Energy & environment

Strong easterly wind

While offshore wind remains mostly a European affair, that picture is beginning to change, with ambitious installation plans across Asia. We examine what’s to come with Feng Zhao, a Copenhagen-based senior director at FTI Consulting.

Offshore wind is evolving fast. With costs continuing to fall and turbines growing larger and more sophisticated, the sector has reached a new level of maturity. However, the real change may be still ahead of us. Currently dominated by European projects, offshore is poised to become far more global in scope.

“At the end of 2017, 84% of offshore wind energy was located in Europe,” says Feng Zhao, a senior director at FTI Consulting. “However, by 2027 FTI’s forecast is that Asia Pacific will replace Europe as the number one market. The market share will be 49% for Asia Pacific and 46% for Europe, with most of the remainder coming from America.”

In fact, we can already see the early stirrings of this shift towards Asia. Looking solely at new installations in 2017, just 73% of these were located in Europe, indicating that the continent’s market stronghold won’t last forever. And while there are also opportunities outside of Asia (most notably in Australia, Brazil and Turkey), the growth projections tell a clear story.

“The number one emerging market for offshore wind is China,” says Zhao. “Then there’s Taiwan at number 2, Japan at number 3, South Korea at number 4 and India at number 5.”

A good anemometer

Zhao has closely followed the wind industry (both onshore and offshore) for over a decade. Based in Copenhagen, he works on all aspects of market analysis, including regulation, growth projection and the supply chain.

Since joining FTI Consulting in 2014, he has contributed to several key reports. These include the annual Global Wind Market Update, which is released in two parts: Demand Side Analysis and Supply Side Analysis. The most recent of these reports was published in March 2018.

The report states that annual wind power installations are expected to grow from 58.4 GW in 2018 to over 74.2 GW in 2027 (representing a CAGR of 3.3%). Overall, we can expect to see 689 GW of new wind power capacity globally across this period, bringing cumulative installations up to 1,160 GW.

To date, offshore comprises just a small slice of the overall market. According to the Global Wind Energy Council (GWEC), there was 18.8GW of offshore wind energy installed across 17 markets at the end of 2017. However, that year saw an unprecedented surge in new installations (4.3 GW in total).

In other words, growth is strong. Since the change has less to do with a slowdown across Europe, and more to do with a pick-up in emerging markets, it spells good news for the sector overall.

To take two emerging markets as an example, both Japan and South Korea have ambitious plans in the works. Japan, which has the seventh longest coastline in the world, is aiming to install 10 GW of new offshore wind power capacity by 2030 (4 GW of which would come in the form of floating turbines). Meanwhile, South Korea is planning 500 MW of offshore wind in the near term and 12 GW further down the line.

According to research and consultancy group Wood Mackenzie, the offshore wind power market across the whole Asia-Pacific region will reach 43 GW by 2027, a 20-fold increase in capacity.

Playing the long game

All this said, Zhao concedes we may see some short-term pain over the next few years. As markets move away from government subsidies and towards an auction-based system, we are undergoing a transition period in which growth may appear to stall.

“It normally takes a few years – a minimum of one year but in reality more like two years – for the market to adapt itself from feed-in tariffs into a market-based system,” he says. “We are currently seeing a drop in installations in the UK due to this transition. In the UK previously we had Renewables Obligations Certificates (ROCs) and it has switched to Contracts for Difference (CfD), which has had an impact.”

He anticipates we may see a similar pattern in other markets, such as China, which has gradually been reducing feed-in tariffs for wind in an attempt to achieve grid parity. Earlier this year, it announced it would transition to an auction mechanism, with the first auctions in early 2019 and a complete halt in subsidies by 2022.

Zhao feels this may lead to some temporary dips, but describes that pattern as ‘normal’ and expects the market to swiftly rebalance itself. In fact, China plans to have 5 GW of offshore wind grid-connected by 2020, along with another 10 GW under construction. According to Wood Mackenzie, its total installed capacity could hit 31 GW by 2027.

