Sunday, December 11, 2011

The cost of offshore wind: Understanding the past and projecting the future
Abstract: Offshore wind power is anticipated to make a major contribution to the UK’s renewable energy targets but, contrary to expectations, costs have risen dramatically in recent years. This paper considers the context of these cost increases, and describes a disaggregated levelised cost model used by the authors to explore the effect of different assumptions about the direction and scale of the major cost drivers. The paper identifies the competing upward and downward pressures on costs in the medium term, and discusses the range of future costs that emerges from the analysis. The paper goes on to analyse the implications of these cost projections for the policy support levels that offshore wind may require. The paper suggests that there are good reasons why it is reasonable to expect a gradual fall in costs in the period to the mid-2020s, although it is unlikely that costs will fall as rapidly as they have risen, or that it will be a smooth downward trajectory. A key challenge is to reconcile the scale and pace of development desired for UK offshore wind with the potential growth rate that the supply chain can sustain without creating upward pressure on costs.

► Analysis suggests that offshore wind may see modest cost falls in the medium term.
► These cost reductions are unlikely to be as marked as recent cost rises.
► Competing upward and downward cost pressures remain.
► The ambitious scale of UK offshore wind may bring in new capacity and reduce costs.
► But the pace of growth has the potential to sustain upward pressure on costs.

In September 2010 three of the authors produced "Great Expectations: The cost of offshore wind in UK waters – understanding the past and projecting the future" a 111 page report available free of charge at The report noted the following:

In December 2008, the EU Renewables Directive committed the European Union to satisfying 20% of its energy consumption via renewable sources by 2020. The UK’s national target is 15%. This may mean that the UK will have to find 40% of its electricity generation from renewable sources by the end of this decade. Offshore wind is widely expected to play a major role in contributing to this target. The government has not set a specific target for offshore wind, but projections from a range of analysts suggest the UK will need 15 to 20 GW of offshore wind by 2020, with aspirations to go well beyond that in the decades that follow.

The UK’s ambitions for offshore wind reflect the size of the potential resource and difficulties associated with public opposition to onshore wind. They also reflect a widespread expectation in the late 1990s and early 2000s that costs would fall as deployment expands. However, in the last five years costs have escalated dramatically, with capital costs doubling from approximately £1.5m/MW to over £3.0m/MW in 2009.

All the main electricity generation technologies have been subject to cost increases in the last five to eight years. Exogenous factors such as commodity prices that affect offshore wind also affect the construction other generation options. Moreover, fossil fuel price increases have led to additional increases in the levelised costs of conventional power stations. For example, the cost of electricity from gas turbine (CCGT) plant has almost doubled; it now stands at approximately £80/MWh compared to approximately £42/MWh (inflation adjusted) in 2006. Coal, nuclear and onshore wind all experienced large cost increases over the same period.

Until the mid-2000s the consensus in the offshore wind arena was that costs in the future would be significantly lower than then contemporary levels. Actual cost data from the early offshore wind farms were supportive of the idea of a downwards experience curve and reducing costs. In Denmark, for example, Vindeby offshore wind farm was constructed in 1991 at a cost of €2.6m/MW (£1.82m) whilst Horns Rev was built for €1.67m/MW (£1.05m) in 2002. In the UK, North Hoyle was completed in 2003 at a reported cost of £1.35m/MW and Scroby Sands was built the following year for a reported £1.26m/MW.

Analysts of offshore wind costs also looked at the experience of the onshore sector.... The costs of onshore wind energy fell fourfold in the 1980s, and halved again in the 1990s through a combination of innovation and economies of scale....
UK offshore wind development has been slower than originally expected and has proved to be significantly more costly than much of the literature anticipated. By June 2010, eleven Round 1 wind farms had been completed with a total capacity of just below 1 GW. Around half the proposed capacity for Round 1 is either still in development or has been lost to downsizing or withdrawals. Round 2 is still in the relatively early stages of development with only one project fully completed and another four under construction.

Currently, the typical timeline for a large UK offshore project is estimated to be between seven and nine years, in large part due to the complexity of the planning process (recent changes may have improved matters...).

From the mid-2000s onwards, the costs of offshore wind development have been escalating. For projects coming online in 2008, capital costs were more than double the 2003 level. As of June 2010, the industry consensus is that capital and energy costs are approximately £3.0m/MW and £150/MWh respectively.

... It is possible to form a view of the relative contribution from past major [cost- drivers; they were (in descending order of impact):
1. Materials, commodities and labour costs
2. Currency movements
3. Increasing prices for turbines over and above the cost of materials, due to supply chain constraints, market conditions and engineering issues
4. The increasing depth and distance of more ambitious projects, affecting installation, foundation and operation and maintenance (O&M) costs
5. Supply chain constraints, notably in vessels and ports
6. Planning and consenting delays

In 2009, key industry actors considered that the likely medium term trajectory of offshore wind costs would be for only a modest fall from 2009 levels out to 2015.

Recent evidence suggests that costs in 2010 are no higher than 2009, suggesting costs may have ‘peaked’. There is some evidence that a turning point may have been reached; the agreed price of the latest Round 2 project was reported as £2.9m/MW.
The United Kingdom Energy Research Center (UKERC)has considered the prospects to 2025 using a disaggregated approach, examining each of the drivers or factors that impact on the cost components of offshore wind power:

Turbines represent the largest single cost item in an offshore wind farm, up to around half of overall capital expenditure. Turbine prices have gone up in part because of increasing commodity prices, particularly steel. However the total impact of materials, commodity and labour cost increases explains only around half the rise in turbine costs. The remainder may be explained in part by improving reliability in response to problems with early farms. There is also evidence that turbine prices in the early 2000s did not properly represent production costs, since many turbine makers were not making economic returns. However many analysts and industry experts believe that low levels of competition had an important impact. Moreover, offshore wind is a small element of wider turbine manufacture, and although long term benefits may emerge for ‘first movers’ as this grows, it is to be expected that, at first, serving such a ‘niche’ will require a premium.

