Economics of Offshore Wind Power: Challenges and Policy Considerations

177 Pages·2017·4.721 MB·English

by  Rahmatallah Poudineh, Craig Brown, Benjamin Foley

ECONOMICS
OF OFFSHORE
WIND POWER
Challenges and Policy
Considerations
Rahmatallah Poudineh,
Craig Brown
and Benjamin Foley
Economics of Offshore Wind Power
Rahmatallah Poudineh • Craig Brown
Benjamin Foley
Economics of
Offshore Wind Power
Challenges and Policy Considerations
Rahmatallah Poudineh Craig Brown
The Oxford Institute for Energy Studies The Oxford Institute for Energy Studies
Oxford, UK Oxford, UK
Benjamin Foley
Keystone Engineering Inc.
New Orleans, LA, USA
ISBN 978-3-319-66419-4 ISBN 978-3-319-66420-0 (eBook)
https://doi.org/10.1007/978-3-319-66420-0
Library of Congress Control Number: 2017957581
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F
oreword
Continuous advancements in wind generation technology coupled with
falling costs and increased interest in moving towards a low-carbon energy
mix suggest a bright future for wind—and solar—energy. In recent com-
petitive auctions, wind and solar have beaten conventional generation
options with prices that continue to decline. This suggests that subsidies
and other financial incentives, still offered in many parts of the world,
including the United States, may be phased out over time as the industry
becomes competitive.
In a recent competitive auction for offshore wind in Germany, for
example, 1300 MW out of 1450 were accepted without any subsidies.
Until recently, bidders would have received a 12 €cts/kWh subsidy for
every kWh generated over 20 years. The offshore wind also achieved a low
clearing price in the UK Contracts for Difference (CfD) second allocation
round (£57.50/MWh). These, and similar trends, demonstrate that
wind—and solar—technologies can indeed achieve autonomy as the
industries evolve under the right circumstances.
While onshore wind has enjoyed rapid growth in key markets around
the globe, many experts, including the authors of this volume, see major
opportunities for offshore wind moving forward. Despite higher installa-
tion and maintenance costs, offshore wind offers lower generation costs
due to more persistent and higher-velocity winds. Moreover, offshore
wind farms can be positioned out of sight and out of mind in order to
lower the visual and environmental opposition.
The variability of renewables—which applies to both wind and solar—
has become more pronounced in places with high penetration of these
v
vi FFOORREEWWOORRDD
resources such as Europe, the USA, China, Australia, and elsewhere. This
clearly requires more investment in transmission lines, better interconnec-
tions, more storage, and certainly more demand participation in the mar-
ket—all areas where investments are expected to take place.
And this is where regulators and policy makers can—and should—play
a constructive role by encouraging further investments in low-carbon
energy resources while providing the means to integrate their variable out-
put into existing grids, historically designed to deliver power from large,
central, dispatchable thermal stations to major load centres.
As we move forward into a future where the predominant form of gen-
eration will increasingly come from variable renewable resources, policy
makers and regulations must provide not only certainty, but the incentive
to invest in modernising the transmission and delivery infrastructure. This
includes more cost-reflective tariffs that potentially vary by time and loca-
tion to offer incentives to consumers to shift their consumption patterns
in response to variable wholesale prices.
Moreover, for many experts, such as the authors of this volume, it is
becoming clear that the traditional industry paradigm—where the output
of various types of thermal plants was adjusted to follow the variations in
demand—must be replaced by a new paradigm—where demand takes an
increasingly active role in response to variable prices in the wholesale mar-
kets due to swings in variable generation. Only when price-responsive
demand learns to tango with variable renewable generation can the grid of
the future accommodate large swings in renewable generation, increasingly
becoming the norm as the world moves towards low-carbon energy sources.
The contribution of the authors of this book is noteworthy since they
focus on the promise of offshore wind, which offers tremendous growth
opportunities in many parts of the world where significant resources
remain untapped.
Needless to say, policy makers need to focus on incentivising cost reduc-
tion in the offshore wind industry by implementing appropriate support
policies such as competitive auctions, creating a supply chain, reducing the
risks, encouraging technological innovation, investing in Research and
Development, and providing a stable environment for project financing.
Menlo Energy Economics, Fereidoon P. Sioshansi
San Francisco, CA, USA
June 2017
P
reFace
In 2015, we authored a working research paper on policies to promote the
offshore wind power industry. The work, which was published as a paper in
the Oxford Institute for Energy Studies, became a source of inspiration for
us to look deeper into this industry and, in particular, the implications of
our original findings as the industry expanded globally. The opportunity to
write this book came about when Anna Reeve from Palgrave Macmillan
approached us to write an energy-related book. Given our expertise and
interests in the offshore wind industry, along with the fact that, at that time,
