Offshore Wind Cost Reduction Pathways Study This study would not have been possible without the input, opinion and review of the offshore wind renewable industry. Content discussed and analysed in this report is as a direct result of industry input and data provision. The Crown Estate would like to thank the participants who took part in one-to-one meetings, workshops, debates and discussions and who were involved in compiling and validating the information which forms the basis of this study. For a full list of acknowledgements, please see the acknowledgements section in this report. Foreword For the UK, offshore wind is a story of many successes. We have the world’s biggest offshore wind market, the world’s most attractive investment environment, and an unparalleled record of deployment. Five of the ten largest offshore wind farms – including the top two – are in British seas. These successes are fitting: ours is an island nation, blessed with copious wind and shallow seas. If we are to match our clean energy ambitions, we must take full advantage of this potent natural resource. We believe that the offshore wind industry can and must evolve to be more competitive and forward looking. That in turn will boost the security of our energy supplies, create jobs, and attract further inward investment. Realising offshore wind’s potential is crucial to meeting our 2020 renewable energy targets. But we have a responsibility to deliver a low-carbon future at the lowest cost to consumers. That is why we welcome the Offshore Wind Cost Reduction Pathways Study, which identifies and quantifies cost reduction opportunities for the offshore wind industry. An evidence-based study, it enriches the reader’s understanding of the drivers and dependencies of offshore wind costs. Through consultation with industry, the study provides a platform for the government, project developers, the supply industry and operators to align future activities and maximise cost reductions. Opportunities for savings across the finance, technology and supply chain sectors have been identified and quantified, thus allowing a significant reduction in the cost of offshore wind. Overall, it gives us confidence that significant cost-saving opportunities are available and achievable by 2020. We believe that the Offshore Wind Cost Reduction Pathways Study represents an authoritative and credible way forward. We would like to invite the DECC Cost Reduction Taskforce to apply The Crown Estate’s evidence, findings and conclusions to their thinking and in the formulation of an action plan. Rt Hon Edward Davey MP Alison Nimmo Secretary of State for Energy and Climate Change Chief Executive, The Crown Estate i Offshore wind cost reduction pathways study Acknowledgements The Crown Estate would like to thank: The following companies who participated in this study by providing their perspectives and insights on potential future offshore wind cost reduction, together with supportive data and information: A2Sea Eksport Kredit Fonden Mitsubishi SeaRoc AbleUK Eneco Moody’s Seaway Heavy Lifting Alstom Energy Technologies Institute MOOG Siemens Ambau E.ON MPI Offshore Sinovel AON Fluor MT Hojgaard SLP Energy Areva Forewind Natural Power SMart Wind Atkins Fugro Nexans Smulders Projects Ballast Nedam GE Energy NSW GmbH SSE Renewables BiFab GE Energy, Power Conversion OGN Group Statoil Borealis Geosea Owec Tower Strabag Bladt Industries Global Marine Systems PD Ports Subsea7 BMT Nigel Gee Gravitas Offshore Limited Peel Ports Tata Steel BPA GustoMSC Petrofac Technip Carbon Trust Harland and Wolff Pinsent Masons University of Strathclyde Centrica HSBC Prysmian Van Oord Cosalt Wind Energy IWES Ramboll Vattenfall CT Offshore JDR Cables Repsol Vestas CTC Marine KBR Repower Systems SE VINCI Construction UK David Brown Gears KCI RES Offshore Visser & Smit DONG Energy KfW Ricardo Wesserwind DTU Wind Energy Legal & General RWE Npower Renewables Willis E.I.B Lloyds Saipem ZF Wind Power Antwerpen EDPR Mainstream Renewable Power Scottish Power Renewables ii The Project Advisory Board who played a key role in guiding The following organisations and interested parties who kindly the study. The members were: gave their time: • Duarte Figueira DECC • BIS • Allan Taylor DECC • CBI • Mark Thomas InfrastructureUK • Committee on Climate Change • Thomas Arensbach Gamesa (until March 2012) • Professor Dieter Helm (University of Oxford) • Ron Cookson Technip • Energy Bank • Gordon Edge RenewableUK • Energy Research Partnership • Michael Rolls Siemens • EWEA • Richard Sandford RWE • Garrad Hassan • Christian Skakkebaek DONG Energy • Narec • Ian Temperton Climate Change Capital • Northern Ireland Executive • Poyry The team that prepared this report including Paul Arwas, • Red Point David Charlesworth, Duncan