Sea change: Offshore wind sector adjusts development plans as costs rise (Ep. 250)

Speaker A: All right, welcome back to Energy Sense, an S and P global energy podcast covering all topics on the intersection of energy and finance. This is your host, Hilvaden, speaking with your other host, Sam Humphries, who's in a storage closet somewhere. Sam, how's it going?

Speaker B: I'm good, thanks. So, I am, um, in Aberdeen this week at, uh, the eAge conference. So a lot of geoscientists were talking, all things subsurface and technical. It's been great so far. But, um, yeah, I'm in the storage closet trying to record this, which is, you know, that's just shows my dedication to podcast.

Speaker A: You look like you're sitting behind a hotel front desk with all of the conference goers who have said, hey, hold my bag until my flight. Hold, Sam, until my flight.

Speaker B: It is near enough, but, you know, to just check. After all illusions, I'm perched in front of a fridge with my computer on top of it. So, you know, it's great. It's so glamorous this live.

Speaker A: All right, well, we, uh, we have just recorded a podcast with Andre Utkin, who is a recurring guest and a good friend of both of ours. We were talking about offshore wind. Really trying to look at offshore wind, kind of zooming out from some of the headlines and seeing where it's working, why it's having challenges. Um, can you give some folks time, uh, to some things to listen to over the next few minutes?

Speaker B: Absolutely. So I think a lot of the conversations we've had about offshore wind, as this is kind of a negative story with the. The focus on the U.S. um, and the appetite there. But it is a growing market, albeit not as fast as other areas. And I think part of that is down to China, you know, um, and that is a fascinating facet in this whole conversation. But. But to me, the most interesting part is Europe, because the dynamic has changed somewhat and the scale and the prices needed and the financing behind these projects has fundamentally shifted, um, to what we were looking at maybe six years ago. Um, and so Andre does a really good job of explaining what has shifted, why the gold base has sort of changed somewhat, and what is needed to make this, um, a success. Well, what about you? What did you think?

Speaker A: Yeah, I just thought he did a. I mean, Andre always does a great job with these types of things, but I thought he did a really good job kind of explaining some of the challenges. And it does generate an expensive electron. It does have transmission challenges that are unique to putting projects in the middle of the ocean, uh, or the middle of water, um, but it does, you know, meet certain country needs. And there, there he lists at the end some countries or some areas of the world to watch, inclusive of, uh, but not limited to China. So I encourage everybody to press play and say to the end and, uh, enjoy. All right, Andre, uh, thanks as always for joining us. You are a, uh, repeater, a repeat offender on the podcast, uh, because Sam, uh, and I are big fans and of course, listeners are big fans. So we're glad to welcome you back and we are glad to talk about, uh, offshore wind and really want to kind, um, of zoom out, uh, with you today to kind of look at, um, offshore wind globally. Um, that there's a lot of attention. I sit here in the US and there's a lot of attention, um, from the White House, uh, I'll say negative feelings about offshore wind in the U.S. but offshore wind, I think is having a hard go of it, uh, in 2026 relative to Prior, uh, cycles, uh, globally. Um, but there are areas that I think are perhaps working, and hopefully we can unpack some of this, uh, with you today. So maybe if you could help kind of frame it, um, what is the status of offshore wind today? Uh, globally, US as part of that, but also kind of exclusive of the U.S. um, how should we be looking at offshore wind relative to other electricity forms of generation?

