Published October 31, 2016
Last week I attended the offshore wind conference in Amsterdam where the industry got together to exchange offshore wind knowledge and experiences. Interestingly, ten years ago on 25 October 2006, the Netherlands became the hot spot in the small at that time offshore wind community: Financial close was reached for the first non-recourse financed offshore wind farm in the world, the 120MW Q7 wind park, now known as Princes Amalia. Ten years later, the Netherlands is again the hot spot of the offshore wind world thanks to DONG Energy providing the lowest bidding price to build the 700MW Borssele 1 and 2 project with an average bid strike price of 72.70 EUR per MWh.
This is good news for the industry as countries that considered offshore wind too expensive will start rethinking about it. But can this strike price be repeated?
Low interest rates and low oil and steel prices surely played a role for such a low bidding price, but this is just a part of a bigger picture. Site conditions and the project structure set up by the Dutch government were favourable for project developers and are not easily found in other countries (to compare apples with apples). For Borssele project, TenneT, the Dutch transmission system operator, took care of the transmission connection of the project to the Dutch grid including the supply, installation and operation of the offshore substation. Through the Dutch Enterprise Agency RVO, the Dutch government took care of the initial metocean and geotechnical studies as well as the permit management of the site on behalf of the developers with developers being responsible for the turbines, foundations and inter array cables. Water depth conditions were also attractive between 14 and 38 meters, allowing use of extra large (XL) monopiles.
But were all above conditions sufficient to allow such a cost reduction that has fallen below DONG’s LCOE target price for 2020 of 100.00 EUR per MWh even when considering the transmission costs?
Jasper Vis, Country Manager of DONG in the Netherlands, mentioned in Amsterdam’s conference that the cost reduction process is the outcome of a combined supply chain effort on scale, innovation and industrialisation. Indeed, the scale in size of wind turbines was key. For every new 8MW turbine you would need 4 x 2MW turbines from Q7 financial close times in 2006 and 2 x 4MW turbines from Gemini financial close times in 2014. The amount of steel needed for the same energy produced under the same water depth conditions is heavily reduced when moving to larger turbines with larger rotor diameters using XL monopiles. Moving also from 33kV to 66kV inter array cables optimises the energy production with lower electrical losses and fewer cables needed to be connected between the turbines and the offshore substation.
However, the catalytic effect on scale came from the size and continuation of projects being built. Thanks to the volume of continuous work occurring throughout European projects the last years a significant cost reduction was possible allowing innovation and industrialisation to take place. Ten years ago, the average annual offshore wind installation rate was below 100MW with one project constructed per year. Nowadays it is strong with at least 3 projects and 1.1GW offshore wind turbines installed and grid connected per year for five consecutive years (including 2016 expectations).
Projections for 2017 onwards consider approximately 3 GW annual growth for the coming three years. DONG Energy plays an important role in these developments as the largest offshore wind developer with an ownership of 1.7GW of projects, involvement in construction and operation of approximately 3.5GW offshore wind farms by the end of 2015 and expected growth of additional 4.4GW by 2020. The above developments have allowed the whole supply chain to move fast forward during the last 3 years using larger turbines, foundations, cables and vessels to cope with the size and volume of upcoming projects, what could be considered as the “scale effect”. This strong contracted growth and clear visibility for the years to come leads to industrialisation for whatever works well and innovation for whatever needs improvement within the industry. The Dutch government has committed to this “scale effect” with a five year roll out plan of 3.5GW offshore wind developments that gives comfort and security to the supply chain to continue to work together to bring costs down in competitive tenders. And this is not just a DONG’s accomplishment!
DONG’s competitive advantage together with other large utilities such as Vattenfall, E.ON and Statoil is its strong involvement in the supply chain as developer, manager of construction contracts and operator. Using its strong pipeline and construction and operations management expertise, helps DONG and other large players to interact with the supply chain on portfolio basis instead of individual projects that can make a big impact on cost reduction. It will be interesting to see what the bid strike price for Borssele 3 and 4 will be which is expected to be announced in Q4 2016.
So what does the future hold? Oil and gas players will continue to move towards tapping into the offshore wind industry. Consolidation may continue to occur for wind turbine suppliers, balance of plant contractors and consultancy firms buying or merging with counterparts in the sector to strengthen their position and offerings to the market. This was recently seen in pairing of GE with LM, Siemens with Gamesa, NKT with ABB. Wind turbines of 10+MW and monopiles of up to 2,000 tonnes will enter the market, while gravity base and suction bucket structures will try to get a slice of the foundation pie with full scale demonstrator projects expected to come online in the coming two years. Exciting times!
 Gemini is a 600MW, 2.8bn EUR offshore wind farm in the Netherlands and is currently the largest non-recourse finance wind deal in the world.