Clark, Richard Clay, Gareth Craft, Ian Donaldson, Andy Dunlop, Adrian Fox, Richard Howard, • Dr Robert Gross (Imperial College London) Chris Lloyd, Alan Marshall and Fay Wiles • Scottish Government The team that prepared this report including Paul Arwas, • Scottish Renewables David Charlesworth, Duncan Clark, Richard Clay, Gareth Craft, Ian Donaldson, Andy Dunlop, Adrian Fox, Richard Howard, • Technology Strategy Board Chris Lloyd, Clare Lovett, Alan Marshall and Fay Wiles • Welsh Government • WWF iii Table of contents Executive summary Chapter 1: Introduction Page 1 Chapter 2: How we conducted the study Page 3 Chapter 3: Cost reduction opportunities Page 13 Chapter 4: Cost pathways to 2020 and beyond Page 38 Chapter 5: Prerequisites for cost reduction Page 53 Chapter 6: Health and safety Page 61 Chapter 7: Conclusions Page 63 Glossary of terms Page 65 Appendices A. Recent analyses of offshore wind costs Page 67 B. Key assumptions Page 69 C. Project Advisory Panel terms of reference Page 73 Specifically commissioned reports CD Insert • BVG Associates, Offshore wind cost reduction pathways – Technology work stream, April 2012 • E C Harris, Offshore wind cost reduction pathways – Supply Chain work stream, April 2012 • PMSS, Offshore wind cost reduction pathways – Health & Safety Review, April 2012 • PricewaterhouseCoopers, Offshore wind cost reduction pathways project – Finance work stream, April 2012 • RenewableUK, Potential for offshore transmission cost reductions, February 2012 Printed: May 2012 v Offshore wind cost reduction pathways study Executive summary The costs of offshore wind in the UK have increased • the rate of offshore wind capacity build substantially since the first commercial scale wind farms were deployed in the early 2000s, driven both by underlying cost • the pace of technological change increases (commodity prices rises, currency fluctuations) and • the maturity of the supply chains serving by more specific factors such as supply chain bottlenecks, offshore wind developers sub-optimal reliability and the move to deeper water sites. Recent wind farm projects have indicated that costs have • the depth of financial markets investing stabilised at around £140 per MWh (for projects at Final in offshore wind. Investment Decision in 2011). At the same time, Government and industry are facing In three of the pathways, offshore wind reaches a Levelised important decisions regarding the size of the offshore wind Cost of Energy at or below £100/MWh for projects reaching industry and investment in new technologies and facilities. Final Investment Decision (FID) in 2020, and is well on its way Future costs will be critical in determining the future size of to meeting this benchmark by FID 2017 (see Exhibit A). the industry in the UK. The exception to this is the Slow Progression story, where cost reduction is held back by the relatively small market and This study has produced a rigorous and validated assessment insufficient intervention by government and industry, and the of the potential for offshore wind power cost reduction. LCOE remains relatively high. It is based on unprecedented engagement with and challenge from around 120 companies and organisations and individuals from the offshore wind industry, insurance, academic and finance communities over a period of six months. What do we mean by the Levelised Cost of Energy (LCOE)? Reducing the cost of offshore In simple terms, LCOE can be seen as the lifetime cost of the project, wind to £100/MWh by 2020 per unit of energy generated. is achievable It is defined as the sum of discounted lifetime generation costs (£) divided DECC has put forward a challenge that offshore wind should by the sum of discounted lifetime electricity output (MWh). Generation reach a Levelised Cost of Energy (LCOE) of £100/MWh by costs include all capital, operating, and decommissioning costs incurred 2020, in order to maximise the size of the industry. by the generator/developer over the lifetime of the project, including Drawing on input from project participants, we have defined transmission costs. It does not necessarily correspond to the level of revenue (or ‘strike price’) that would be required to support the project four industry ‘stories’ reflecting different ways in which –it is an expression of cost rather than revenue. The discount rate is the offshore wind could develop. These have been used as the Weighted Average Cost of Capital (WACC) over the lifetime of the project; basis to develop cost reduction ‘pathways’, in order to test the as determined by the capital structure and financing costs. LCOE is achievability of the £100/MWh ambition. Our cost reduction calculated on a post-tax basis and expressed in real 2011 prices for all years. pathways explore