Speaker C: Right. So, um, hi everyone, and first of all, thank you so much, Gil and Sam, for, for the invitation. I think that's the third time that we're talking offshore wind. The first time I remember was about six or seven years ago when we kicked this conversation off. And back in the day, of course, the mood was very, very different. Right? So we were very bullish. Uh, prices were going down. Uh, we saw, um, you know, CFDs and, uh, um, and PPAs at about 40 to €50 per megawatt hour. In Europe, um, actually projects were executed at that level of pricing. So our outlooks were bullish, both on technology side, but also on the development side and on the pricing. Now, six years later, as Yahil correctly said, the mood is a little bit different. Right? So in certain places, we feel like almost, uh, offshore wind is nearly dead. Uh, in other places, uh, is still holding strong, but, uh, some fundamentals have shifted. So, uh, I think it's very important to kind of remind maybe people why offshore wind is important to certain places, why it's not for some other places and where we are today. So to start with offshore wind, what is the promise of offshore wind? Right, It's a scalable, uh, very Big infrastructure, usually big because well today we don't build long, less than 1 gigawatt projects usually that is the size and sometimes more. Uh, we're talking doggy bank in the UK now which is under construction, soon will be built. Uh, we're talking 3.6 gigawatt at once, right? So this a big infrastructure project. It requires a lot of, lot of money. It's billions and dollars, sometimes tens of billions of dollars. Uh, it's a very technically challenging uh, activity. Right? So not many, many players out there can actually deliver such projects at scale. Now where we are today, although we have uh, all the issues, and we will now mention the issues, uh, we have over 90 gigawatt of installed capacity globally. Uh, it is pretty much 50, 50 today between Europe and China. Uh, China has accelerated like with all other clean technologies in the recent years and now China is in, is, is, is taking the lead. It's about 50 gigawatt in China, uh, 40, uh, five fish uh in Europe and the rest is spread between North America and some Asia Pacific countries. Now China, what is interesting, for the first time now China came up with a new 15 five year plan. And for the first time China actually put a target on offshore wind. Never had a target before. Now there is a target and China will double this capacity in the next five years. Now that's just the target, right? To have 100 gigawatt of offshore by 2030. Now we also know that all the targets in China are uh, set to be met in the next two years and not in the next five years. So we would assume that you know, the capacity will be much higher than that. And um, uh, according to our kind, uh, of latest outlooks, uh, we project offshore wind to grow from this 95 gigawatt today to about 230 gigawatt uh by 2030 and long term projections to about 1 terawatt uh, of installed capacity and roughly half of it is coming again from China. Uh, we can of course untap why China uh, and not other markets.

Speaker B: So before we get into that and before we start talking about the U.S. i kind of want to go back to Europe because you sort of mentioned there some of those key projects that are in the UK and so on. Um, but uh, even within Europe appetite has shifted and investment is changing. Can you explain why things have changed and what is the opportunity? Because I don't want this to be a negative conversation. I want to see where the opportunity is there in Europe.

Speaker C: Right. So I think Europe is a good place to start because Offshore wind is a European uh, technology. Right. It was developed first but uh, uh, close to 30 years, uh, ago in Denmark, Sweden, you know, we started with a very small project and obviously that's where you know, the fleet was growing. Right. Germany, Denmark, uk, uh, Netherlands, Belgium, now moving into Baltics again. Returning back to the pre pandemic level, uh projects um, were way cheaper than they are today. And technology was way cheaper uh, than today for a couple of reasons. So number one, and one of the most important elements here is the cost of finance. So the cost of finance was dramatically cheaper than it is today and it has about 50% of impact on your LCOE. Right? So we were talking roughly about 50, 50, uh, 60, you know, dollars, euros per megawatt hour back in the day. Now since uh, interest rates after pandemic uh, have risen, also the uh, all the components that go into this technology, again it's a very heavy technology in terms of price and that goes into uh, you know, minerals, steel, aluminium, copper, uh, and it just requires so much processing. Uh, it's a heavy machinery essentially. Um, prices of wind turbines for example has gone to 40, 45% up since then. Uh, and all this combination of different factors really make this technology much more, much um, more expensive than it used to be before. Uh, plus certain um, certain supply chain issues. Right. So we were talking about the uh, availability of next generation vessels that can build say 18 megawatt turbines. Uh, the same uh, can be applied to cables. Cables have gone through the roof in terms of pricing and also we're using the next generation of those cables. Right. So we started with H Vac technology back in the day. Now we're talking about hvdc, uh, and a massive converters and there's a certain lack uh, of those and the pricing has gone up. Now this is one part of the equation and you can say, well but financing cost and the cost of minerals should be also equally applied to all other technologies as well. Right. I would argue if the cost of nuclear should have gone up equally because it's also um, a very heavy capital, uh, a piece of infrastructure that would require or kind of equal amount of material and money. So it has to be gone up. And that's where it becomes interesting because uh, particularly in Europe, those very heavy um, goals and ambitions which are related to the build out of offshore wind are still in place. Uh, but they were certain related to uh, understanding that the technology will be cheap. Now when we arrive to the point where it is not necessarily, but at the same time the demand which is to me the crucial part here. The, the demand in Europe is not growing. It's actually going down or slowing down from the pandemic time. Um, and we are building up cheaper or other resources, uh, like behind the meter, solar and wind, uh, and batteries and gas to a certain degree. Uh, we make nuclear expansions, right. We try to run it as much as possible. Then of course the question is, um, what is going to happen with the power prices in Europe in the short and midterm and whether offshore wind on a merchant basis can actually be profitable. And unfortunately, according to our S and P global analysis, the power prices are going down and the capture price of offshore wind is not enough to recover the cost of the technology. So we are now at the point where the demand is not growing as it's growing in China or United States, India and therefore, uh, we have to do some rational choices of which technologies to build or not. And offshore wind is one of those which is kind of on the verge, on the edge of essentially making sense on a merchant basis. Therefore we need some sort of support for it.

