By Westwood Global Energy Group
By The offshore wind sector witnessed another year of high growth despite global financial uncertainties. Although 2022 did not match 2021’s record of over 19.5GW of online capacity, which was mainly driven by the expiration of national feed-in-tariffs in Mainland China (MC), 2022 witnessed the second highest amount of global online capacity with almost 8.5GW. Final investment decisions (FIDs) were taken on over 11.5GW of projects, making it the fourth highest year for FIDs.
2023 capacity additions are forecast to be 55% higher than 2022 levels, keeping the offshore wind sector busy. This continued growth is expected to take place in a year where the sector will also need to deal with several issues to keep up the momentum. Some of the key themes that Westwood expects to see this year include the continued awarding of lease areas as well as the launch of auctions in new markets, investment in newbuild vessels, development uncertainties, the fallout of losses faced by turbine OEMs, the emergence of Chinese EPC supply chain companies entering markets outside of MC and the integration of offshore wind with other forms of energy. We explore these further below.
Auction results and new auctions to be launched
A total of 54.9GW of offshore wind leases were awarded in 2022. The ScotWind lease round accounts for most of this capacity, with over 24.8GW of project capacity being awarded in the initial round and a further 2.8GW in the clearing round. Several offshore wind lease rounds are scheduled to be launched and potentially conclude in 2023. These include the 4GW Celtic Sea floating wind auction in the UK, the 500MW A06 (Floating Mediterranean) auction in France and the Central Atlantic, and the Gulf of Mexico and Oregon auctions in the US.
Offshore wind auctions are also planned to take place for the first time in new markets that are aiming to develop projects. Up to 10GW of floating wind projects are planned to be auctioned in Portugal, 4GW are planned to be auctioned offshore Tamil Nadu State in India and Lithuania is also planning to launch its first lease auction for a 700MW wind farm.
Alongside these lease auction rounds being launched, the results of auctions that are currently taking place are also expected to be revealed in 2023. The results of 6.2GW INTOG Leasing round in the UK is scheduled to be announced this year. Poland is planning to conclude its auction for up to 11GW of lease areas and France is also expected to announce the winners of the 250MW Brittany Floating Wind and the 1GW Normandy fixed bottom tenders. Elsewhere in Taiwan, the floating wind tender, which was scheduled to be released in 4Q 2022, was delayed until 1Q 2023, although Westwood predicts it remains scheduled be awarded in 2023.
Some recent lease auctions have witnessed the implementation of qualitative criteria when it comes to selecting the winning bidders. The Hollandse Kust West Site VI tender in the Netherlands included a criterion for bidders to demonstrate how their proposal would contribute to the ecology of the North Sea. Qualitative measures are being implemented in future auction rounds and their importance is expected to increase. The Utsira Nord auction in Norway highlights this shift as the lease areas will be allocated to bidders on the bases of qualitative criteria such as proposed projects contribution to innovation and technology development.
Investment in newbuild vessels
Offshore wind production targets that have been set by various countries, means there will be a lot more offshore construction activity taking place globally from the mid-2020’s. In turn this will translate to increasing demand for construction vessels in the offshore wind sector. Separately, the Jones Act creates a situation in the US whereby newbuild vessels will be required for the US offshore wind market, as under the Act only US-built vessels can be used in US waters. Vessel suppliers have identified this demand and several orders have been placed for newbuilds in 2022.
Starting with wind turbine installation vessels (WTIVs), Cadeler has placed an order for two F-Class WTIVs. Separately, a consortium of ONP Management & Renewable Resources has ordered a Jones Act-compliant WTIV, while Bleutec Industries placed an order for a Jones Act-compliant hybrid vessel. The Binary Marine Installation Solution (BMIS) will consist of two construction vessels – one for foundation installation and one for wind turbine installation. Moving onto heavy lift vessels (HLVs), Vallianz placed an order for a turbine foundation transport vessel. Finally, in terms of newbuild cable lay vessels, two orders have been placed and these have come from Prysmian and Cecon Contracting respectively.
Outside of these 2022 firm orders, letters of intent/option agreements have been signed for several offshore wind construction vessels. There are currently five WTIVs under these agreements and three of these have been signed by Havfram, whilst the remaining two have been signed by Van Oord and Subsea 7 respectively. The transition of these agreements to firm orders will be dependent on how quickly offshore wind projects progress globally, as this will be the key determining factor on when a vessel demand crunch will occur.
Development uncertainties
2022 was a year in which the offshore wind sector faced several risks, which have the potential to impact decisions of developers investing in their forward-looking pipeline. Factors such as price volatility, cost inflation, political unpredictability and supply chain bottlenecks will continue to make commercial decisions increasingly difficult and uncertain in 2023.
Cost inflation from raw materials and rising energy prices have resulted in a reduction of the financial viability of projects. As a result of this, developers may seek to renegotiate financing agreements, potentially resulting in delays in the development of projects or even causing them to cancel projects.
Some developers of offshore wind projects in the US have already expressed their concerns. In December 2022, Avangrid filed a motion with the Massachusetts Department of Public Utilities (DPU) to dismiss the review of power purchase agreements (PPAs) issued to its 1.2GW Commonwealth Wind offshore windfarm in 2019. Avangrid has declared that it wants to submit a revised bid that reflects economic changes since late 2021. Mayflower Wind Energy LLC, a joint venture between Shell New Energies US LLC and Ocean Winds has also expressed worries regarding the financing challenges for its project in Massachusetts. Despite these worries, the PPAs for both projects have been approved by the Massachusetts DPU.
