2023 Offshore Wind in rough waters ... or not ?

On the surface 2023 seems to have been a rough year for the offshore wind sector, with regulators not awarding off-take agreements, auctions with no bids, termination of off-take agreements, supply chain struggles, multi-million Dollar walk away fines, unprecedented cancellations of projects and slashed shareholder values.

But has it really been that bad, or is it just that bad news get's a lot more attention then good news does?

I'll share some thoughts on what to make of this year and try to put in a bigger context in this article. As always I look forward to hearing your thoughts and a good discussion.

A couple months ago, I saw this post from Theodore Paradise (Thanks for sharing) making reference to the "Gartner Hype Cycle" and the situation the offshore wind sector found itself in during 2023.

The Gartner hype cycle (see illustration below) is a graphical presentation developed by Gartner to show the maturity, adoption, and social application of specific technologies.

This comparison stuck with me and I kept coming back to it. I think it describes the big picture fairly well, so let's look at it in more detail.

The Technology Trigger & The Upward Slop

Back in 2012 the offshore wind industry set out an ambitious target to drive the levelised costs of electricity (LCOE) for new projects to below the EUR 100 per MWh threshold by 2020.

At the time the market was still very small and regional:

• Globally there were only about 5.5GW installed
• Europe accounted for about 5GW, of which 52% was installed in the UK, 25% in Denmark, 7% in the Netherlands, 6% in Belgium, 5% in Sweden and 4% in Germany.
• The other 0.5GW came from China and Japan, but these were mainly installed nearshore and in shallow inter-tidal areas
• The main players were Dong (22%), Vattenfall (15%), E.ON (11%), RWE (10%), SSE Renewables (7%), Centrica (6%)

Detailed statistics can be found in EWEA's market report s, which back then used to be handed out at the conferences in nice hard cover books.

Only 5 short years later, by 2017, the targeted cost reduction had been achieved repeatedly by several projects. As a mater of fact, it was way more than just "achieved" as can be seen from the below examples:

• In July 2016 ?rsted won the right to build the Borssele 1&2 projects in the Netherlands with a 72.7 €/MWh bid.
• In September 2016 Vattenfall won the right to build the Vesterhav nearshore project with a 63.8 €/MWh bid.
• In November 2016 Vattenfall won the right to build the Kriegers Flak project with a 49.9 €/MWh bid.
• In late 2016 a consortium of 壳牌 , Van Oord , Eneco and 三菱商事 won the right to build the Borssele 3&4 projects in the Netherlands with a 54.5 €/MWh bid.
• In early 2017 the worlds first zero-subsidy bids were awarded in Germany for EnBW 's "He Dreiht" and ?rsted 's "OWP West“ and ?Borkum Riffgrund West 2" projects.
• In September 2017 several projects in the UK were awarded Contract for Difference (CFD) below this threshold. Winning bids were 57.5 GBP/MWh for ?rsted 's 1.4GW Hornsea 2 and OW Ocean Winds 's Morray East projects and 74.75 GBP/MWh for RWE 's Triton Knoll project

Side Note: All of the above except "He Dreiht", which is soon to start construction, have now (2024) been build and are fully operational.

By the end of 2017 the market had already more than tripled, with an average annual growth rate of almost 30%, and now cumulatively more than 18.7 GW installed globally. It was however still very regionally focused, as the following WindEurope and GWEC market figures clearly demonstrate:

• Europe still made up for the vast majority of the installed capacity with over 15.8GW of the 18.7GW.
• The European market was now heavily dominated by the UK and Germany, which together accounted for more than 80%, followed by Denmark, the Netherlands and Belgium. These five together made up 98% of the European market.
• China had emerged with 2.8GW, adding 1.1GW in 2017 alone. All other countries just had a few MW installed, e.g. Japan (65MW), South Korea (38MW), Taiwan (8MW), Vietnam (99MW) and the US (30MW). The 30MW in the US was the 6 turbine Block Island project.