Speaker A: So let's talk through that a little bit. So if, if we're looking at kind of a spectrum where solar is a very low cost electron with a pretty low but predictable capacity factor, um, you know, around 25, 30% or so. Um, and then you look at the other extreme where there's nuclear which is a very high cost electron with a very high capacity factor, around 95%. Solar is pretty cheap and anybody can install it. Nuclear is very expensive and it's going to require taxpayers to effectively underwrite the cost of that. It seems like offshore, ah, wind kind of sits in this middle land. That's an expensive electron with a low unpredictable or less predictable uh, delivery relative to say uh, the predictability of gas or the predictability of solar. Um, is that um, call it middle class for lack of a better word, kind of working it against it where it's not on one end of the spectrum and it's hard to find a constituency uh, to support it.

Speaker C: I think it's fair to say, uh, it really depends on the market, right. Because in certain markets it's actually fairly predictable. Like if we're looking into Denmark, right, which is pretty much decarbonized by now and ton of that electricity is coming from offshore wind or to that extent UK where uh, you know, last year half of its electricity came from offshore wind. It's reasonably predictable and it's, and it's quite nice addition to the, to the mix. It Also depends on the market because certain markets have a generation profile where offshore wind fits very well and also the weather conditions. Right. So if you're a country like in the UK360 surrounded by the relatively shallow waters with a fantastic wind resources and essentially your load centers are uh, just next to the next to the sea. It makes perfect sense to build up as much offshore wind as possible uh in order to achieve at least certain, certain percentage uh, of the generation mix by, by offshore wind. Uh, but this is not the only solution. And uh, you know analyzing UK we've, we observed that uh, you know most of the projects got built in Scotland whereas the consumption is in the south of the country. And what is actually lacking is not the next or the new uh offshore wind power plant was lacking is a transmission grid between north and south. So arguably maybe it would have been better if this investments have gone uh, to the transmission. Well we see the same actually applies to Germany where the Northern Sea and the Baltic Sea, that's where offshore wind is happening whereas the consumption is in the south. So uh, to build up the interconnection between those regions or to enhance the grid that you already have would probably uh, be more reasonable and more um, efficient uh use of, of of of many. Um. But you're back to your, back to your question Hill and your point about uh, you know, where offshore wind sits today, as you call it an expensive electronic. Um, I feel yes, uh, it does compete for nuclear today and we see this more and more, uh especially with the renaissance of nuclear going pretty much everywhere in the world. Uh, in the US the administration is extremely in favor but the same goes to Europe. Right. So here probably um, we are sitting, I am sitting in Europe and Paris. We definitely see a strong renaissance to nuclear because of the energy security. Uh, you know we know that if we expand or build new, um, we see that the power system that is done well here in France for example which has done 80% of nuclear is rather stable. The prices are much more stable than in Spain or Germany or UK where the price is usually set by or most of the time set by gas. But at the same time look at the Germany. So Germany needs to decarbonize the. They have a political decision not to proceed with nuclear whatsoever. Um and they don't want to have coal, they don't want to have gas. So you don't necessarily have a lot of options. Uh and solar and batteries unfortunately will not be enough to cover uh, you know, Germany's demand at all time, at all cost. Right. And so we, we, we know all the term Dunflower, right? That is couple of, a couple of days, a couple of weeks where there's no sun, where there's no wind. Um, it rarely happens in the Northern sea with offshore wind is rather predictable. Uh, so in that case, uh, you know, offshore wind have or has a good impact on the system. So I would argue that there's still places in the world like the Northern Sea, Baltic Sea, uh, some Asian Pacific countries like Taiwan, Japan and South Korea where you have fantastic winds, uh, proximity to those projects, you can build the infrastructure. And that makes sense to do it at this 50% capacity factor. Uh, but I agree also with you that at this level of pricing today there's a lot of competition and offshore wind have to compete for the public acceptance and for the public money.

