Navigant Research Blog

UK Offshore Wind Costs Plummet to Record Lows

— October 5, 2017

Offshore wind power costs are plummeting as wind turbines get bigger and European countries implement a variety of market-oriented competitive pricing schemes. The general pattern is to let wind project developers bid and compete for the lowest power purchase agreement (PPA) price at which they are still confidently willing to finance and build a wind project. The latest results of the United Kingdom’s Contracts for Difference (CfD) auction for 15-year contracts are being hailed as a breakthrough on price.

Contracts for Difference Awards

3,196 MW was awarded mid-September, divided to go to three projects. Project and price highlights are as follows:

  • Dong Energy will construct its 1,386 MW Hornsea Project Two with a winning bid at £57.50/MWh ($75.75/MWh). Staged commissioning is planned for years 2022 and 2023.
  • EDP Renovaveis (EDPR) also won its CfD bid at the same £57.50/MWh ($75.75/MWh) price for its 950 MW Moray Offshore Wind Farm East with a similar 2022-2023 completion timeframe.
  • Innogy (formerly RWE Innogy) won its CfD bid at £74.75/MWh ($98.48/MWh) for its 860 MW Triton Knoll offshore project.

Other Offshore Wind Wins

Technically, the lowest prices awarded recently for offshore wind are for the Borssele III and IV wind farms off the Netherlands, amounting to 700 MW at a new record low PPA price of €54.5/MWh ($65.2/MWh). This was awarded in December 2016 to a consortium made up of Shell, Van Oord, Eneco, and Mitsubishi/DGE. The next lowest price seen yet was awarded in September 2016 as part of Denmark’s nearshore tender to Vattenfall for its 350 MW Vesterhav Syd and Vesterhav Nord wind farms at €60/MWh ($71.79/MWh).

However, while both of those projects are nominally the lowest PPA contract price, the Borssele projects in the Netherlands and the Danish nearshore tender do not include the cost of transmission and grid connection. This cost is estimated to add another approximately $15/MWh-$20/MWh, which pushes their real price up to around the price level of the recent UK CfD projects.

Changes in the Past Few Years

These recent prices reflect a rapid drop from offshore PPA prices only a few years ago. Dong’s 1,200 MW Hornsea 1, which will go online in 2020, was guaranteed £140/MWh ($184.2/MWh) in 2014. Three years later, the recently awarded 1,386 MW Hornsea 2 will proceed at less than half the previous Hornsea 1 project’s cost. By comparison, the new low prices are coming in cheaper than the United Kingdom’s nuclear power.

In addition, in the previous CfD auction in 2015, two offshore wind farm projects won subsidies between £114/MWh and £120/MWh ($150/MWh and $157.8/MWh)—Neart na Gaoithe and East Anglia 1, respectively.

Other Auctions and Numbers

Recent April 2017 offshore wind auctions in Germany should also be mentioned. Dong and EnBW won power contracts for offshore wind plants totaling 1,490 MW with zero subsidies.

Large projects and ever growing turbine sizes are major reasons for the price drop. The latest generation Vestas 9.5 MW turbine can provide enough power for over 8,000 average UK homes. Siemens likewise has rapidly uprated its offshore platform to 8 MW, and the company is hinting at a 10 MW plus turbine for coming years. Dong and EDPR did not disclose the turbine nameplate rating expected for their latest wind projects, but size is likely to be between 10 MW and 15 MW per turbine. Larger turbine units generate more power and reduce the total number of offshore foundations needed for a given project size, thereby reducing construction, foundations, and inter-array cable cost.

 

New Wind Turbine Battleground Focused on 4 MW Units

— September 28, 2017

The latest battleground in the ever tightening wind turbine market is with onshore wind turbines in the 4 MW range. Until now, this segment has had few offerings and only minor commercial deployments. No less than four turbine OEMs announced new 4 MW turbine models over the past few months. The overwhelming majority of annual onshore wind turbines installations are in the 2 MW to 3 MW range, and innovation continues to occur rapidly in that nameplate space.

Power Contract Auctions Prevail

However, a number of factors are pushing turbine OEMs to design more turbines with higher nameplate capacities. This includes the steady shift in Europe and other markets from fixed priced contracts for wind to highly competitive power contract auctions. These auctions squeeze power purchase agreement pricing for wind projects as low as developers and investors are willing to go, and taller tower, larger rotor, larger nameplate machines promise higher annual energy production (AEP). Larger turbines also maximize AEP in a geographically limited location. Europe in particular is already a population-dense continent and land availability for wind projects is becoming increasingly constrained.

