The following is a guest column from Westwood Global Energy Group Lead Analysts Michelle Gomez, Bahzad Ayoub and Ruth Chen.
The offshore wind industry had another record year in 2021. Around 18.6 GW of capacity was put into operation – the highest annual increase in the industry.
Mainland China’s push to bring capacity online ahead of the expiration of the national feed-in tariffs (FiT) at the end of the year made it an exciting ‘finish’ and meant the new capacity added was six times the 2.5 GW 2020 installed. This culminated in the country accounting for the lion’s share (86%) of global capacity additions, surpassing the UK for the world’s largest installed base of offshore wind capacity.
Perhaps most interesting is the magnitude of the performance. At the start of 2021, many outside analysts adopted particularly conservative estimates for capacity growth for mainland China (in the 3-5 GW range), and even our estimate of 11 GW (which was the most optimistic estimate at the time) fell short of expectations .
While offshore wind capacity expansion in 2022 is unlikely to reach the same levels as in 2021, the offshore wind sector will remain busy as the recently released ScotWind results are already preparing the industry for an exciting year.
We expect some key themes that have surfaced in 2021 to crystallize, including the “subsidy-free” reality in mainland China, the results of the fourth round of UK Contracts for Difference (CfD), growing interest and investment in Oil & Gas (O&G). Offshore wind sector, as well as the acceleration of US offshore wind energy, commercialization of floating wind concepts and increasing support for green hydrogen. We examine these below.
Mainland China without government subsidies
Mainland China must now contend with a (national) subsidy-free reality this year, in which the project tariff is based on the applicable coal-fired power tariff, which is well below the previous offshore wind FiT rate of 0.85 RMB/kWh to be commissioned at the end of December 2021. This will force the industry to find further CAPEX and OPEX reductions – whether through technological innovation, supply chain collaboration or other optimization measures.
In the last quarter of 2021, we are noticing a number of new tenders for the supply of turbines issued by Chinese wind farm developers for wind farms, coming online in 2024/2025, although they were first awarded in 2019/20. Bid prices for new turbine deliveries submitted by Chinese turbine OEMs represent an average decline of 37.9% from 2019-21 levels, indicating industry-wide efforts to reduce wind farm component costs.
As turbine sizes need to grow, it could be difficult to protect developers’ margins. But the recent introduction of larger turbine capacities by local OEMs is a promising step to ensure future turbine supply remains locally sourced while controlling costs.
UK CFD Round 4 Allocation
The fourth round of the UK CfD subsidy allocation opened on 13 December 2021 and the winning auction bidders are expected to be announced between April and July 2022. This is the UK’s largest CfD round to date, with £200m (US$264m) a year allocated for fixed-ground offshore wind. The allocation will be key for the UK to meet its target of 40GW of offshore wind power by 2030.
There are currently a total of six fixed bottom projects (with a total capacity of 7,900 MW) that can be tendered for a CFD in this fourth round. All of these projects have been approved by the relevant authority in England or Scotland and these projects now require a CfD in order to move on to the next stage of achieving an FID (Final Investment Decision) and eventually proceeding with construction. All but one of the six eligible projects plan to use turbines with an individual capacity of 14 MW or more.
A further £75m (US$99m) has also been committed to new technology, of which £24m (US$32m) is earmarked for floating wind energy. Of the UK’s 40GW target, 1GW is said to come from floating wind power.
Increased investments from oil and gas operators
In recent years, a group of mainly European oil and gas companies have made visible progress in developing their offshore wind farms. Westwood expects these companies to continue investing in the offshore wind space in 2022, either by buying equity in existing projects or winning new development bids.
Several auctions are currently underway and are expected to close in 2022. This includes the rights to develop the Normandy and Bretagne wind farms in France, as well as licensing for the development of two to three offshore projects in Norway via the Sorlige Nordsjoe II auction.
While Equinor was the pioneer of O&G offshore wind power, four other O&G companies have recently stood out – BP, Shell, ENI and TotalEnergies. The four companies have been very active in auction processes and have submitted bids either as individual companies or in partnership with other stakeholders who complement or expand their offshore wind capacity.
