I borrowed the title of this comment from Bruce Valpy at BVG Associates, who used it in a piece he wrote recently looking back at 2016 and forward to 2017. It neatly summarises where the offshore wind industry is right now.
Some of his thoughts are highlighted below, as are some from Keith Patterson, a lawyer and head of the projects group at Brodies LLP, who has also been reflecting on the renewables market as a whole. Both are pretty optimistic in what they have to say.
“Despite a few scares along the way, the world did not stop turning in 2016, but it did keep getting warmer. The imperatives for decarbonisation remain as strong as ever and the sector is never short of things happening. Here are some things to look out for,” said Mr Brodie.
Among them were the UK’s second CfD auction, which will take place nearly three years after the first. This is widely expected to be an ‘offshore wind round.’
Then there’s Brexit: will the UK seek to remain a member of the internal energy market? Perhaps ꟷ the UK has an established strategy to interconnect to EU energy grids. We can expect a statement of the UK’s view in its Article 50 notice. Prime Minister Theresa May was setting out the UK’s Brexit plans as I wrote this. The energy market could also be affected by the UK’s much anticipated industrial strategy, promised this year. It is said to include energy at its heart – will the UK continue the interconnector strategy?
Will the US withdraw from the Paris Agreement? No tweets recently, so maybe not. But who knows? Well, we may know soon after the inauguration on 20 February. The Scottish government’s energy strategy is due early this year too.
Will there be clarity on the regulatory framework for storage projects, following Ofgem’s (long awaited) call for evidence on energy system flexibility? Will this be enough to unlock investment in longer-term storage, Mr Patterson asked? Is the retrofitting of storage capacity to existing wind and solar stations an idea whose time has come?
2016 saw what Mr Valpy described as ‘the fall and fall’ of offshore wind prices, with European auctions such as Borssele, Vesterhav and Kriegers Flak sorting the courageous and forward looking from the followers seeking to ‘stay safe’ in the pack.
A word of caution about some other projects is probably wise, however, amid all the euphoria about recent awards: the cost of France’s as yet unbuilt Round 1 projects is hideous. I’ve seen figures of €170/MWh quoted and have been told that the cost could actually be well north of that. Contrast that with €54.50/MWh for Borssele 3 and 4 in The Netherlands, although that’s not comparing like-for-like, as they have differing tender models.
“We see ample room for further cost reduction based on technology, but we don’t see so much more room to squeeze margins or take benefit of supply chain dynamics in a market that is consolidating,” said Mr Valpy. “Examples of that consolidation are there in some of the big wind supply chain deals of the year, where effectively we have said goodbye to Areva (via Adwen) and Gamesa from the offshore turbine competitive landscape.”
This potentially leaves current offshore wind markets in an awkward position for two reasons. Firstly, he says, the small number of players is barely enough to drive competition. Second, the offshore market turnover of each player in the market may not be enough to facilitate new, much larger turbine development. As Mr Valpy noted, competitive auctions can partly mitigate the first of these, but there is no substitute for the next generation of larger turbines and that needs more market.
Another of his predictions for 2017 is that, based on recent auction prices and the prospect of further cost reductions, there will be a rapid expansion in the number of countries interested in establishing an offshore wind industry. This is because they see that offshore wind is not just a curiosity in northern Europe, but in many cases the most scalable, low-carbon generation source that can be built close to population centres. So, there you have it: there are still plenty of challenges, but next stage of market growth starts here.
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