In Germany, meanwhile, the move away from feed-in tariffs is already causing a headache. In October 2018, a proposed offshore wind auction was scrapped, in a move widely denounced by industry.

“A special contribution of up to 1.5 GW of offshore should be set in 2018,” said Stiftung Offshore-Windenergie managing director Andreas Wagner. “Due to the long lead times for offshore wind farms and their grid connection, it is necessary to quickly adapt the legal framework. Only in this way can further offshore wind capacity be hooked up by 2025.”

As Zhao explains, these kinds of adjustment periods, however messy, are par for the course.

“It’s a pain for everyone, but that’s the reality because governments understand there’s no way for them to continue to pay the premium,” he says. “You need to provide the feed-in tariff when the industry’s at an early stage, because that’s how you grow your industry, but we’re no longer at that stage. Short term, it’s a bit tough, but long term we’ll be fine.”

The small island with big ambition

The one exception to the rule would be a market like Taiwan, where the country is attempting to grow its industry from scratch by offering both feed-in tariffs and auctions. Despite having very limited installed capacity currently, the government has ambitious plans – it wants to build the same offshore capacity in six years that the UK achieved in 18 years, and join the top 10 markets for offshore wind by 2025.

“Because they’re doing auctions and the feed-in tariff at the same time, they don’t have this transition period,” says Zhao. “In the normal market, where they’re used to a feed-in tariff and switch to an auction-based system, it normally takes longer to adapt.”

He thinks that, moving forward, governments will need to provide better visibility when it comes to their long-term offshore targets.

“This will help the industry feel more comfortable investing and get the investment risk under control,” he says. “If you cannot support the offshore industry financially through subsidies or ROCs or any kind of renewable certificate that’s fine, but you should offer the long term visibility to guarantee the stable growth of the market.”

Of course, in a world without government subsidies there will be an extra incentive to drive down the costs of renewable energy. Compared to onshore, offshore is still relatively pricey, largely due to the higher costs incurred for installation, operations and maintenance. (It works out at around 40% higher on a levelised cost of electricity basis.) However, since the industry is newer, there is scope for a sharper reduction in prices.

Already, the signs look encouraging. In 2016, the Netherlands approved a bid for its cheapest offshore project to date, €54.50 per MWh compared to €72.70 just a few months previously. And last year, the industry reached a tipping point in which the costs of wind sat comfortably below the costs of fossil fuels in many places.

Zhao thinks the onus will be on the sector to become even more cost-competitive.

“We’re doing these auctions we try to help bring down the cost of energy, but the final goal is that there will be absolutely no feed-in tariff so you really have to compete,” he says. “If you can bring down the levelised cost of electricity (LCOE), this brings opportunities to develop more offshore wind, especially in emerging markets.”

On the technology side, he expects the drop in prices will be fuelled by the introduction of larger turbines. According to a report by McKinsey, 13-15 MW turbines will likely hit the market by 2024. It stands to reason that, all things being equal, one large turbine will work out cheaper than two smaller ones.

“Currently we’re talking about single digit turbine size, between 3 and 9 MW, and after 2020 we’re going to move into two digits,” says Zhao. “This will help the industry continue to drop the LCOE.”

He adds that, from the suppliers’ perspective, offshore remains a relatively small market, dominated by a few large players. In fact, the top five OEMs accounted for 62% of new wind installations in 2017.

Over the next few years, we might expect to see greater dominance of Chinese players, with the lion’s share of projects in China going to domestic manufacturers like Goldwind. (For European manufacturers setting their sights on Asia, the Taiwanese market may prove an easier nut to crack.)

“In terms of new installations, we expect a third of the market will be in China in the next ten years, so there’ll be less opportunity for the big guys playing a central role in Europe,” says Zhao. “In terms of global footprint, it’s no longer a European game – it’s going to be a diversified industry with business everywhere. And it’ll be more mature and healthy going forward.”

This article appears in the 2018 vol 2 edition of World Wind Technology

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