Offshore wind is becoming cheaper and cheaper

In June, eleven of the world’s leading energy and wind power companies, including MHI Vestas Offshore Wind, signed a joint declaration saying that they expect to be able to deliver offshore wind projects at a price of less than EUR 80 per megawatt hours (MWh) by 2025.

A few weeks later, DONG Energy was awarded the winning tender for the Dutch offshore wind farms Borssele 1 and 2, offering a record-low average price of EUR 72.7 per MWh for the first 15 years of the contract. In other words, DONG Energy has achieved its target of delivering power at a price of less than EUR 100 per MWh by 2020 – four years ahead of schedule.

Scale, competition and new technology

There is not one, but several factors driving the falling price of offshore wind, explains Jens Tommerup, CEO of MHI Vestas Offshore Wind, one of the world’s leading manufacturers of offshore wind turbines:

"A big driver of cost reduction is scale. Long term policies will encourage investment across the whole supply chain and enable synergies across projects. This in turn drives cost reduction across manufacturing, installation and maintenance."

Jens Tommerup also expects to see lower costs across the entire value chain, thanks to the 66kV electrical infrastructure, which doubles the number of wind turbines that can be connected on one equivalent array cable. He also expects the price to be pushed further down by the use of larger installation vessels capable of transporting heavier and longer components for the huge 8 MW turbines. There will also be investment in infrastructure such as port facilities providing better access for vessels and more space for pre-assembly activities similar to the facilities already in place in Belfast and at the Port of Esbjerg.

Ulrik Stridbæk, senior director at DONG Energy, which builds wind farms, also points to scale as a key factor in declining prices:

“By moving up a notch to larger wind turbines, you can cut down on the number of foundations necessary. You need fewer turbines to produce the same number of megawatts. You can build larger and larger wind farms. We’ve seen a leap every time larger turbines have been introduced.”

He also attaches great importance to the sector becoming more competitive.

“Competition is a very important driver. The fact that wind farm construction has been put out to tender has created competition, and the competition has spread to the individual components, because now there are more companies that can build wind turbines and foundations and more companies that can handle the transport ships. In other words, more competition all around,” says Ulrik Stridbæk.

Offshore wind at record-low prices

The very reason why DONG Energy was able to submit a bid to build Borssele 1 and 2 at a price of EUR 72.7 per MWh is precisely a combination of these factors, as Ulrik Stridbæk points out:

“Offshore wind has been thoroughly industrialised, and that is what drives the price down rather than one specific invention.”

At the same time, he rejects the notion that the record-low price at Borssele 1 and 2 is due to the wind farms being in an exceptional location:

“The location itself is unique, but the factors that drove down the costs will continue to apply, also to other wind farms.”

Collaboration is key

In the joint declaration, the wind industry states that achieving a price below EUR 80 per MWh requires both individual and joint action.

"We will collaborate where it makes sense such as working to develop common standards for health and safety, vessel specifications, aviation lighting and other areas where we can ensure standardization. Furthermore we will continue to work together to push for greater clarity of market volume and stable political frameworks. However we will continue to compete on key areas such as technology and service offerings," says Jens Tommerup of MHI Vestas Offshore Wind.

DONG Energy’s Ulrik Stridbæk also advocates collaboration in areas that are not inherently subject to competition. He believes collaboration is a three-step process and repeatedly emphasises the importance of starting out with the simple things first. Step one is about setting joint standards.

“In Germany, turbine blades must have a red stripe. No other countries have that requirement. As a result, the industry needs to make different blades. It’s not a major expense, but is it necessary? It’s not necessary to find the lowest common denominator, but it's better to share your experience and try to do things the same way. That’s step one,” says Ulrik Stridbæk, while also mentioning helicopter landing pads and environmental protection rules.

Once the industry has enough experience in developing joint standards, the next step is to become better at coordinating expansion of the transmission infrastructure across the North Sea and from the offshore wind farms to the onshore grid.

Step three is for the North Sea countries to work together more to expand offshore wind so that turbines are built in the best-suited locations in the North Sea.

“A dedicated partnership on expansion would make a lot of sense, but that would really be a long-term project. That’s why it’s important to start with the simple things,” says Ulrik Stridbæk.

“It’s absolutely essential that the initiatives for more cooperation do not raise uncertainty about the framework conditions applying in each country in the short and medium term.”

All parts of the value chain contribute

All along the value chain, each individual company is working to make their products and services even more cost-effective, and as a result they individually help lower the price of offshore wind. MHI Vestas Offshore Wind is constantly working to improve its technology.

We are committed to affordable offshore wind power, and as a turbine manufacturer we are delivering a larger and more powerful wind turbine- the V164-8.0 MW- which will drive down the cost of energy by reducing installation time, electrical infrastructure, foundations, and service visits compared to power plants using less powerful turbines,” says Jens Tommerup

As the company building and operating the wind farms, DONG Energy is specifically focused on financing and on developing in-house standards.

“We’re constantly working to make offshore wind increasingly relevant and attractive to more and more financing providers. This will allow us to lower the price of financing. In addition, we’ve gone to great lengths to standardise everything, both when it comes to the equipment used at the facilities and in terms of operations and processes,” explains Ulrik Stridbæk, adding that more experience also means lower prices, because the employees become more and more skilled at performing their jobs, which mitigates project risks.

The price will drop further

Both Jens Tommerup and Ulrik Stridbæk expect the price of offshore wind to continue to drop after 2025.

“We expect the price of offshore wind to keep falling, but we don’t want to speculate specifically which factors will drive prices lower after 2025. More powerful and more efficient turbines will be crucial, but scale and political clarity are even more important for building confidence across the value chain,” says Jens Tommerup. He emphasises the importance of avoiding a stop-go market, which could drive uncertainty and make long-term investment less attractive.

Ulrik Stridbæk also believes prices will drop even further, but he repeatedly points out that expansion is a key requirement for that to happen.

“The market in Europe must grow by at least 3 GW per year if the downward cost trend is to continue. That’s what will happen for all other energy technologies being developed, like onshore wind and solar power, whose prices will fall as they expand. Obviously, it will become more and more difficult, so it will require a higher and higher degree of expansion for prices to continue dropping,” says Ulrik Stridbæk and continues:

"The most important factor is to have a continued commitment to expanding offshore wind, that new targets are defined for offshore wind in Denmark and that the targets in the UK, Germany, the Netherlands and France are reached."

In addition to lowering the price of offshore wind, the EU countries’ commitment to expansion and their support for offshore wind is another prerequisite if Europe and Denmark are to maintain their leading positions in offshore wind,” says Ulrik Stridbæk. As he points out, DONG Energy has established a presence in both Boston and Taipei and expects promising trends in the North American and Asian markets:

“Europe is feeling the pressure from the other regions, and it could lead to a more competitive market.”

This is a translation of the Danish article published in Port of Esbjerg Magazine 3, 2016.