Looking ahead, new market entrants, scale effects, innovation, recent movements in exchange rates and lower commodity prices bode well for the future price of turbines. Technology experts expect a range of design improvements, continued upscaling and other innovations to emerge in the coming decade. Given the uncertainties, a downside risk remains and if a range of problems are not addressed the price of turbines could even rise.

It does not appear likely that turbine prices will fall rapidly; indeed they are likely to remain at or around their current level until around 2015 or so. However, provided a range of drivers move in the right direction together and assuming no further adverse currency effects (ideally because production moves to the UK) cost reductions could be significant in the period 2010 to 2025. We suggest that turbine cost reductions of up to perhaps 40% could be achieved in that timeframe, with an implication for overall levelised costs of a reduction of up to around 15%.

Foundations are subject to a similar set of drivers to turbines. With the exception of the Beatrice development, there has been no UK manufacture of foundations. Most have been sourced from Holland and have therefore been subject to Sterling-Euro currency fluctuations. Steel prices have also had a significant impact, and moving to deeper waters creates a significant challenge that is likely to increase costs in the short run. Whilst we did not find evidence of insufficient competition in foundation supply, several commentators highlight supply chain constraints. There is considerable potential for innovation, which many believe to offer substantial potential for cost reduction. Overall, we believe that there is a considerable spread of possible outcomes for foundations hence the range is from a 20% cost increase to a 30% reduction. The impact on levelised costs is moderated by the fact that foundations account for a relatively small share of total costs, and lies in a range of less than 5% either way.

Depth and distance are of particular relevance to future UK offshore wind development given the more challenging ambitions of UK Round 3. We provide crude estimates of the cost levels for the nine Round 3 zones relative to the capital and levelised costs of a typical mid-depth/mid-distance site more typical of Round 2. Levelised costs increase in all cases but one by between 5% and 24%. Whilst innovation and learning in installation, foundations, maintenance and a range of other factors ought to mitigate the impacts of going to more inherently costly locations, on the whole we believe that depth and distance are likely to place upward pressure on costs. It appears unlikely that better wind speeds will be sufficient to compensate for additional costs associated with going further offshore.

Assuming no mitigating factors, a range of up to around 15 to 20% increase in the cost of energy is possible.

Load factor is another key intrinsic factor. This has been given particular attention by developers and manufacturers, and improved turbine reliability and better O&M should improve turbine availability. A downside risk remains, since it is possible that the greater distances associated with some Round 3 sites will negatively affect availability, due to greater access restrictions. If Round 3 sites are only able to achieve availability and load factors that are at the lowest end of the plausible range then levelised costs may rise by around 9%. If availability problems are resolved then better wind conditions and optimisation of turbines has the potential to reduce levelised costs. If UK Round 3 developments are able to secure load factors similar to those achieved in several Danish developments, other factors being equal, levelised costs could be reduced by up to around 15%.

O&M costs.... Whilst a range of learning effects are likely to improve effectiveness and decrease relative costs, absolute increases in O&M costs are not unlikely, given both more challenging conditions and the importance of improved availability.... A 25% increase or decrease in O&M spend will respectively increase or decrease levelised costs by less than 3%.
Commodity price movements had a big impact on the price of some of the key components of offshore wind farms, notably turbines and foundations. However, the impact of any single material input on the overall costs of offshore wind should not be overstated. Steel for example accounts for only around 12% of the capital cost of an offshore wind farm. We do not speculate on commodity prices out to 2025... A 50% increase/decrease in costs ... only change levelised costs by around 5% in either direction.
Planning delays have had a substantive impact on Rounds 1 and 2. We have not attempted to quantify this, but in terms of both absolute costs and revenue foregone it has a substantial and material impact on project finance and economics. It also places further strain on the supply chain....

Conclusions about future costs
Whilst there a few reasons to expect meaningful costs reductions by 2015, many of the factors that drove costs up have either moderated or have the potential to be remedied. Looking ahead to the mid 2020s there are grounds for optimism. To illustrate the range of possibilities, UKERC used sensitivity analysis to develop a range of plausible developments in key cost factors in the period to 2025....

5. In our worse case, the costs rise from a current level of around £145/MWh to around £185/MWh. If favourable developments take place in all of the main factors, then costs could fall to under £95/MWh....We believe a gradual fall in the cost of offshore wind is a reasonable possibility over the period between now and 2025, particularly if policy can place downward pressure on costs and support the emerging UK supply chain.

Our ‘best guess’ figure for the mid 2020s is a fall of around 20% from current levels to just over £115/MWh, with continued falls thereafter. Greater reductions are possible, but would require most, if not all, of the major cost drivers to move decisively in the right direction at once.

by Philip Heptonstall, Robert Gross, Philip Greenacre, Tim Cockerill; all of the Centre for Energy Policy and Technology, Room 328 Mechanical Engineering Building, Imperial College, London SW7 2AZ, UK; Tel.: +44 20 7594 7309.
Energy Policy via Elsevier Science Direct
In Press, Corrected Proof; Available online 6 December 2011
Keywords: Windpower; Cost; Projections

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