Speaker A: Is it. Sorry, sorry, I'm going to double up here. Would you say the bigger kind of economic challenges for offshore wind or the cost of its electron or the cost of, of its transmission and getting that electron to market?

Speaker C: I think it's both. Right. Because uh, well, transmission, uh, you know, when you build onshore wind, we know that today the interconnection queues are huge. Uh, to get connection is a challenge in most of the places in the world. And I personally don't know a single market where we say this market has a fantastic transmission infrastructure. I don't think that exists. Uh, but when you go to offshore wind transmission, uh, grid does not exist to start with. Right. Because we're in the sea, you have to build it. And usually uh, just the wet part or the wet cable that has to bring the electron from the park is about additional 25% of cost. Right. So um, there's a lot uh, of new approaches to transmission grid. So one of them is uh, instead of connecting individual projects, now we're building cluster of projects. So at least we're trying to design projects and clusters and then to try to bring as much electricity, uh, via HVDC and therefore have um, uh, lower power losses. Right. But at the same time, of course now, uh, the emerging question there is the security, the physical, the cyber security first of all, but then the physical security of the assets and the um, and the uh, cable infrastructure, particularly here in the Northern Sea and the Baltic Sea, we've seen a lot of precedence, right, where those cables got um, collapsed and um, uh, it is a challenge if you know, a couple of gigawatt of infrastructure just go out, um, blank and it takes some time to bring it back. Right. It's not as easy as to bring an electrician to fix uh, a power cable at your house. It's much, much, much more complicated.

Speaker B: And so with those projects you talked about, the clusters there that are being developed, because economies of scale and there's that security element as well, if you build it together. But with the projects that are being proposed or in the works, are they much larger scale than the ones we have seen before in order to make those economics work and sort of like you say in Germany, meet that demand? Because surely, um, in my head that would make sense. That I'm not sure if that is what we're seeing.

