Offshore wind costs: shape-up or ship-out
This author no longer works for DNV GL.
I am currently trying to get into shape. The (early) onset of middle-aged spread means that I find myself on a wacky diet and exercise regime in an effort to look and feel better. As I write this on a day of fasting, I can attest that it can feel like an uphill battle. Yes, you’ve guessed it, here comes the tenuous analogy: as the offshore wind sector gets to grips with its own existential challenge—that of cost reduction—it too has a range of options to consider, if it is going to shed the pounds (or Euros for that matter).
Scaling-up the supply chain can be thought of as industrial weight-training—hitting the gym in order to establish a strong manufacturing base, capable of delivering cost reduction over time through economies of scale in production and learning effects in construction. But rather like cash-strapped gym-subscribers, the UK and German Governments have scaled back market size, which has in turn diminished supply chain confidence. Despite this and against a background of stuttering installation rates over the last few years, the industry has got to the point where it now has its own supply chain—largely decoupled from the previously competing needs of onshore wind and Oil & Gas sectors. A solid, if limited, range of experienced and credit-worthy contractors are now available to project developers in the procurement market. So perhaps “mega market scale” was not the panacea some held it up to be. The industry appears to have reached some level of critical mass in establishing the underlying industrial infrastructure needed.
But many would argue that scale is also needed to stimulate healthy levels of competition, ensuring that cost savings are both incentivised and passed through the value-chain. Unleashing the white-heat of competition can be thought of as the surgical solution for weight-loss, with the market stripping away layers of fat in the value-chain, like a liposuction machine in overdrive. Whilst a nip and a tuck here and there might well be warranted, to rely on competitive pressure alone to deliver cost reduction is risky. We only need to go back to the early days of offshore wind in the mid-2000s, when an over-heated market led to inappropriate risk allocation and ultimately insolvency for a number of specialist players.
At this stage in the life of the offshore wind industry, competitive pressure must be balanced against effective industry collaboration. The latter provides the safety net which the sector needs as it matures. This can be thought of as the boring third option: dieting – and it is perhaps easier to lose weight when you do it with other people. Weekly weigh-ins are not just about group humiliation—they also provide a forum for those facing similar challenges to exchange experiences on what works and what doesn’t. Similarly, standardisation committees and Joint Industry Projects (JIPs) might be unglamorous, but these are the foundations for a mature industry; one which finds ways around commercial barriers to share best practice thus avoiding past mistakes; one which delivers the lowest cost of energy by adopting an integrated and collaborative approach to design, engineering and procurement.
Several recent examples indicate that offshore wind is indeed on the path to a leaner future via collaborative and integrated practices, including the UK Crown Estate’s SPARTA (System Performance, Availability and Reliability Trend Analysis) project and the recently published “CableRisk” JIP. These and other similar initiatives are perhaps signs that the industry is now mature enough to shed a few kilos by determinedly doing the difficult and dull. I’ll try to take inspiration from this determination and maturity as I do my best to resist the temptation to deviate from my diet. Now, how many hours until breakfast?
Joe Phillips is a Chartered Engineer at DNV GL and Head of Strategy & Policy. His international team provides targeted support to governments and companies. He has worked in renewable energy, primarily in offshore wind for over 10 years in engineering, project management and strategic roles. He has been the lead author of a number of industry reports including “UK Offshore Wind: Charting the Right Course” and “Wind In Our Sails – the coming of Europe’s offshore wind energy industry.”