Ambitions are high for offshore wind. Around 11-18GW of the UK’s 2020 EU renewable energy targets are to be generated from it, with the potential for more than 40GW being deployed to contribute to 2027 carbon budgets and beyond.
But there is a barrier to this ambition – cost. Building offshore windfarms is expensive, currently around £140 per megawatt-hour. Earlier this year, EC Harris led one of three workstreams for the Crown Estate which looked at this cost issue. We examined the role of the supply chain, which, accompanied with the other workstreams on finance and technology, aimed to identify ways of cutting 30 per cent off costs by 2020.
We identified six areas where the supply chain may be able to effect cost savings.
Competition. In certain areas of the offshore wind supply chain – such as wind turbine manufacture and the provision of installation and operation and maintenance services – there are currently very few competitors. This pushes prices up and creates a bottleneck in supply, particularly in peak years of production. As demand increases post-2015, new entrants from both Europe and the Far East are needed to lower costs and prevent capacity problems.
Vertical collaboration and interface risk. Currently, contracts are mainly awarded on a project-by-project basis, with most owners and developers adopting a multi-contract strategy with little collaboration along the supply chain. Players need to maximise early involvement, either informally or formally through alliancing and frameworks. Increased vertical collaboration reduces costs by limiting the amount of reworking necessary, optimising processes and allowing the supply chain to plan more adequately. Reduction and active management of interfaces, both across windfarm elements and within supply chains, can also bring significant benefits as it reduces contract contingencies and cost overruns.
Asset growth and economies of scales. With certainty over higher annual and cumulative volumes, cost savings can be achieved through sweating assets; rationalising suppliers and obtaining volume discounts; “learning by doing” and implementing procedures that allow repetition in a more efficient manner; and standardising processes and protocols, thus reducing the need for more expensive bespoke solutions.
Horizontal co-operation. Unlike the oil and gas industry, there is little evidence of information sharing among peers in offshore wind. Greater sharing of
best practices, the development of joint intellectual property and sharing between peers (for example, operations and maintenance operators sharing repair vessels) would increase learning and have a positive impact on costs.
Contract form. Round 1 and 2 projects were mainly contracted on a lump sum basis with poorly defined contract terms and inadequate incentives and penalties for performance and delays. Moving away from lump sum contracts, tightening terms and conditions, and introducing more appropriate incentive and risk-sharing mechanisms will lead to cost reductions.
Uncontrollable risk. Current practice is for the supply chain to exclude uncontrollable risk from its scope. A better understanding and apportioning of this risk could accrue savings. For example, unforeseen ground conditions could be mitigated by gathering greater understanding of the seabed prior to installation, and weather risk could be mitigated by investing in vessels that can operate in greater swells. Longer contracts (covering a number of installation cycles or a programme of projects) can ameliorate the impact of downtime due to breakdowns (spreading their impact over a longer period) and result in better optimisation of resources.
Based on these findings, we believe there are six prerequisites for reducing cost in the supply chain:
· greater visibility of volume in the short, medium and long terms is vital if large capital investments into manufacturing plants, port facilities and vessels are to be secured;
· sufficient capacity in prototype testing sites is needed – for wind turbines and foundations in particular. New entrants need to prove their products to make them attractive to purchase. Limited testing sites will inhibit competition, and thus cost reductions;
· the finance and insurance communities need to understand the offshore wind industry better to encourage willingness to modify current risk allocation practices. The financing community also needs to better understand that funding opportunities in the offshore wind sector extend from Tier 0 (investment in projects) to all tiers in the supply chain;
· the pre-consent stage needs de-risking by, for example, aiding information sharing across the supply chain relating to things like sea ground conditions and wind speed which will facilitate collaboration.
· developing technical, operational and contractual standards across the different elements of the supply chain would foster co-operation and reduce bespoke elements. Also, fostering industry-wide forums for the discussion of lessons learnt and sharing best practise would ensure they deliver best value.
· human capital must be available in terms of both numbers and skill sets.
It should be possible to reduce costs by 15 per cent through the supply chain alone. The greatest savings are to be had in installation costs, followed by wind turbines and support structures.