Elsewhere in Taiwan, Orsted cited “high inflation and increasing interest rates”, together with limitations set by current regulation, is making projects “uninvestable at this stage” – the developer declined to bid in Taiwan’s Round 3.1 lease auction.
Reactive political policies with regards to high inflation have also created uncertainties for project developers. In the UK, for example, a windfall tax with a temporary levy of 45% on profits has been introduced for electricity generators and this includes offshore wind farms. Although this only applies to wind farms that are not supported by the Contracts for Difference (CfD) subsidy mechanism, it still impacts project developers who operate these wind farms, and it will have them questioning their future investments.
Fallout of losses faced by turbine OEMs
International turbine manufacturers have had a difficult 2022, with Vestas, Siemens Gamesa and GE reporting financial losses. Vestas reported a loss of EUR1.031 billion (approximately US$1.068 billion) in the first nine months of 2022. GE has announced losses of US$1.786 billion in the first nine months of 2022 from its renewable energy division, whilst Siemens Gamesa reported an annual loss of EUR940 million (approximately US$975 million) in its FY2022 results. Siemens Gamesa also announced that it is planning a 10% reduction of its workforce by FY2025 as part of its long-term cost cutting strategy.
Although most of these losses can be attributed to the onshore wind side of these companies, they will have knock-on effects on their offshore wind segments. Outside of the aforementioned issues that each of these OEMs are facing, the offshore wind sector is grappling with several challenges, such as rising material costs and increased energy prices. As a result, turbine OEMs are facing significant losses as the pricing for the turbines have already been agreed upon, meaning that any price rises or additional costs incurred upon delivery, are absorbed by the OEM.
The likely fallout of these losses will be increased pricing from the turbine OEMs, which in turn will impact project developers, potentially leading to delays in projects as the developers may have to prioritize their project investments. As Vestas, GE and Siemens Gamesa are currently the only OEMs that supply the market outside of MC, and these companies are facing financial difficulties, there is now ample opportunity for new players to enter the field.
Chinese EPC supply chain companies entering new markets
After experiencing huge capacity growth in 2021 adding 16.4GW, driven by the termination of central government subsidies, 2022 and 2023 installed capacity is still forecast to remain higher than the average 2-3GW levels of 2019-2020. Mainland Chinese EPC contractors have begun making inroads outside of MC and this is expected to increase. Although a small number of Chinese supply chain companies have managed to secure contracts, they are aiming to increase their market share by investing in the development of factories in international markets. Ming Yang Smart Energy and Dajin Heavy Industry are examples of companies that are pursing markets outside of MC, with both companies signing contracts whilst developing and pursing plans to establish local manufacturing centers.
Ming Yang’s turbines have been operating offshore Italy at the Taranto wind farm since April 2022. The turbine OEM has also been awarded a contract to supply a turbine at the Nyuzen wind farm in Japan and it has also been selected to supply four turbines for the TwinHub Demonstrator floating wind project, offshore the UK. In terms of operating outside of MC, Ming Yang has selected the UK as its first new market. The OEM listed on the London Stock Exchange in July 2022 and has also signed a Memorandum of Understanding (MoU) with the UK Department for International Trade (DIT), focusing on MingYang investing in a blade manufacturing factory, a service center and potentially a turbine assembly factory in the UK.
Dajin Heavy Industry has had a banner year outside of MC. The fabricator has been awarded a contract to supply turbine towers and turbine foundations at Moray West in the UK. It has also been awarded a contract to supply turbine foundations at the Noirmoutier project, offshore France. Dajin also announced that it is planning to open a European turbine foundation manufacturing factory capable of manufacturing XXXL monopile turbine foundations, jacket turbine foundations and floating turbine foundations.
Integration of offshore wind with other forms of energy
Hydrogen production, electrification of oil and gas (O&G) platforms and the joint development of offshore wind projects with other renewables are some areas in which offshore wind projects are starting to combine with other forms of energy.
The world’s first O&G electrification project via offshore wind, Hywind Tampen, began operating in November 2022 and this is scheduled to be fully commissioned in 2023. Net-zero targets, increasing carbon prices and higher energy costs are driving increased investment in the electrification of O&G assets. The results of the INTOG leasing round in Scotland are scheduled to be announced by the end of March 2023 and this will be a major first step in transforming offshore wind electrification from a demonstration scale concept to commercial scale projects.
The offshore wind sector will also witness an increase in projects being combined with other sources of renewable energy. A recent example of this is Hollandse Kust West Site VII wind farm in the Netherlands. RWE Renewables won the lease rights to this site in November 2022. The project developer is planning to provide surplus electricity to power green hydrogen production on land and to incorporate floating solar panels to allow a more efficient use of ocean space. SolarDuck will build a 5MW floating solar power demonstrator at the site of the wind farm, and this is scheduled to come online in 2026.
The world’s first hydrogen-producing offshore wind turbine project received funding in May 2022. The UK government awarded Vattenfall £9.3 million (US$11.5 million) in innovation funding from the Net Zero Innovation Portfolio Low Carbon Hydrogen Supply 2 fund for the Hydrogen Turbine 1 (HT1) project. An electrolyzer will be installed directly onto an existing operational turbine which is currently producing power at the 96.8MW Aberdeen Bay wind farm located offshore Scotland, UK. The turbine will be used to produce hydrogen, and this will then be transported via a pipeline to shore at the Port of Aberdeen.