There are many reasons that made this steep cost reduction possible, in my opinion some key drivers were:

• advances in technology, mainly increases in WTG capacity and advances in foundation technology and the rise of the XXL monopile,
• standardization of approaches and specialized equipment such as purpose built installation vessels,
• lessons learned and experience gained by all market participants and hence reduction of the respective risk premiums and contingency margins.

Furthermore, as offshore wind projects are capital intensive projects a significant driver for their LCOE are the “cost of capital”. Falling interest rates since the 2007-2008 global financial crisis meant that by 2012 we had entered a phase of unprecedented cheap capital, as can be seen for example by the EURIBOR rate chart below, which by 2017 had dipped below 0%.

Furthermore, non-recourse debt finance had emerged as a important instrument in offshore wind financing, both financing of new construction and re-financing of operating assets. In 2015 and 2016 together more than 12GW of projects were financed using non-recourse debt. Truly unique for the market was that lenders, subject to proper due diligence and structuring, were able to take construction risk in a non-recourse transaction, even without big EPC contracts.

I had the pleasure to back in that period work for one of the two accepted lenders technical advisors, SgurrEnergy and work with some of the pioneers of the sector (incl. Rabobank , KfW IPEX-Bank , Dexia , 法国兴业银行 , Watson Farley & Williams , Martin Benatar and Green Giraffe Advisory ) being part of a number of these early transactions, both during the pre-financial close due diligence phase and during the construction phase. Exciting times during which we always had the ambition to ensure lessons learnt are transferred, the projects are made better and the industry as a whole is moved forward. Shout out to some of my good colleagues from back then, James Stewart , Andrew Cole , Keith Williamson and Kevin Murphy . It was a pleasure.

Under the right market conditions the LCOE for new offshore wind projects was now lower than most other power sources and these projects were regularly delivered on time and budget.

Combined with the scalability and typically much shorter lead times to get these projects implemented and operational this made offshore wind an attractive option for policymakers seeking a pathway to decarbonize. Decarbonization and the fight against climate change was gaining momentum globally following the signing of the Paris Agreement by world leaders at the UN Climate Change Conference (COP21) in Paris.

All of the above resulted in a global interest in offshore wind, a massive expansion of governmental targets and a rapid expansion for offshore wind globally. Existing markets (exclude Germany for some years, who found itself particularly hooked on cheap Russian Gas) doubled down on their ambitions and new markets emerged. In terms of the "Gartner Hype Cycle" we were somewhere on the initial upward slop.

It seemed as if everybody wanted offshore wind and everybody wanted it as cheap as the others and as fast as possible, "before 2030 became the new credo". The industry had become a "victim" of its own success.

To provide some perspective, cumulative global targets today are more than 750 GW of offshore wind by 2050. More than 10 times the installed capacity today.

During this period turbine sizes continued to grow rapidly as the main WTG OEMs Siemens Gamesa , 维斯塔斯 and GE Renewable Energy entered into a cycle of outbidding each other in terms of who has the biggest WTG model and by 2022 the first 14-15MW orders were placed and respective prototypes being constructed or already operational. We will see how sustainable this rapid development cycle has been in the next few years as more and more turbines of this class become operational.

With growing WTG size so did the project sizes and GW scale projects now had become the new normal.

This also meant that the amount of capital needed to build these projects increased significantly to several billion Euro per single project. Capital however also remained super cheap.

In addition to the traditional developers, we saw the project sponsors diversifying and increasingly including pension funds and their fund managers such as Copenhagen Infrastructure Partners , CPP Investments | Investissements RPC , 麦格理集团 (operations have become Corio Generation today) and some of the energy supermajors including Equinor , 壳牌 , TotalEnergies and bp .

