GCube Insurance president Jatin Sharma argues that subsidy-free offshore wind may not simply reflect costs being lowered, but being redirected, and ultimately borne by the industry in the form of increased risk.
Subsidy-free offshore wind is the phrase on everyone’s lips, these days. And no wonder – in the last year, building offshore wind projects without government financial support has gone from a pipe dream to reality.
With subsidy-free offshore wind becoming viable and more widespread, the industry is rightly celebrating the success of the sector in maximising efficiencies to achieve these milestones.
But there is more to the story. With zero-subsidy projects a direct result of cost reduction in the supply chain and technological advancements such as larger turbines, risks are elevated both by the use of prototypical technology, and by efforts to cut costs throughout the development process.
With this in mind, the industry must collaborate to minimise risks to projects as it deals with the dual challenge of cutting costs and implementing more ambitious technology.
The first subsidy-free projects were awarded in Q2 2017, when a pioneering German offshore tender saw three subsidy-free schemes approved as part of almost 1.5 GW of capacity awarded for projects in the North Sea. The project winners, Ørsted and German utility EnBW, are required to construct their projects by 2025.
Similar announcements followed barely a year later. The first ever designated subsidy-free auction – in which only projects requiring no support were invited to tender – was launched by the Netherlands in March 2018. The winner, Swedish utility Vattenfall, is due to build its 700-750 MW Hollandse Kust Zuid project by 2022 – more than three years before the winning German projects are expected to come online.
And hot on the heels of this success came a second German auction, awarding contracts to projects including Baltic Eagle and Borkum Riffgrund West – at least one of which was zero-subsidy.
These announcements are testament to the determination of these mature offshore wind markets to propel offshore wind to self-sufficiency – an ambition closely followed by other markets such as the UK, which saw the cost of offshore wind fall to £57.50/MWh (US$76.40/MWh), almost half the price of nuclear, in September 2017.
However, it is important to recognise that the term ‘subsidy-free’ can have different meanings in different markets. In Germany and Holland, the government pays for the grid connection, meaning that developers are much more easily able to submit ‘zero-subsidy’ bids.
This is often aided further by supportive regulatory policies. For example, the Dutch Government’s decision to offer clear visibility on the long-term market volumes for offshore wind has minimised risks associated with the market, enabling interested parties to be confident about their return on investment.
This means that, while subsidy-free projects may have reached viability in some markets, the achievement is not yet replicable across the board.
However, the industry is only moving in one direction, and we are sure to see the offshore wind energy industry gaining increasing independence from any form of government support, in the coming years – in Germany and the Netherlands and in other markets such as the UK.
So how do subsidy-free projects become possible? There are three main ways in which the industry is cutting costs and increasing efficiencies: direct cost-cutting, ever-larger turbines, and floating wind.
These advances are maximising efficiencies and reducing costs, propelling the global offshore wind industry forward and allowing wind to become a more ‘mainstream’ source of energy. As the industry becomes increasingly able to support itself, governments are naturally looking to minimise their contribution by driving down subsidy prices and working towards zero-subsidy tenders.
However, subsidy-free projects may not reflect costs being lowered, but simply being redirected. As governments save money by awarding zero-subsidy contracts for offshore wind, the ultimate cost is borne by the industry, in the form of increased risks to projects.
Larger turbines, floating wind, and cost-cutting in the supply chain all increase risk – and the industry must get to grips with this, if it is to prove successful in this challenging climate.
Larger turbines introduce economies of scale that are necessary for subsidy-free offshore wind and, with manufacturers creating ever-larger turbines – such as GE’s 12MW Haliade-X, slated for shipping in 2021 – zero-subsidy bids at tenders are being made on the assumption that larger turbines will be available in the near future.
Technological advancements such as larger turbines are key to driving the progression of the offshore wind sector – but they also introduce an element of risk. Not only does each turbine make up a greater proportion of the project – thus threatening greater loss of revenue, should a turbine fail – but they are also by nature prototypical technology.
The London Array case demonstrates the oft-unforeseen consequences of scaling-up technology. Of the 175 turbines that make up the 630 MW project, 140 of them are about to undergo emergency repairs, due to leading edge blade erosion, which caused blade damage much faster than anticipated. Blade failure is currently the leading cause of financial losses to wind energy projects – and as turbines scale up in size, the risk is only set to increase.
Moreover, the development of larger and larger turbines is happening so rapidly that any particular model is denied the opportunity to perform long-term and across many projects, leaving the industry with a lack of turbine-specific experience.
Finally, larger turbines also introduce challenges further down the supply chain, as ports, transportation infrastructure, and construction vessels struggle with larger equipment and blades of up to 107 m (GE’s Haliade-X).
Floating offshore wind is another double-edged sword. This new technology enables investors to tap into the stronger winds that blow further offshore, opening up a multitude of resource-rich deep-water sites that were hitherto inaccessible. It will play a key part in reducing costs and maximising efficiencies – thus allowing zero-subsidy projects to become more prevalent – in the coming years.
However, as a relatively untested technology, floating offshore wind is forcing developers – and insurers – to apply ‘fixed-foundation rationale’ to floating projects – which naturally increases risk. Without previous ‘lessons learnt’ on which to fall back, developers and their supporting partners – from OEMs to insurers – must remain aware of these risks and collaborate to ensure best practice, minimising risks to all involved.
The risks posed by technological advancements such as larger turbines and floating wind are compounded by the sector’s aim to cut costs directly – an aim that is the third major contributor to the viability of subsidy-free projects.
Streamlining operations throughout the supply chain – from initial site assessment through design, construction and installation, and into the O&M phase – allows developers and investors to operate within tighter budget constraints.
However, cost-cutting inevitably introduces increased risks, with the danger of ‘corner-cutting’ leaving projects vulnerable to losses – both those caused by the use of substandard equipment, and those attributable to human error.
GCube Insurance’s report Down to the Wire showed that cabling incidents accounted for 77% of global offshore windfarm losses handled by insurers in 2015 (a number that has not decreased in the intervening years), two thirds of which were caused by contractor error during the installation phase.
All too often, these mistakes are catalysed by the considerable time and cost pressure under which projects must be completed. Driving down costs is vital for the long-term sustainability and success of offshore wind – but this must not be allowed to compromise the integrity of individual projects.
Somewhat ironically, the very steps taken by the industry to drive down costs – allowing subsidy-free projects to become increasingly viable – threaten to cost the industry dearly, if risks are not properly mitigated.
Not only does the advent of untested technology and a move to drive down costs in the supply chain heighten the risk of losses, but these losses also threaten increased severity, should the worst happen, because subsidy-free projects – planned to narrow budget margins – can no longer rely on a subsidy ‘cushion’ for protection.
It is important to recognise the incredible success of the offshore wind sector in exceeding all expectations to dip below wholesale power prices. These cost reductions are vital for proving the validity of the sector.
But subsidy-free offshore wind is not a panacea. If the sector is to be ultimately successful, it requires a thorough understanding of the risks that threaten its stability.