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Challenges loom for massive UK offshore wind market: SSE, Ørsted, RWE

30 September 2021 Cristina Brooks

The UK's ambitious offshore wind target promises to reshape its energy landscape long-term, according to an executive panel at the Global Offshore Wind conference in London on 29 September.

In 2020, the UK upped its offshore wind target to 40 GW in the next decade, building on its 2019 strategy for the sector, in a bid to reach net-zero emissions by 2050.

Targeting this goal, the UK is gearing up to grant subsidies for 10 GW and 8 GW of capacity in the offshore energy sector, with July's auction bottom-fixed and floating offshore wind seabed leases and a competitive February auction for bottom-fixed offshore wind seabed leases.

The Dutch and German governments have recently held auctions for offshore wind that is now set to be built subsidy-free, exposing developers with winning bids to more price volatility and potential price cannibalization.

Speakers suggested that taking a Europe-style "zero-subsidy route" in the UK would threaten the viability of its 40 GW offshore wind target.

Jim Smith is managing director of the renewables arm of Scottish utility SSE, which has 17 offshore wind assets in operation and another three under construction, and this week announced it would invest £100 million with Japanese major Marubeni into the Scottish offshore wind supply chain

"We need to start thinking now about how the electricity market will work post-2050 with renewable penetration, because not only is it about attracting newbuild with whatever the price signals are, but it's also about all of these existing assets," said Smith.

Currently, the UK's Contracts for Difference (CfD) subsidy pays developers for 15 years, but not an offshore wind project's entire 25-year lifespan, leading to lower margins in the long run. "The [offshore wind farms'] short-run marginal costs may be zero, but they still have operating costs, they still need to continue to make money, or they pause, and we actually go backward rather than forwards," Smith added.

But the problem can be solved, he said, pointing to the industry's recent successes. Many questioned the high cost of offshore wind power, however, the sector had "smashed" price reduction goals, manufacturers improved technology, and supply chains arose to reduce costs and energy prices, said Smith.

While in 2017, the price for offshore wind per megawatt-hour was £167, the price in 2021 is £83 and will to decline to £46 by 2025, according to UK-based renewable planning consultancy Pager Power.

The UK had over 10 GW of operational offshore wind capacity at the end of 2020, the largest figure for any country.

40-GW target

Development of both floating wind—a sector that recently inched closer to being constructed at commercial scale—and power networks are needed for the UK to reach the 40-GW target, speakers at the event said.

Central planning, for example, to allocate zones for different maritime industries, for wind farms, and their networks could help developers overcome technical challenges and help the UK to reach net zero, according to Duncan Clark, head of UK operations for Danish wind developer Ørsted, who spoke on the panel.

However, Smith said that reducing costs for floating wind remains a hurdle. "We need to deliver the same cost-reduction trajectories that we saw for bottom-fixed platform designs over the last 10 years and if we do that we can open up a huge market worldwide," he explained. He added that the trend toward requiring that a proportion of the wind farm equipment is manufactured in the UK may not be very economic.

Not only do larger floating wind farms need to be developed to reduce their overall cost, but the UK must develop ports that don't currently exist, said Ralph Ibendahl, head of EMEA energy transition at RBC Capital Markets, which advised TotalEnergies on the purchase of a controlling stake in the 1-GW Seagreen offshore wind farm off Scotland's east coast.

But the cost of all this development should not fall heavily on the consumer. "I think the final challenge is that it would be good to be seen to be delivering a just transition, because we're really doing something and something that should really take 30 years, we're trying to do 10 years. They are the big challenges for this industry," said Smith.

Grid challenges

One of the UK's tasks before it can reach the heady heights of 40 GW is the introduction of HVDC transmission for offshore wind. HVDC systems are able to transfer power over long distances more efficiently and with superior stability.

"It's been done elsewhere, but it's the first time in the UK and that won't be without some challenges. We have to move to a world where that's just routine off the shelf, and all of our stakeholders are very, very comfortable with it, whether that be insurers, funders, consenting authorities, or whoever," said Clark.

Constraints on landside power networks, such as local planning consents that must be gained a piecemeal manner, pose another barrier, according to Clark. "Of course, today our trajectory is limited by the pace at which we can get access to the grid, and so we have some real challenges there. Not only with the technology but with planning … And I think we'll be trying to draw [regulators] into the issues that are quite technical. We've been talking about a coordinated transmission grid for as long as I can remember, at least 15 years," he said.

Sven Utermöhlen, chief operating officer of RWE Renewables' offshore wind unit, chimed in on the need for coordinated planning. "So, we have seen that in Germany and that is still an issue that is not yet fully resolved. And I think it is a topic in many markets that has now caught up with the UK. I absolutely agree the UK needs to invest the money, and it needs to invest it ASAP," he said.

"However, it needs to be coordinated with a really stringent planning and consulting approach because what we see in Germany is the fact that we needed to build out high voltage transmission lines from the North to the South, and Germany has known for 10 years the problem is some of the lines have still not been consented," he added.

The RWE executive warned that transmission policy changes could mean delays. "We've seen some markets changing their system rapidly, and that usually has led to a hiatus, a two-year sort of pause. And that's the last thing that we need in the UK," he said.

Smith argued for an integrated grid in the regions where networks will be needed by wind farms. This would allow building to take place at a faster pace than if it remained a piecemeal process where developers apply for each connection, he said.

Morten Buchgreitz, global senior vice president at Danish wind turbine manufacturer Vestas, noted it was a global problem and that the power networks needed to be developed to transport supplies to homes to enable electric vehicle charging.

Investment cliff ahead

Attractive terms for power purchase agreements won't be as readily available in five years, posing new risks and disincentives for investors in post-subsidy markets. "And I guess the final option is that, you know, you live with the risk on a merchant basis, but I think that is probably the least-preferred route for equity or developers or funders or lenders," said Ibendahl.

Currently, oil and natural gas majors have some appetite for risk when it comes to investing in the sector, he said. "When we think about further out, given the scale of ambition in offshore wind, and God forbid something goes wrong on a merchant deal, the interest and the appetite that has been built up in the equity and debt market so far could evaporate quite quickly," he added.

"I think that is something for regulators to really think about. Squeezing the last bit of margin out of a deal, is that the right thing?" he asked.

That only two bidders competed in a recent Dutch offshore wind auction was a consequence of the zero-subsidy market, creating the need for "a regulatory solution," he warned.

Posted 30 September 2021 by Cristina Brooks, Senior Journalist, Climate & Sustainability, IHS Markit

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