there was not a single publication that offered a broad but concise view of
the industry economics and its challenges, we decided to write this book.
The book is composed of ten chapters starting with an introduction that
discusses the history and main drivers of offshore wind power, along with its
role in achieving wider government policies. It then goes on to present an
overview of the global offshore wind market in Chap. 2, along with current
market structure and latest developments. The key challenges of the indus-
try, which are cost drivers and technical hurdles, are discussed in Chap. 3.
The book then presents approaches to support renewable electricity, includ-
ing offshore wind, in Chap. 4, with a view to the necessity of harmony
between support policy and wider electricity industry and market character-
istics. The current support schemes applied in various offshore wind mar-
kets around the world are analysed in Chap. 5, before Chap. 6 provides a
detailed analysis of cost reduction opportunities and innovation in the
industry. Public acceptance, which is often an overlooked subject when it
comes to offshore wind, is discussed in Chap. 7. In Chap. 8, we review the
current trajectory of offshore wind in the global market and highlight the
vii
viii PREFACE
key uncertainties that might affect this trend over the next 5–10 years. In
Chap. 9, we present the main policy considerations in order to create a
vibrant offshore wind market that has a prospect of becoming a competitive
industry. Finally, in Chap. 10, we provide the concluding remarks.
The purpose of this book is to be an informative source about the off-
shore wind industry for students, academics, policy makers, industry
experts, and interested readers by providing a short but broad and widely
accessible analysis of the industry. By reading this book, the reader can
expect to learn how the offshore wind industry has been developed to date
in key markets, why it has been sluggish compared with its onshore coun-
terpart despite nearly 30 years of history, what are the challenges facing this
industry, what is the role of government policies in realising cost reduc-
tions, and how policies can be formulated to nurture a sustainable industry.
The book can be part of the reading list in a course in renewable energy or
wind energy, or alternatively a course in wider energy economics. Although
the book is written in a way that it offers a coherent story from the begin-
ning to the end, readers can directly refer to chapters they are interested in
without the need of reading the whole book. Along with being a part of the
bigger picture, each chapter provides a self-contained analysis of its topic.
We would like to thank our friends, colleagues, and especially our fami-
lies for their support and encouragement during this journey. During the
year, while we were busy with this project, we sometimes had to dedicate
some of our family times to carry out research and to draft this manu-
script. Thus, we are truly grateful for the support we received from our
families and hopeful that the contribution that this book makes to the
debate about offshore wind economics can make up for long hours and
lost time. Also, we would like to extend our gratitude to Anna Reeve and
Thomas Coughlan from Palgrave Macmillan, who supported publication
of our work. Lastly, we would be remiss if we did not acknowledge and
thank the various professionals and colleagues working tirelessly in off-
shore wind engineering, policy design, and project development to bring
this technology to the forefront of global clean energy markets.
Oxford Institute for Energy Studies Rahmatallah Poudineh
Oxford, UK
Oxford Institute for Energy Studies Craig Brown
Oxford, UK
Keystone Engineering Inc. Benjamin Foley
New Orleans, LA, USA
c
ontents
1 Background: Role of the Offshore Wind Industry 1
1.1 Introduction 1
1.2 History 3
1.2.1 Emergence of Offshore Wind 6
1.3 Role of Offshore Wind 7
1.4 Role of Offshore Wind Outside of Europe 10
1.5 Conclusions 13
References 14
2 G lobal Offshore Wind Market 15
2.1 I ntroduction 15
2.2 I nstalled Global Capacity by Market 17
2.2.1 Infrastructure and Supply Chain Development 19
2.2.2 Project Development and Investment 20
2.3 Offshore Wind in the Global Energy Mix 21
2.3.1 R enewable Energy in Global Power Generation 21
2.3.2 L evelised Cost of Energy and Plant Costs Comparison 25
2.3.3 L COE Targets for Offshore Wind 28
2.4 Conclusions 29
References 29
3 Cost Drivers and Technical Hurdles 33
3.1 Introduction 33
ix
x CONTENTS
3.2 Cost Drivers 34
3.2.1 Capital Expenditure (CAPEX) 35
3.2.1.1 T urbine 36
3.2.1.2 Foundation 36
3.2.1.3 Grid Interconnection 39
3.2.1.4 Transport and Installation 41
3.2.2 Operating Expenses (OPEX) 42
3.2.2.1 Operation Costs 42
3.2.2.2 Maintenance Costs 43
3.3 Technical Hurdles 44
3.3.1 S ubsea Cable Reliability 44
3.3.2 Design Process 45
3.3.3 W eather Restrictions 46
3.3.4 Intermittency 47
3.3.5 S erial Production of Foundations 48
3.4 Conclusions 48
References 49
4 Renewable Energy Support Policy Design 51
4.1 Introduction 51
4.2 Indirect Policies 53
4.3 D irect Policies 55
4.3.1 P roduction-Based Schemes 56
4.3.2 I nvestment-Based Schemes 57
4.4 Evaluation and Discussion 58
4.5 Conclusions 62
References 63
5 Current Support Policies to Promote Offshore Wind Power 65
5.1 Introduction 65
5.2 Direct Policy Mechanisms to Support Offshore Wind 66
5.3 Offshore Wind Support Schemes in Global Markets 68
5.3.1 E urope 68
5.3.1.1 U nited Kingdom 69
5.3.1.2 Germany 72
5.3.1.3 The Netherlands 73
5.3.1.4 D enmark 74
5.3.1.5 B elgium 75