Speaker C: This is exactly what we're seeing. Project has gone much um, bigger in size and uh, to that extent, you know, something that I'd like to say is, you know, offshore wind is the technology of scale, right? So offshore wind has to be big in order to make sense at any, at any uh, any element that you evaluate. So starting with the wind turbines, right? They're also growing in size. They have been growing in size. We started 30 years ago with the turbines of half a megawatt. There were basically onshore wind turbines, uh, just put in a foundation, uh, next to the beach, uh, and that's where it all started. Today we're talking about, well, next generation 25 megawatt turbines that some Chinese O and M started to develop, right? So technology is getting bigger in order to make more energy per unit and therefore make the whole thing cheaper. Uh, but yeah, in terms of the size of the projects as well. Uh, because then uh, you know, if you do 1 gigawatt or 5 gigawatt, obviously 5 would be cheaper because uh, you have a bit more leverage with uh, the O and Ms. And uh, these are long term contracts. Uh, and we see also that sometimes you have uh, uh, two clusters build up next to each other by two separate developers. But then these two separate developers would be also working very closely. Although they might be competitors in the market, they would like to work uh, closely to reduce cost as much as possible. So maybe to have a, say a shared O and M base, right? Because again how zm, uh, is done, right, you have a, you have a base and the port and you need to have some, some dedicated crew vessels and drones and helicopters. So all that you, you need to, you need to think in advance in order to make it cheaper. Another is also quite important is the Wake Effect. And there's a lot of debate particularly here in Europe on how to um, how to design those project to start with so that they don't uh, kind of compromise its own production. Right? Because there's absolutely no sense if we say the offshore wind is 50% capacity factor, but then we built enough to reduce the overall capacity factor to 20 and uh, it will start to produce less than solar. So we see a lot of disputes uh, between different developers in the UK but also in Germany. There's some studies are now going on um, where uh, you know, there's a debate on how to, how to prevent this. Right, because nobody wants to build it. And then to you know, figure out that the actual, actual production is much, much lower and that can kill obviously the business case which is already uh, quite slim in the European markets. So that became a hu. Point of discussion. Um, and there were a couple of studies that said Germany for that extent has a target of 70 gigawatt by 2050, which is a ton of offshore wind. And essentially if you built all that, you pretty much occupy um, you know, most of the space that is available in Germany. And therefore obviously you know, turbines will be uh, so the first range of turbines will be taken the wind speeds and the turbines behind will uh, be left with uh, with, with lower, uh, with lower uh, energy and therefore they will produce less. Uh, so this, this, this is something that the market is trying to figure it out what would be the optimum and maybe the target has to be reduced and those, those, those uh, those maritime spaces which were dedicated initially to, to, to projects might also need to be reorganized in order to kind of optimize the whole fleet. And uh, so that is something that is quite challenging at the moment.

Speaker A: All right, so if we're kind of trying to, let's assume that we're in a new normal and let's assume that uh, interest rates stay high and let's try to move as many variables as possible rather than going back to the way things were. Where do you think the conditions are best for offshore wind as a part of that resource stack? Knowing that it's a more expensive electron than solar, knowing that you have to have access to water, right. You can't build an offshore wind in the middle of land. Um, and trying to limit. There seems to be a lot of policy uncertainty around climate goals, um, maybe less policy uncertainty around industrial um, goals. But if we're looking for oceans, if we're looking for wind, if we're looking for perhaps some policy support, where globally should we expect uh, offshore wind to really take off? And I assume you're going to mention China, but is there something someone else

Speaker C: outside of China, right That's, that's a great question. I think so. And it's a complex one. Right? So let's, let's maybe divide first of all offshore wind into fixed offshore wind and floating offshore wind. Because I think there's two technologies will tackle and to me they are different. Although uh, they contain the word wind in both of them. But the way how you develop, the way how you build, the way how you construct is completely the way how you finance, uh, the technology suppliers are completely different. So to me uh, these are separate beasts and therefore they will be tackling different markets. They won't be competing on the same market because obviously if you can do fixed, you're never going to do floating simply because floating is more expensive. So you're going to be doing fixed, uh, first in those markets where it's possible. So let's start with that first. Um, we have obviously Europe, right? So um, uh, Northern Sea, Baltic Sea and to certain degree Southern Europe. Although I'm a little bit skeptical in the uh, in the, say this decade simply because of the costs and that the winds are slightly lower in the Southern Europe than in Northern Europe. So to me Northern Europe makes more sense also because we now see that the governments actually. So uh, just coming back, I know that you don't want to come back, but coming back a little bit, all the issues that we saw in tenders in Europe, we still see that this European markets don't want to recalibrate their targets. They set them a couple of years ago, they want to fill them. And we now see that even the auctions that haven't worked because they didn't allocate enough support, uh, now they were recalibrated and the governments are really happy to pay a little bit more to get those projects done. And we saw that uh, one of the examples is uh, of course the very successful tender last summer in the uk. The round eight CFD allocation, uh, eight gigawatts of new capacity. That is a lot of capacity in uk, don't want to stop. And I feel that we will have this year, uh, also very successful round. So this European countries um, will definitely lead. Uh, now, um, China of course, as you mentioned, China is definitely a point of growth simply because, well, things are much cheaper in China. So they have their own O&M's. Wind turbines are about 70% cheaper than their western counterparts. In the Western Hemisphere, uh, they got the whole supply chain, right? So they got vessels, they got ports, they got developers who know what they do. They have cables. It is a Separate industry kind of going on, which is really leading, uh, the whole development. Um, and then Asia Pacific. So markets like Australia, Japan, uh, Taiwan, South Korea, Vietnam, now India has been tendering as well. Uh, Turkey, uh, has a possibility to do, uh, there's good winds and um, uh, and space also to do that. And also the load centers are quite close. Um, we can talk Philippines as well. There's another one which has been kind of slowly progressing since decade now. And of course I cannot not mention United States because um, that makes perfect sense in certain places, not everywhere. Uh, I have to say, uh, for example, one of the places where I would argue it is really a stretch is the Gulf of Mexico. When those standards happened a couple of years ago, I was very skeptical. Not only because it's deep and expensive and there's no supply chain for that, but also because of the winds. So if you calculate what would be the output, um, it's a stretch. But in places like New York, which is an extremely densely populated area, it's very difficult to do something else. Offshore wind right in front makes uh, a lot of sense. Canada is another one I do know. And um, our team will be doing research on Canada offshore wind, uh, because they would like to uh, run a huge tender. Uh, I think the objective is to do about 15 gigawatt of offshore wind in the future. And some would sell this power partially to the U.S. um, where the physical infrastructure cannot be built at ah, this point of time.

