Making green energy affordable

2012-2017

Driving down costs

On one hand, by 2012, the ambitious national buildout policies had created a dedicated offshore wind energy industry. Developers were learning and generally completing projects with fewer delays and on budget.

On the other hand, in the light of austerity policies following the financial crisis, it became clear that costs for offshore wind energy had to be reduced to ensure continued political support.

Governments and industry entered into a dialogue to outline the possibilities and prerequisites of cost reductions.

In the UK, Ørsted was first to propose an ambitious cost reduction target in 2012 of driving down the levelised costs of offshore wind energy to EUR 100 per MWh by 2020, in effect setting an ambition to cut the cost by roughly one third. The UK Government set a similar target of GBP 100 per MWh.

This GBP 100 per MWh target was later adopted as an industry-wide target in the UK.

Cost reduction programmes
As market volume increased, new suppliers of turbines and other components entered the market, and competition to offer the best and most cost-effective solutions increased. Both industrial suppliers and project developers worked hard to optimise energy production and reduce their costs.

Developers individually sought to develop their competitive edge, but in some areas also joined forces to reduce costs collectively through industry-wide innovation. For instance, through programmes such as the UK-based Carbon Trust Offshore Wind Accelerator, which was jointly funded by the main developers of offshore wind energy, the sector aimed to advance best practice, overcome market barriers and reduce costs.

For turbine manufacturers, the drive to reduce costs was a strong incentive to develop larger turbines with longer blades and higher output – a particularly important development, as larger turbines mean fewer installations, fewer foundations and fewer units to service, all leading to reduced costs.

The increased competition transformed the industry. All along the offshore wind energy value chain, processes were streamlined, turbines and other components became standardised, and remote monitoring and simulation was being implemented. All of which helped reduce costs.

From 2012 and for the next couple of years, turbine manufactures launched new turbines, reaching 6, 7 and even 8MW – effectively quadrupling the 2.0MW-turbines installed in 2002 at Horns Rev 1 in Denmark. To put this scale into perspective, a single 8MW turbine can cover the electricity demand of more than 7,000 UK households.

Policy framework increases competition
In 2013, the UK government carried out an important reform of the electricity market. Until then, renewable energy had been promoted through the Renewables Obligation Certificates (ROCs), whereby renewable energy producers would receive certificates for their generation, to be sold to utilities to cover their mandated quota. Instead, the government wanted to strengthen competition through auction rounds, while increasing security for the projects with a guaranteed strike price. Ultimately, the governmental decision, in 2013, to shift to Contracts for Difference (CfD) was instrumental in reducing the cost of build-out.

This change to a new support regime risked inhibiting the industry’s momentum given the uncertainty the transition period which could have resulted in an investment hiatus.

To counter this, the FID enabling contracts scheme was put in place, offering advanced projects a CfD, conditional on the market reform being ratified. This enabled selected projects to proceed with development and proved of paramount importance in securing an uninterrupted buildout rate, thereby underpinning the industrial build-up.

The reform was an important milestone on the journey to today’s modern offshore wind energy industry. It led to developers taking a ‘leap of faith’ by committing to building projects of yet unprecedented scale and price levels, totalling almost 3,200 MW across five projects, and it spurred a new level of competition between the suppliers and developers to drive down costs.

Alongside the UK, other governments sought to increase competition. In the years 2015-2017, several new auctions in the Netherlands, Denmark and Germany clearly demonstrated the falling costs of electricity from offshore wind energy, as sharp focus on efficiency and economics of scale materialised.

In April 2017, the world’s first zero-subsidy offshore wind energy contract was awarded in Germany’s first offshore wind energy tender ^{Citation The contracts do not include transmission assets, which are provided by German and Dutch transmission system operators, respectively.} . Similar zero-bids followed for specific sites in the Netherlands. And in September 2017, the 1,386MW Hornsea Project 2 was awarded a CfD of GBP 57.5 per MWh, significantly undercutting the 2020 target of GBP 100 per MWh.