Offshore Wind on the Horizon

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Offshore wind will be instrumental as the EU and U.S. aims for 2050 carbon neutrality. Today, it accounts for only 3% of the European electricity mix and remains marginal elsewhere. S&P Global Ratings expects global installed capacity will surpass 180GW by 2030 (6x more than today).

With 25GW of installed capacity at year-end 2020, Europe accounted for 72% of the global offshore wind market, with S&P Global Platts Analytics expecting the region to account for 60% in 2030.

Offshore wind is gradually closing the cost gap in Europe with other technologies, with prices in nearshore bottom-fixed wind auctions in the North Sea falling close to $50/MWh including transmission costs. S&P Global Ratings expects costs to continue to fall in the next decade.

Offshore wind still currently lacks competitiveness in the U.S., but economics are improving. S&P Global Ratings estimates for the levelized cost of energy without the benefit of any investment tax credit is about $85/MWh.

Despite a generally good track record so far, S&P Global Ratings continues to see construction and operating risks as high, including erosion of offshore wind installations, weather-related effects on wind developers’ internal return rate, and supply chain disruptions.

The challenge is finding the right balance between allocating sufficient resources to achieve internal sustainable targets while accelerating growth. S&P Global Ratings is focusing on five ESG factors, notably the shortage of skilled labor, sustainability of supply chains, contribution to the circular economy, health and safety, and community engagement.

Australia's Star of the South has entered a A$43.1 million ($31.12 million) partnership with the state of Victoria's government to develop the country's first offshore wind farm, the company said on its website Nov. 23.

At full capacity the wind farm, up to 25 km off Gippsland's south coast near Port Albert, could reach 2.2 GW and provide 20% of Victoria's energy needs, the developer said.

"This is an important step forward for offshore wind in Australia," said Star of the South CEO Casper Frost Thorhauge. "This partnership will enable us to keep investing where its most needed, while ensuring benefits for government and the community through knowledge-sharing."

The partnership will see Star of the South invest A$23.6 million and Victoria A$19.5 million in onshore and offshore geotechnical investigations, transmission design, industry development and stakeholder engagement. Investigations at sea started in 2019 after the project was granted an exploration license.

"If Star of the South is approved and proceeds to construction, the project could start construction as early as 2025 with full power toward the end of the decade," the company said.

It would connect to the grid in the Latrobe Valley, one of the strongest points in the National Electricity Market, it said.

Europe will need the equivalent of 400 GW more offshore wind capacity by 2050 to meet electricity demand if it pursues a "green molecules" pathway to net zero, Belgian transmission system operator Elia said Nov. 19.

In a new report, Roadmap to Net Zero, the TSO studies two routes to decarbonization: an ELEC-pathway, where it is assumed electricity demand increases by 70% as a result of strong electrification; and a MOL-pathway, with electricity demand increasing by 30% due to a higher share of green molecules in final consumption.

"The ELEC-pathway requires a lower supply of RES [renewables] compared to the MOL-pathway, because certain electrified end appliances (electric vehicles and heat pumps) are very efficient and because producing green molecules carries high conversion losses," Elia said.

This underlined the importance of pursuing electrification "where it is the most efficient option," it said.

While it was clear Europe would need to import green molecules from outside its borders because of its limited renewables potential, the extent of this need ranged widely depending on choices made.

"Total electricity demand under the MOL-pathway is 1,800 TWh higher than under the ELEC-pathway," ," Elia said. "This is equivalent to the annual production of about 400 GW of offshore wind or three times today's electricity demand in Germany."

The asset challenge was massive under either pathway, Europe's annual renewables expansion rate needing to triple on the average rate over the past five years.

Inherent intermittency of renewables meant Europe would need between 240 GW and 400 GW of dispatchable generation capacity by 2050 depending on the level of interconnection, it said.

"Over the next decade, existing and new thermal plants will have to take up the role of dispatchable capacities in the system," Elia said.

During this time, decisions could surface on how to decarbonize these fossil-fired assets, the TSO argued, while growing renewables chipped away at run times.

"Different climate-neutral technologies are on the table today to take up this role, such as hydrogen fired gas turbines, fuel cells, biomass and (pumped) hydro power, [and] thermal storage plants," it said.

Despite the capital cost of Dominion Energy Virginia's 2,640-MW offshore wind farm rising to $10 billion from $8 billion and the levelized cost of energy growing to $87/MWh from $80/MWh, company executives said Nov. 5 that a higher capacity factor will limit the impact on customer bills.

"Today we are filing our application with the [Virginia State Corporation Commission] consistent with the project schedule that we communicated previously," Robert Blue, Dominion Energy's president and CEO, said during the company's third-quarter 2021 earnings conference call.

The filing will contain anticipated costs, contractor selection, project components, transmission routing, capacity factors, and permitting information, Blue said.

When completed in 2026, the Coastal Virginia Offshore Wind Project will be "essential" to meeting the state's legislated decarbonization requirements that include mandates for developing renewable energy resources, he said.