Speaker B: Okay, so we always finish these conversations up with a look at the future, which most of this conversational anyway. But I know in a chat before we started this you said the future is 612 years. But I'm going to pin you in. I want to know about something that was happening in the next six to 12 months. It could be a project, it could be a piece of legislation. Anything that you are aware of or want people to pay attention to.

Speaker C: Wow, that's great. Uh, I think there are a couple of things, right, so number one, uh, I would mention three things. So number one, I think what is very interesting is the next uh, auction in the uk. Again, UK is a very big market, is a leader in Europe and uh, there are many developers who are very interested. Last year was an absolute, after an absolute disaster of a couple of years, last year was an absolute success. And we kind of believe that this year will be a success too. So wish offshore wind in the UK all the best. But I think that this is something that is very interesting to see what level of pricing we are going to See at what level projects uh, will be cleared, ah, who will be the winners and how quickly this can be. Broader scale. So this is number one, number two, um, something that we haven't talked today but particularly in Europe is uh, very important is the kind of this competition between the Chinese O&M's and Western O&M's. There's this long lived saga ah, about whether or not we need to allow Mingyan to finally install the factory somewhere in Scotland or UK or Spain or Italy. There were so many countries that were announced where potentially they could build their factory of up to 1.5 gigawatts of potential production a year. Um, UK has decided not to allow Mingyan to do that. Uh, Minion says that uh, they will still continue and proceed. So this is something very interesting to see how it's going to evolve. Obviously very political question. So um, I won't take any sides but I think that this is very interesting to observe. And number three, um, very interesting also to see how German market will be evolving. Uh, for those of you who followed a couple of years ago, um, several oil and gas players uh, bought uh, uh, rather expensive leases to develop very uh, big clusters of projects which are now uh, as of our understanding uneconomical any longer. And so there is this negotiation with the government of what to do next. So either to reprise them or to retender them or to return them back to the government and therefore probably slow down the sector in Germany for a couple of years. So I think this is something that is crucial to see how Europe and Germany will respond uh, and whether or not we can find a solution quickly so that this, a ton of capacity of a 7 gigawatt can be, can be released very, very soon.

Speaker A: All right, that was fantastic. Andre, thank you so much for joining us. Um, and we look forward to welcoming you back at some point, I guess your fourth time, uh, the next time.

Speaker C: Thank you. Thank you guys. Hopefully next time we will be talking in a little bit more positive notes right than this time.

Speaker B: Absolutely. Fingers crossed.

Speaker C: Sam.