The offshore wind industry’s economic potential has often been considered just out of sight on the horizon, much like how operational turbines themselves appear from coastlines. But the fledgling offshore wind industry is finally reaching maturity, promising gigawatts of clean energy and billions in economic opportunity.
While solar photovoltaics and onshore wind have experienced dramatic cost declines and capacity additions, offshore wind has remained more of a boutique resource with just 14 gigawatts (GW) of installed capacity – great in theory, but prohibitively expensive and concentrated in a few regions of the world.
That’s changing rapidly: Bloomberg New Energy Finance forecasts global offshore wind installations will triple to 39.7 GW by 2020 and the governments of Germany, Denmark and Belgium have pledged to add 60 GW of new capacity in the next decade. This growth is occurring worldwide, and is driven by three factors: proximity to coastal cities, advancing technology, and declining prices.
Proximity to power demand, plus clear policy drives offshore wind deployment
Densely populated coastal cities require large amounts of electricity, but their density makes connecting them with distant generation sources a nuisance. New fossil fuel generation is difficult to build in cities because of local air pollution concerns, and utility-scale renewables require large amounts of open space – certainly at a premium in developed urban areas.
But locating offshore wind just off the coast can directly link turbines to congested areas, reducing constraints on existing power lines, avoiding siting conflicts that challenge onshore wind. These projects can also utilize dormant substations and transmission infrastructure left behind when coastal power plants are retired for economic reasons.
This proximity to U.S. coastal cities, combined with more than 4 GW offshore wind installation goals from Mid-Atlantic and New England states, creates billions in economic potential for state and local governments looking to revitalize former industrial hubs:
- Massachusetts’ mandate that utilities contact for 1.6 GW new offshore wind and legislation to reduce developer risk has already led to $113 million in investments at the New Bedford Marine Commerce, and 18 other coastal communities could be revitalized by developers looking to service offshore wind farms in the region.
- New York’s goal of 2.4 GW installed offshore wind energy by 2030, the largest of any U.S. state, is expected to generate significant investment along the state’s coastal communities as project developers build facilities to meet demand.
- Maryland regulators cited the expected influx of almost 9,700 new jobs and $1.8 billion in new in-state spending when approving 368 megawatts (MW) of new offshore wind proposals.
- Virginia will install its first offshore wind farm by 2020, representing $300 million in new investment, through a partnership between utility Dominion Energy and developer Dong Energy.
For investment potential context, consider the £512 million that ports along the United Kingdom’s eastern coast have received since 2011, the £310 million turbine blade factor Siemens opened in that region, or the £6 billion Dong Energy expects to invest there by 2019.
Technological innovation spurs growth by cutting project costs
Offshore wind’s feasibility is underpinned by falling costs and rising generation potential, both empowered by technological improvements making turbines bigger and more productive. Offshore wind turbines have doubled or tripled in size, allowing them to capture more wind and increase generation per turbine with fewer construction and maintenance costs, greatly improving project economics per megawatt of generated power. Since nearly half of offshore wind’s costs come from balance of system costs (substructure, infrastructure, installation, etc.), efficiencies emerge along supply chains as projects are completed through learning by doing, saving developers and utilities billions.
Four manufacturers now install turbines featuring power ratings of 7.5MW or higher. Vestas’ 9.5 MW turbine is the world’s largest, spanning 187 meters, and will produce enough electricity to supply more than 8,000 homes. Looking forward, McKinsey expects 13-15 MW models to hit the market by 2024.
Offshore wind farm locations offer stronger and more consistent wind patterns than inland, pushing capacity factors to 35-55%, thus making them more profitable. Offshore wind generation also tends to correlate with peak times for power demand – late afternoon and early evening – which helps grid operators balance declining solar output after sunset while weaning utilities off fossil fuel generation. In competitive energy markets (which most of America’s coastal states are in), offshore wind developers can leverage these attributes to increase revenue by generating energy when power prices are highest.
Offshore wind costs still high, but will be cost-competitive sooner than expected
At its cheapest, the levelized cost of energy (LCOE) for new offshore wind projects are still more expensive than onshore wind—around 40 percent higher—but onshore wind has had a decades-long head start, dating back to the 1940s whereas the first offshore wind farm began operating in 1991. Thanks to technological advances, those costs are plummeting and approaching an inflection point.
In 2016, average offshore wind costs fell 22%, with Denmark’s Dong Energy and Germany’s EnBW recently winning bids for projects without any direct subsidies, and similar results expected in the United Kingdom’s upcoming national offshore wind auction.
As offshore wind approaches subsidy-free prices, oil companies are taking note and making investments. These companies have experience managing larger capital-intensive projects as well as expertise in marine technology, making them particularly well positioned to profit from offshore wind projects. Shell already maintains a 50% stake in a 680 MW project in Dutch waters, and envisions scaling projects to nearly 15 times their current size in order to reach cost-competitiveness.
Smart government policy is key to unlocking offshore wind’s potential
While the technology and economics of offshore wind may finally make sense for project developers, utilities, and grid operators, clear government policy is still required to provide investment certainty and get steel in the water. In the absence of smart federal policy guidance under the Trump Administration, states will have to lead the way to lock in economic growth opportunities for their communities as well as the corporations who want to make investments.
Fortunately, policy models already exist to provide certainty for utilities and developers. Massachusetts’ Act Relative to Energy Diversity reduces financial risks for developers by identifying ideal areas for offshore wind development that minimize potential conflicts and costly delays. New York has specified ideal wind farm project sizes and is developing an Offshore Wind Master Plan to identify ideal project locations, while consulting with stakeholders and conducting feasibility studies to expedite development. And Maryland’s renewable portfolio standard includes a 2.5% offshore wind carve-out beginning in 2017 and running beyond 2022, providing three-year Offshore Renewable Energy Credits between wind farms and utilities that create revenue certainty.
Every new turbine added just off the coast has an economic ripple effect, creating good jobs and investment in coastal communities which have often suffered from industries moving overseas. Conversely, each new turbine presents immense economic potential for investors and utilities to benefit from offshore wind’s technological advances and cost declines. Combine them, and you’ve got a win-win scenario for economic growth and investment, along with major emissions reductions.
By Silvio Marcacci
Silvio Marcacci is Communications Director at Energy Innovation, where he leads all public relations and communications efforts.