46% of global additions to 2025 and contributing the majority towards 29GW expected to come online in the North Sea over the next decade – to which Belgium, the Netherlands, and Denmark will also contribute.

Meanwhile, the UK’s round three megaprojects will begin construction in the next few years and are expected to contribute heavily to the UK’s lead of the global offshore wind market over the next decade. Of the 11,700 turbines to be installed over the next 10 years (globally), 6800 will be installed in Europe – with the UK and Germany accounting for approximately 60% of installations.

It should be noted that these activity levels represent more for the industry than power to the grid, requiring a hike in local investment to reach full potential. The North Sea supply chain will need to develop quickly in order to cater for these projects – many manufacturers envision that without significant investment into new facilities, supply chain bottlenecks are likely.

Factors beyond supply chain development also threaten the strong global pipeline, including: installation challenges, HSE, cost-overruns and policy changes, to name a few. Energy is always highly political and this is no different for offshore wind. Cooperative policy is not only key in ensuring a pipeline in established markets, but also the growth of offshore wind in emerging markets such as the US, France and Poland.

Notably, because of heavy political influence, the industry must eradicate a reliance on subsidy in order to ensure sustainability in the long-term. A prolonged period of cost reduction, innovation and investment will be required to maintain growth. Only with the above factors in mind (and amenable political conditions) will potentially strong markets like the US be better placed to develop on a scale equivalent to the North Sea.

Global activity to 2025 is forecast to reach new highs – capacity additions will peak at 9.3GW in 2023 and over US$226 billion (€200 billion) in capex will be spent over the next decade. The core of the global market will remain in the North Sea as UK and German activity levels are sustained – driving investment within the local supply chain.

To complement growth in Europe, the Asian market is also likely to develop quickly – chiefly through growth in the number of Chinese projects. Meanwhile, large potential markets will emerge, accounting for 14% of total capacity. Of these markets, the US holds large interest as Block Island is expected by many to kick-start development of a significant prospective pipeline. Nevertheless, Douglas-Westwood anticipates a moderate 1.4GW of capacity to come from the US by 2025.

The offshore wind industry faces many challenges, both local and global. However, through advancements in technology, ambitious renewables targets and ongoing cost-reduction, the industry will undoubtedly see significant growth over the next decade.

Celia Hayes is a consultant in Douglas-Westwood’s London office. Since joining DW, Celia has conducted high-level research on a variety of markets, with a focus on upstream oil and gas and renewables – aided by prior experience in extractive industries research for PwC. She is lead author of DW’s recent Offshore Wind Market Forecast, covering market expectations and trends from 2016 to 202o. Hayes graduated from the Royal School of Mines, Imperial College London, with a Master’s degree in Geology.