I joined the offshore wind industry in 2011. It was a time of growth for the industry and our company, but it was also an industry looking at a troubling trend. The cost of offshore wind measured in the Levelized Cost of Energy (LCoE) was increasing. At that time, it was about three times that of coal. We said only half-jokingly “Well, it’s not cheap, but it’s still less expensive than solar photovoltaics!” That certainly changed, and rapidly. Our “standard case” forecasts however, could not predict the steep declines in LCoE from both offshore wind and solar photovoltaics.
Working in any industry which is influenced by policy and requires stable frameworks (e.g. national energy plans, environmental consents, limited CfD-type subsidies, etc.), as is the case with all forms of industrial power generation, whether mature like fossil fuels or developing like renewables, we knew that massive financial support would not continue forever. We were consistently reminded to avoid becoming complacent by our top management: “If we don’t reduce costs, offshore will not grow as we expect it to!” So the industry set ambitious targets, including reaching a LCoE of €100 per MW by 2020. While these targets seem unambitious today, the surrounding complexities of the time (e.g. the notably higher interest rates) meant that these targets were exceptionally daring, and, at least in my calculation, dependent on whether grid costs were considered or not in the calculations.
Reality soon overtook our ambitious targets and in 2015, the first auctions started making their impact. We saw record-breaking strike prices for Horns Rev III in Denmark, record low strike prices for the CfD auctions in the UK, and subsequently in The Netherlands the following year. Countries were telling the industry to start competing for the lowest LCoE. There were many factors leading to these records, among them low interest rates, stranded assets for our utility customers, and plummeting oil prices. However, the single most critical factor was our customers starting to bid for auctions.
Perhaps OEMs did not fully appreciate the new price level at the time, but the message from customers was clear: “We expect you to soon compete at levels where we will be subsidy-free”. We’re just about there. In two short years, the first subsidy-free offshore wind power plant, the Hollandse Kust Zuid (HKZ) project being built in The Netherlands will come to life. Grid scope is however not included, which when it is, will take the industry some additional years to reach subsidy-free levels. Already now in Denmark we are seeing the first auctions coming up where the grid is taken into account, e.g. for the Thor wind farm – this is very exciting for the competitiveness within offshore wind, but also for LCoE in general!
In my opinion, the industry is in agreement that subsidy-free cost levels including grid with the current technology is not possible. It could be if the power price was higher, but that is contradictory to our work in expanding the global deployment of offshore wind power. Thus, we continue to innovate and advance. Our offshore wind turbine being used at the subsidy-free HKZ project, the SG 11.0-200 DD, will enable our customers to bid for subsidy-free wind. How low they will go really comes down to customer’s expectations of the power price development – will it continue to be artificially low due to oversupply from stranded fossil assets? Will the power price for certified renewable power increase? Will current or future pandemics apply further pressure on the power price? Or will new revenue streams, e.g. green hydrogen or ammonia production from offshore wind push it up again? There are many complexities surrounding the power price; and ultimately this risk is pushed by the customers to the supply chain as long as the offshore wind pipelines are smaller than the supply.
So the story of competition and innovation continues. Before 2015, let’s call it “subsidized offshore”, where we could innovate at comparably low investment levels while the industry margin was not under the same amount of pressure as today. Yes, Siemens Gamesa invested around €150 million in an in-house test facility in 2012, doing so focused on several turbine platform rather than only one. Going forward, and across the industry, estimates for investments for each new platform are said to be in excess of €500 million each. These amounts will be required to reach the LCoE levels needed to sustain the next phase of the industry, which we can call “post-subsidy offshore”. Power price uncertainty becomes the key business case risk in this scenario. However, I definitely see value in some governments continuing with a double-sided CfD mechanism in the post-subsidy era. The cost to the country is thus minimized and power price risk is not fully borne by the developer. Ultimately, the power price level is influenced by national and supra-national government politics. The risk of the price falling below the CfD lower boundary, and triggering governmental support to bring the price up to the minimum agreed level for the wind park operator, would be in the hands of the government and/or supra-national government such as the EU.
Coming back to the technology race, there has been a race to bigger-is-better ever since the start of the wind industry in the 1980s. The competition has been about beating fossil fuels on costs, which we have done. And offshore wind projects are now being built without government subsidies.
It has been a great achievement, and we’re obviously not done innovating and competing to reach the next, best product. I’m not one to call the technology race over just yet, but looking at it from an SGRE chair we are seeing the first signs of diminishing economic returns to scale in offshore as supply chain restrictions begin to come into play.
Technically, we can produce longer blades, stronger bearings, and larger generators. That’s simply a question of engineering and manufacturing skills. However, beneficial economies of scale for us and our suppliers must accompany these innovations. Installation vessel sizes must also keep pace.
I believe that the key to future innovation and thereby competition in the late 2020s and on is to optimize within the boundaries of what keeps both us and our suppliers financially healthy. Doubling turbine sizes every two years, along similar principles as Moore’s Law within computing, will simply not continue to enable lower LCoE levels. We need to find balance. The level of investments required by us and our suppliers cannot be seen as insignificant. Of course, we need to satisfy market requirements while optimizing within these boundaries, and I am convinced our next products will continue to thrill our customers.
Looking ahead towards 2030 and the challenge that lies ahead, I am humbled. We have the technologies needed to curb climate change, but the political will to do so varies across the globe. But looking at the spirit exhibited by the youth today, I am undaunted in claiming that we will be able to get our emissions under control. It will be little, and it will be late, but through the deployment of offshore wind technologies we will play a huge part in this existential endeavour!
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