Chapter 1
Analysis: Economic realities may bring change in wind direction
A different approach is needed if offshore is to play its role in decarbonizing the world.
The offshore wind sector is at a crucial point in its global development, and change is in the air. Widely viewed as a runaway success over the past 30 years, the sector is now facing its greatest challenge.
Supply chain problems have resulted in global project costs rising by 39% since 2019.2 Schemes in late-stage development are being delayed, or even canceled, by developers that say increased equipment and construction costs mean they can no longer make a return on their investment. Over the next decade, cost inflation could add around US$280b in capital expenditure for the offshore wind sector (excluding China).3
The constant drive to make turbines cheaper and bigger means the supply chain doesn’t have time to recoup the costs of R&D before more is demanded. It pushes up the cost of R&D, labor and vessels, and introduces risk and volatility into the sector. This has been compounded by supply chain imbalances on the back of the COVID-19 pandemic and the war in Ukraine, and created uncertainty with the economics of projects.
This uncertainty has been reflected in recent sustainable energy auctions. The UK’s fifth allocation round in September — using a contract for difference (CfD) model to agree the price to sell electricity — failed to attract a single bidder for offshore wind. The “strike price” set by the UK government was not enough to entice developers to bid.4
Some auctions for US lease areas have also run out of steam. Those off the East Coast attracted record-breaking prices in February 2022, but the more recent Gulf of Mexico auctions attracted very low levels of developer interest.5
The sector is not broken, however. Germany’s first dynamic offshore wind auctions, in July — for the rights to build, using a “buy now pay later” format — attracted bids totaling €12.6b (US$13.46b) for projects in the North Sea and the Baltic Sea. Other markets have also successfully concluded offshore wind tenders at reasonable prices, including Ireland, the Netherlands and Lithuania.
These contrasting auction outcomes reflect the current turbulence in the sector, and it is becoming increasingly clear that factors other than price may need to be considered in the next phase of offshore wind.
“We need to recognize that offshore wind has matured,” says Andrew Perkins, Partner, Corporate Finance, Ernst & Young LLP. “Bidders need to be assessed in terms of delivery risk, their business plan, their supply chain contracts and their balance sheets.”
The sector has reached this inflection point just as the climate emergency is demanding an urgent ramping up of investment to ensure global net-zero targets are met. To reach 2030 forecasts, an average capacity of 35GW will need to be installed annually worldwide;6 less than 9GW of new offshore wind has so far been added in 2023.
There is no doubt that offshore wind has a major role to play in decarbonizing the world and supplying it with cheaper, greener electricity. It will also aid the evolution of the heat industry, green hydrogen production and eMobility. But this will all depend on the sector securing enough of the critical materials and metals essential to turbine manufacture, which are at high risk of supply disruption.
Supply bottlenecks for turbines and components are likely to appear as early as 2025 because of the impact of the US Inflation Reduction Act (IRA), increased ambition in Europe, continued rapid build-out in China, and large developing markets speeding up their deployment of renewables. There is also concern that if the supply chain is only built out to satisfy peak installation demand in 2030, there will be insufficient demand to support it after 2030.7
Governments need to ensure a regular flow of new projects, and quickly adjust subsidies and budgets to market changes, to mitigate risks over which developers have little to no control and to ensure developers can realistically expect a reasonable return on their investments. They must also find ways to simplify and speed up the consenting process, to reduce exposure to risk between the award of an offtake and a final investment decision.
As Kinga Charpentier, Co-lead of the EY Nordics Renewables team, says: “There is a new reality now. Forecasts need to be adjusted for investors to be able to get a reasonable return. It's an adjustment that will happen, because people will still need to deploy capital, but it may take a couple of years for the market to readjust.”
The long-term outlook for the sector is “very positive.” Renewable energy has an incredible growth journey ahead of it to meet decarbonization goals, and offshore wind will play a huge part in that.
There may be some casualties during this time, as the sector continues to mature, but inefficiencies will be driven out and new competition will enter the offshore wind space.
Jonathan Cole, CEO of specialist offshore wind developer Corio Generation, believes the long-term outlook for the sector is “very positive.” “Renewable energy has an incredible growth journey ahead of it to meet decarbonization goals,” he says, “and offshore wind will play a huge part in that.”
Offshore wind is in the process of maturing, and if those in the sector can modulate the pace of technology progress to take advantage of economies of scale, think about value rather than cost and, crucially, join up energy and industrial policy, the sector — and the planet — will benefit in the long term.
Chapter 2
Key developments: renewables highlights from around the world
Australia to build one of the world’s largest batteries, and Poland gets its first offshore project.
Despite offshore wind’s current travails, there are still real winners in the sector right now — as the RECAI 62 rankings show. They include Ireland (up one place to 12), which awarded more than 3GW in its June 2023 auction, and Sweden (up three, to 17), which approved two west coast offshore wind farms this year.
Elsewhere in the rankings, Denmark (9) and Norway (26) climbed two places and five places respectively, in a strong showing by the Nordic markets, while the top three spots remain unchanged, with the US, Germany and China out in the lead.
Download the RECAI top 40 ranking (pdf) for details on technology-specific scores, and see methodology for details on how ranking and scores are determined.
Chapter 3
Normalized index
Showcasing markets performing above expectations for their economic size.
The RECAI uses various criteria to compare the attractiveness of renewables markets, such as magnitude of development pipeline, that reflect the absolute size of the renewable investment opportunity. Hence, the index naturally benefits large economies. By normalizing with the gross domestic product, we can see which markets are performing above expectations for their economic size. In this way, the normalized index helps reveal ambitious plans in smaller economies, creating some attractive alternatives for potential investors.
Chapter 4
A mixed global picture continues for corporate PPAs
A calmer landscape may yet be ruffled by rising costs of generation and geopolitical unrest.
2023 has been a challenging year for power purchase agreements (PPAs), as more and more corporates target new deals, while supply chain, grid and permitting delays continue to hamper progress in many markets.
Having said that, in Europe, 7.1GW of PPAs had been signed by the end of September (more than the total 6.6GW in 2022) and the 2021 record of 7.6GW is likely to be exceeded.8
After the extreme prices and volatility of 2022, wholesale markets calmed in the first nine months of 2023. However, unrest in the Middle East has already started to impact markets globally, through greater volatility and an uptick in pricing.
Thankfully, high inflation rates that were affecting many PPA markets have been easing in recent months, helping PPA prices to level off, or even decline, in some markets. Other helpful drivers in Europe include the revision of the Renewable Energy Directive (REDIII), to target 42.5% renewables for all EU energy consumption by 2030, and the speeding up of the permit-granting process.
The greatest tension in the corporate PPA market, however, is from rising costs of generation and lowering long-term wholesale markets, resulting in a tightening price band where PPA deals work for both developer return and corporate savings.
The EY corporate PPA Index uses key parameters from four pillars to analyze and rank the growth potential of a nation’s corporate PPA market. For details on data and methodology, download the EY Corporate PPA Index (pdf).
RECAI is published biannually. See below for recent editions:
Summary
Offshore wind is essential to decarbonizing the world’s electricity, but rising interest rates and supply chain imbalances have impacted the economics of projects around the world in the past 12 months. With COP28 about to start in the United Arab Emirates, governments, developers and investors must look at ways to modulate the pace of technology progress to take advantage of economies of scale, and join up energy and industrial policy, for the long-term benefit of the sector — and, ultimately, the planet.
