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UK offshore wind has reached £100/MWh — here's how

OPINION | Sector costs fell by 32% in four years and there are more reductions on their way, writes ORE Catapult's Gavin Smart

A recent offshore wind study came to a striking conclusion — that the target of achieving a levelised cost of energy (LCoE) of £100/MWh by 2020 had been achieved four years ahead of schedule.

The LCoE for UK offshore wind has fallen by 32% — from £142/MWh in 2011-12 (for projects taking a final investment decision [FID]) to £97 ($122/€113) in 2015-16, according to the Cost Reduction Monitoring Framework 2016 report (CRMF), produced by ORE Catapult for the Offshore Wind Programme Board.

And the story doesn’t end there. The future is bright, with further cost reduction, economic growth and job creation on the horizon, as well as an expected “Sector Deal” from the government to build  a sustainable industry that will benefit the UK for decades to come.

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So, how did we get from £142 to £97 in roughly four years? Initial reductions were predominantly driven by increased turbine ratings, with a move to 6MW turbines coming earlier than most had anticipated. Further reductions appear to be driven largely by supply-chain efficiencies, competition (including in offshore transmission bidding) and performance improvements. Some of this can undoubtedly be attributed to the industry reacting positively to the continuity provided by FID-enabling rounds and visibility of future Contracts for Difference (CfD) auctions – with the benefits again being realised earlier than most would have expected.

The graph in the picture carousel above (expand to read) provides a good visualisation of where the cost reductions have been found .

The average scale of turbine ratings has increased, from the 4MW assumed in 2011-12 to an average of 6.3MW in 2015-16, with direct reductions to balance of plant and operational expenditure costs.   Projects are now routinely taking FID with 7MW and 8MW turbines — and there is still further cost reduction to come from increased turbine ratings, with technology already available. And there are larger turbines to come, with MHI Vestas having just unveiled a 9MW model.

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Wind farm technology has also advanced. We’ve seen increases to capacity factors and longer useful life, as well as reduced installation times and improved fabrication methods. Going forward, technological advances are still being made in most areas, and contractors will continue to look for that competitive advantage; driven on by continued investment in research and development and innovation, with innovation assessment criteria key in CfD contracts.

The supply chain has benefited from increased competition, economies of scale, and better methods of partnering and integration. Competitive auctions are likely to further drive supply-chain efficiencies, including further vertical integration and strategic partnering.

Site conditions have also played an important role as those taking FID are located, on average, in slightly deeper waters, but similar distances from shore and with higher mean wind speeds than those specified in those specified in the 2011-12 Pathways study.

And finally: finance. We’ve seen a reduction in the (pre-tax real) discount rate from 9.24% assumed in 2011-12 to 9% in 2015-16. Only around 1.5% of the LCoE reductions banked to date are directly attributable to lower cost of finance. With all-in lending rates at an all-time low and offshore wind an increasingly attractive sector – plus competitive auctions, which are likely to put pressure on returns – there is scope for further impact from cost of capital.

It’s clear that further significant cost reductions can be achieved over the next decade from technology innovation and collaboration across the sector. UK content and jobs will be a significant focus for the UK’s offshore wind industry as they work hard to maximise UK economic benefit and achieve the right sector deal through a more coordinated approach to industrial strategy.

Gavin Smart is investment & financial analyst at ORE Catapult

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