There are also efficiencies of scale with producing the most megawatt-hours from each single wind turbine foundation and tower. This factor is more quantifiable with offshore wind, where foundations and installation cost is proportionally much higher than it is for onshore. In general, onshore turbines represent around two-thirds of onshore project CAPEX while offshore turbines represent one-third of offshore project CAPEX due to the higher foundation cost. This is why offshore wind turbines may double in size by 2025. The same principle applies (to a lesser degree) that the more AEP per turbine in the onshore realm, the better the project economics.

Competitors Abound

The following are summaries of the most recently announced turbines competing in this new 4 MW battleground:

  • GE Renewable Energy: GE Renewable Energy announced its first turbine offering in the 4 MW range with a new 4.8 MW unit that features a 158-meter rotor enabled by carbon blades. GE has historically avoided carbon fiber for most of its blades, but the demands of longer blades for this oversize turbine may have made carbon use unavoidable. The turbine will have around 30% higher AEP than GE’s previous 3 MW range turbines. Tower heights are 101 meters, 120.9 meters, 149 meters, and 161 meters. GE’s acquisition of Alstom Wind, LM Wind Power, and Blade Dynamics likely played a role in this new 4 MW platform.
  • Vestas: Vestas upgraded and uprated its 3 MW range to now include three models in the 4 MW range. This includes the high wind V117-4.0/4.2MW, which is designed to handle wind gusts up to 80 meters per second that would enable it to handle hurricane and typhoons. V136-4.2MW and the V150-4MW/4.2MW are medium to low wind turbines designed for most areas in Europe and other global markets.
  • Nordex: Nordex is uprating its 3 MW Delta series into a 4 MW-4.5 MW turbine with a 149-meter rotor for medium wind speeds. The turbines are planned for prototype testing in the third quarter of 2018, followed by several pre-series turbines and series production starting in 2019. The company touts the turbine’s wide power range from 4 MW to 4.5 MW, which is ideal for adapting individual installations to a specific grid operator’s requirements and to local wind conditions or noise restraints. Steel towers come in 105- and 125-meter hub heights and concrete-hybrid towers offer hub heights of 145 and 164 meters.
  • Enercon: Germany’s Enercon has been ahead of all other turbine OEMs with 4MW class turbines, having had its EP4 turbines (4-4.2 MW) E-126 and E-141 already commercially available roughly 2 years ahead of Vestas and others. In fact, the newest E-series turbines are downrated from a previous E-126 model that had exceeded 7 MW nameplate capacity as far back as 2012. The E-141 units feature concrete-steel hybrid towers to enable a 159-meter hub height. Enercon is also rapidly evolving its 4 MW class turbines with some radical design departures, which is thoroughly explained by Windpower Monthly.
 

Wind Project Construction Hits Record Pace Mid-Year

— August 31, 2017

The US wind market is in the midst of a wind plant construction boom. As of early August, 25,819 MW of wind projects were in various stages of advanced development or construction, according to the American Wind Energy Association’s (AWEA’s) U.S. Wind Industry Second Quarter 2017 Market Report. This represents a 41% increase in under construction projects over the same quarter in 2016 and the largest amount ever recorded by AWEA. The remarkable increase is the result of the long-term phaseout of the wind industry’s favored incentive, the Production Tax Credit (PTC).

The extension, which was secured by the industry through negotiations with Congress, is structured so that wind plants that began construction by the end of 2016 will receive 100% PTC value. Projects starting construction in 2017 will receive 80% of the PTC value, and the percentage will continue to decline through 2020 (2018: 60%; 2019: 40%; 2020: 0%). Most importantly, revised guidance provided by the IRS in May 2016 changed the construction window from 2 to 4 years. Therefore, projects on the tail end of the PTC window will be finishing construction through 2023.

Most companies seeking the maximum financial return on their wind projects aim to qualify their projects as having started in 2016 or 2017. The bar to qualify for start construction is not very high, which is one reason why so many projects are in various stages of advanced development and construction. To be considered under construction, a wind project developer must have started work of a significant nature on the project site or signed turbine or other equipment supply agreements representing at least 5% of the total expected project cost.

The Big Three

Other key highlights from AWEA’s quarterly report include an update to the installed capacity in 2017: a modest 357 MW during Q2 and 2,357 MW year-to-date. This brings the US total to 84,405 MW, with more than 52,000 turbines operating in over 41 states. The turbine vendor market share represented by installations so far in 2017 reinforces an ongoing trend: the big three turbine OEMs, Vestas, General Electric, and the recently merged Siemens Gamesa Renewable Energy (SGRE), represented 97% of all turbines installed in the first half of 2017.