Actually making these savings, however, will be a challenge. Ultimately, the supply chain needs to be wider, work together and have better sight of what’s to come if the UK is to realise the full potential of its precious wind resource.
Isabel Boira-Segarra is a partner, renewables, at EC Harris
View from the industry
Offshore wind today is a young, fragmented industry where suppliers and original equipment manufacturers work in isolation. What we need are strategic consortiums between turbine manufacturers; substructure, concrete and steel producers; grid and substation elements; and marine contractors (installation and logistics), because no single part of the offshore wind industry can reduce the costs of the whole alone.
For example, turbine manufacture in the offshore sector accounts for 35-45 per cent of total capital expenditure. In the onshore sector, it ranges between 70-80 per cent. This means manufacturers alone have less leverage to cut the total cost of offshore wind production. Only greater industry collaboration can succeed.
Turbine manufacturer REpower is always looking for ways to work more closely with its partners. Currently the turbine tower, foundations and the interface between them are developed independently. By working with our suppliers at the design, production and installation stages of development, we can produce fully optimised turbines that are highly efficient, and therefore more cost effective.
However, we need more component suppliers in order to boost competition, and more demand to encourage the production of cheaper standard components. Post Round 3, the proliferation of large-scale (300-500MW) offshore windfarms will boost demand to a level that will support an industrialised, cost effective sector. This is a certainty.
Gaining more offshore experience is also critical for cost reduction. Currently, more than 90 per cent of the offshore fleet exists in shallow water (less than 20m deep) and is relatively close to shore (less than 20km from land). The sector lacks experience of working in deeper water, where unforeseen circumstances can generate significant cost fluctuations through the life of the project. A €1 billion (£800 million) project can easily increase by 20 per cent by the time it is finished.
More experience will lead to greater cost predictability. REpower has installed turbines in deep water since 2006. We currently have the deepest offshore wind turbine at Beatrice (44 metres), which is helping us reduce contingencies and ensure our costs are kept to the minimum.
Investment in research and development, particularly turbine efficiency, is also critical to bring capital expenditure down. REpower is always striving to build bigger turbines with a larger rotor diameter to increase yield and make windfarms more efficient. The more kilowatt-hours per turbine, the lower the cost of energy. In 2012 we were the first company in the world to install a 6.15MW turbine on the high seas. In larger numbers, this size of turbines will produce the kind of efficiencies that will have a major impact on the cost of electricity produced offshore.
Finally, there are many cost cutting opportunities at the operations and maintenance stage of a windfarm’s life cycle. The REpower Offshore Service Strategy has been developed for sea-based operations and maintenance. The core elements are three units that operate independently: a 90m-long crane jack-up; a platform supply vessel for transporting the crew and bringing them supplies; and a work boat for smaller jobs performed by service engineers. One benefit of this concept is that we can work day and night thanks to a fixed gangway that leads from the jack-up to the turbine.
So, will the cost of offshore wind energy ever be on parity or cheaper than fossil fuels? We believe the answer is yes, in time. Time scales are hard to predict and depend on the rate at which fossil fuels prices continue to rise, and the speed at which the wind sector can reduce its costs. We believe 2020 is a realistic target, by which we will start to see parity with fossil fuels.
It is worth pointing out that in some circumstances, offshore wind is already cheaper than fossil fuels – take the offshore windfarm at Rodsand, off the coast of Denmark. At just 8.4 eurocents/kWh, Rodsand is already cheaper than many coal plants. These competitive costs are achieved because the development is only 5km from shore at a depth of 5 metres. In these, close to shore conditions, offshore wind is already competitive.
As we venture into deeper waters, further from shore – the UK’s Round 3 windfarms will be situated in 20-50 metres of water over 50km from shore – the challenges and costs begin to escalate. However, once the sector matures, and we start producing cheaper more efficient turbines, that can take advantage of better wind conditions further from shore, then we will see costs fall in even the more challenging scenarios.
Norbert Giese, vice president, offshore wind development, REpower Systems SE
This article first appeared in Utility Week’s print edition of 20 July 2012.
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