The consortia, which are led or supported by BP, Shell and TotalEnergies, have been offered options agreements for 9.9 GW – almost the size of the UK’s current installed base – made up of fixed and floating development types in the ScotWind offshore wind lease auction.
Excluding the auctions, these four companies are involved in a total of 23 projects (equivalent to 8 GW of capacity on an equity basis) that are in either the planning, EPCI or operational phases. These projects are located in mature offshore wind markets such as the UK and the Netherlands, as well as less mature/emerging markets such as the US, France, Norway, South Korea and Ireland.
Accelerating US offshore wind energy
2021 was certainly a momentous year for the US offshore wind sector as the current administration committed to a 30GW offshore wind target for 2030. Aside from approximately 8,434.5 MW of offshore wind capacity awarded in tenders by the states of Maryland, Massachusetts, New York and New Jersey, the US Department of the Interior has also issued its first-ever decision-making act, the Vineyard Wind (Avangrid and CIP JV), order to acquire FID on its 800 MW Vineyard Wind 1 development in September 2021.
Those bids are set to continue in 2022, with New York State recently announcing that the next round of offshore wind procurement will start this year. This is conducted by the New York State Energy Research and Development Authority (NYSERDA) and projects of at least 2 GW are selected.
New Jersey also plans to open its third offshore wind tender in 2022. The state has set an issue date of Q3 2022 and a filing date of Q4 2022. This tender is to be awarded in the second quarter of 2023, with the aim of awarding a capacity of 1,200 MW.
A lease auction is also scheduled to take place in February 2022, at which a total of six leased areas will be offered. The leases are all located in the federal waters of the New York Bay, off the coast of New York and New Jersey. The six sites have the potential to add between 5.6 GW and 7 GW of additional offshore wind capacity.
Aside from these calls and lease auctions, several projects are expected to advance to the next phase of development. Westwood expects to achieve around 858 MW of capacity this year.
Commercialization of floating wind concepts
While land-based developments now account for almost all of the world’s operational capacity, floating wind has been widely hailed as the future, and no doubt about it. In 2021 we saw the world’s largest floating wind development, the 48MW Kincardine Phase 2, come online, paving the way for what is to come.
Despite being a nascent technology, there are numerous proposals for the development of floating wind power in both established and emerging offshore wind areas, and this trend is expected to expand further in 2022. This commercialization effort goes with new players like BW Ideol, Hexicon, Fukushima Forward entry and Principle Power.
Government support is also expected to accelerate the development of floating winds in 2022. For example, the ScotWind leasing round in the UK funded the development of floating winds of up to 3GW and this was far surpassed when over 14.5GW worth of floating wind projects won the right to sign lease option agreements.
The Norwegian government has also earmarked the 1.5 GW Utsira Nord coastal area for floating wind projects. In 2022, the much-anticipated 88 MW Hywind Tampen project, operated by Equinor Offshore Norway, is also expected to come online in the third quarter.
Growing support for green hydrogen
The production of green hydrogen from offshore wind power could significantly increase the commercial value proposition of projects.
While the industry is still at an early stage of development, there are several demonstration projects for green hydrogen related to offshore wind power, including Vattenfall’s Hydrogen Turbine 1 (HT1) off eastern Scotland (to be installed at the operational Aberdeen Bay Wind Farm) and Shell’s Hydrogen Holland I (operated by Hollandse Kust Noord) and ERM’s Dolphyn Hydrogen Project etc.
The prospects for hydrogen remain uncertain due to its relative cost, the complexity of the value chain and the challenges of decarbonization of individual countries. But in 2022, Westwood expects different hydrogen strategies to emerge.
For example, the Danish Power-to-X strategy will provide billions in subsidies for the development of green fuels and exploit offshore wind potential. Similarly, the UK will launch a £240m net-zero hydrogen fund, and California’s latest budget for 2022-2023 includes $100m for green hydrogen promotion.
These government initiatives will give further confidence to offshore developers to consider green hydrogen opportunities in their commercialization strategies.