Intense competition has led some vendors to reduce supply chain and manufacturing commitments in the US market. However, this is not a market that can be competitively sourced via a high proportion of imported supply chain. Massive towers, blades, and the nacelle drivetrain componentry ideally are manufactured within the country. The big three continue to have outsized commitments to domestic manufacturing or sourcing from vendors based in the United States, an approach that secures their substantial market shares.

Power Purchase Agreements

Corporate purchases of wind power and other renewables capacity continue to be a major trend exhibited in AWEA’s quarterly report. Power purchase agreements (PPAs) signed during the first half of 2017 totaled 1,697 MW; 37% of that capacity was through direct corporate purchase where companies like Apple, General Mills, T-Mobile, and others contracted PPAs. Notably, direct utility ownership represented 45% of capacity in advanced development. Direct utility ownership of wind plants has typically represented a low percentage of installed capacity. Yet, utilities are motivated to buy directly into wind when it is on a sale that is eventually going to subside.

Future US quarterly market reports can be found at AWEA’s market report link. Also worth noting is that AWEA recently launched an interactive map that tracks the growing number of wind projects online and the hundreds of manufacturing facilities supported by the wind industry.

 

First Dedicated Vessel for the US Offshore Wind Industry

— August 1, 2017

The US offshore wind market has been caught in the classic “the chicken or the egg” conundrum for years. The lack of purpose-built offshore wind installation jack-up vessels in the United States—necessary for the deployment of wind turbines in marine environments—has added uncertainty, complexity, and financial risk to the nascent offshore wind market in the country. It is also a key factor contributing to the slower-than-expected growth of offshore wind in the United States.

Multiple Issues

I wouldn’t attribute all the blame for the United States lagging behind Europe with offshore wind to this issue. European countries and China have been willing to provide generous regulatory and financial support for offshore wind, along with policies that are set up with a long-term framework. By contrast, the US market’s primary incentive mechanisms, the Production Tax Credit and Investment Tax Credit (PTC/ITC), have been enacted in short-term on and sometimes off again schedules for more than a decade.

Onshore wind developers with projects in advanced development can go from a turbine order to commissioned project in less than 8 months. The offshore wind industry, however, takes substantially longer for project development, turbine procurement, and project construction. Large wind projects in Europe typically require 2 years for construction. Prior to construction, the development and investment phases usually take at least 3-5 years.

That reality is the main reason offshore wind has been slower to take off than expected, but following at a close second is the lack of US-based jack-up vessels. These vessels have not been built in the United States because the offshore wind market demand has not been there to justify their pricey construction. Then why not simply bring a vessel or two from Europe?

The Jones Act

An antiquated maritime law from the 1930s called the Jones Act plays a major role in this issue. The law makes it illegal for vessels that are not built in the United States and crewed by American staff (a US flagged vessel) to deliver goods and conduct work from port to port. It is largely considered a protectionist measure to protect the US shipbuilding industry. One offshore project was commissioned last year, Deepwater Wind’s 30 MW Block Island wind farm off the Rhode Island coast. The Jones Act forced additional cost and complexity because the developers had to contract a jack-up vessel from Europe due to the lack of US vessels. Yet, the vessel could not touch US shores, where normally it would pick up the wind turbines, towers, and blades. Instead, Deepwater had to use smaller US flagged barges that towed wind turbine equipment out to the site, where it was transferred to the European jack-up vessel, thus increasing the cost, complexity, and risks of the project.

A Step Forward

One small but important step has arrived to mitigate the Jones Act problem. Two Texas-based companies active in the oil & gas industry, Zentech Inc. and Renewables Resources International (RRI), recently announced they would be the first to build an offshore wind construction jack-up vessel. The vessel will be a four-legged, self-propelled dynamically-positioned level 2 (DP2) jack-up vessel based on a US-built barge. Zentech plans to install four truss legs with spud cans, a proven oil & gas design, integrated in a newly built hull. It will be able to install in each port-to-site voyage three 6 MW-9 MW range wind turbines. Commissioning is expected in 4Q 2018.

The US offshore wind industry still faces challenges, but this recent announcement is a positive step toward minimizing the Jones Act as one of the industry’s impediments.

 

Blog Articles

Most Recent

By Date

Tags

Clean Transportation, Digital Utility Strategies, Electric Vehicles, Energy Technologies, Policy & Regulation, Renewable Energy, Smart Energy Practice, Smart Energy Program, Transportation Efficiencies, Utility Transformations

By Author


{"userID":"","pageName":"Jesse Broehl","path":"\/author\/jbroehl","date":"10\/19\/2017"}