Larger turbines could spell an offshore wind vessel-crunch

OPINION | The offshore wind sector may be overlooking a fast-approaching construction vessel bottleneck – and a hike in 'large component exchange' prices, writes Carl Erik Gurrik

For many reasons, 2017 is proving to be an important year for the offshore wind industry.

One feature of note is the near total adoption of the latest generation of multi-megawatt (MMW) – ie 5MW-plus – turbines. Except for a handful of installation projects, all newly installed turbines are in the MMW category. 

By the end of this year, there will be approximately 870 MMW fully-commissioned turbines in operation in European waters. By the end of 2024, this number will have risen to more than 3,000.

This is a positive narrative for our industry, but it does present a number of challenges. For one, the cost of large component exchange (LCE) in the future. Most analysis suggests that LCE costs will fall. However, in a landscape of competing factors such as known contractual commitments, vessel capability, relative vessel costs, competing markets, and seasonality, the cost of MMW LCE could go up in the future, not down.

Take this example of an LCE operation in the German Bight in the ‘not-too-distant future’. Cost-effective and capable vessels are already in short supply, and as the turbine fleet gets bigger the demand for vessels will only go up and price points will adapt accordingly. Naturally, this raises important questions about when the ‘crunch’ is likely to occur, and what the impact might be on OEM warrantee obligations concerning availability and guaranteed output.

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These questions, however, are for future debate. The more immediate question is why the market appears to be overlooking the impending vessel bottleneck and seems convinced that LCE costs are likely to continue to fall in the months and years to come.

I’d contend that most of the industry analysis undertaken so far is based on the ‘big numbers’ associated with vessels marketed as being in the offshore wind industry. 

From this starting point, it is easy to conclude that there is a healthy supply of vessels for MMW LCE now and in the future. However, this approach misses a number of vital nuances as to the likely availability, capability, cost, and relative experience of those vessels and their owners/operators. Once these factors are taken in to consideration, the number of vessel in the market for MMW reduces significantly and boils down to (arguably) 10 to 12 vessels.

There is little doubt the market for MMW LCE will grow. However, at the same time large, new competing markets will also open up in offshore wind, oil & gas, and decommissioning. Additional pressure is also evident from the increase in the number of dual vessel strategies in the turbine installation market, which are effectively removing yet more capable vessels from the MMW LCE pool.

All of this strongly suggests that prices are not likely to be driven down by competition between vessel owners/operators, but instead could climb due to the lack of availability and the higher dayrates commanded in competing, more lucrative markets.

"It appears that turbine manufacturers’ O&M calculations are based on the assumption that there will be an abundance of capable vessels"

It is also important to note that there are significantly fewer new vessels coming to the MMW LCE market than our experience and analysis suggests are needed. The reason for this is the ever-decreasing proportional value of the MMW operations and maintenance market.

The reality is that overall operations and maintenance (O&M) spend, including LCE, per MW installed is already half that of the previous generation of turbines and it is predicted to fall further with the next generation of even larger MMW turbines. 

It would appear that turbine manufacturers’ O&M calculations are based on the assumption that there will be an abundance of capable vessels for LCE in the future.

What we do know, is that MMW turbines require very large vessels for LCE – and very large vessels require huge investments accompanied by strong and secure business cases. So while it looks very likely that the volume will be there in the future, the price point could be too low (and has the potential to fall further) – a scenario unlikely to support large investment decisions.

I’d recommend a cautionary approach to analysis of the MMW LCE market. The expectations of wind farm owners and OEMs should be readdressed and re-managed for the future. 

Starting from the assumption that there will be a healthy supply of capable and cost-effective vessels in the market may result in disappointment and the need to reset budget expectations. To avoid this, we need an open dialogue addressing both the requirements of the OEMs and windfarm owners, and the requirements of a healthy vessel investment environment.

Carl Erik Gurrik is commercial manager and head of fleet development at Fred Olsen-owned offshore installation specialist Windcarrier

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