In particular across Europe, we saw offtake prices stabilize at a low leveles and in some markets we also continued to see zero bids. Some prominent examples:

• In the 2nd auction round in Germany in 2018 several projects again submitted zero bids and two others bids of 64 €/MWh and 98.3 €/MWh. The average weighted auction price was 46.6 €/MWh.
• In the Netherlands Vattenfall won the Hollandse Kust Zuid I & II zero bid tenders in 2018 and the Hollandse Kust Zuid III & IV zero bid tenders in 2019. Essentially making this a 1.5 GW zero subsidy project. Furthermore, a consortium of 壳牌 and Eneco won the zero bid tender for the Hollandse Kust (noord) project in 2019.
• In 2019 a consortium comprising of EDF Renouvelables , RWE and Enbridge won the right to build the Dunkirk project in France with a 44 €/MWh bid.
• In the 4th CFD Allocation Round in 2022 the UK awarded nearly 7 GW, the most ever, with a new record-low price of around GBP 44.5/MWh (in 2022 money / 37.35 in 2012 money) including ?rsted 's massive 2.9 GW Hornsea 3 project and Vattenfall 's 1.4GW Norfolk Boreas offshore wind farm.

Side note: Bids are not directly comparable across markets, as regulatory frameworks differ, e.g. the responsibility for providing the grid connection varies, prices are indexed to different degrees and governments have de-risks the development of the projects to different extents.

In addition to the established markets, we also started to see large project and offtake agreements being awarded in new emerging markets such as Taiwan, Japan, the US and Poland.

• In Taiwan in 2018 3.8GW of projects were awarded Feed-In tariffs and a further 1.7 GW were awarded a tariff via a competitive auction. Winning bids came from ?rsted and Northland Power Inc. (NPI) and were between 63€/MWh (2,224.5 TWD/MWh) and €72/MWh (2,548.1 TWD/MWh) with a weighted average of around 70 €/MWh (2,489 TWD/MWh)
• In Japan in 2021 三菱商事 was the sole winner of 1.7GW spread over three sites with bids between 92.6 €/MWh (JPY 11,990 JPY/MWh) and 127.35 €/MWh (16,490 JPY / MWh)
• In the US between 2019 and 2021 in different state solicitations in New York, New Jersey, Connecticut, Massachusetts and Maryland several projects were awarded offtake agreements below 100USD and as low as 72 USD / MWh. Many of them were the source of the bad news last year.

Furthermore we saw another trend emerging during this time. An increasing willingness to pay "big bucks" for site control. "The seabed" had become a scares resource as governments moved towards centralized auction models. In some auction formats this referred to as "negative bidding".

The Peak of Inflated Expectations & The Downward Slop

In December 2021 RWE won the auction in Denmark to build the 1GW Thor project by luck of the draw, after several bidders put in the lowest bid possible leading to a stalemate. Due to the nature of the double sided CFD mechanism essentially this indicated that they were all willing to pay the maximum amount of €375m (in 2018 prices and to be indexed) back to the government.

Earlier in 2021 the The Crown Estate had announced the winners of it's 4th seabed allocation round and some winners were willing to pay up to 231m GBP per year purely for the rights to develop the site.

In 2022 in the Bureau of Ocean Energy Management 's New York Bight lease auction 6 companies were willing to pay a total of approximately $4.37 billion US Dollar purely for the rights to develop the sites. About 10GW can be developed on the sites and on a cost per MW basis this was factor 10 up from the previous auctions in the US.

In 2023 TotalEnergies and bp won four sites for a total of 7GW put up by the German government in the first German auction to use a uncapped dynamic bidding mechanism with bids totaling €12.6b. Two points need to be considered when looking at this number:

1. Only 10% needs to be paid in the in the first year after award. The remaining 90% will be paid from commissioning onward, over 20 years, in equal payments. This means that while €12.6b is a really big number, the time value is smaller if you consider it will be paid between 2030 and 2050.
2. The value does not only give the winners the development rights, but also a guaranteed, risk free grid connection, with with transmission system operator having to compensate them in case this is not in place in time.

Despite the aforementioned, the economics for offshore wind actually already started to increasingly come under pressure already in 2021. The COVID-19 pandemic, subsequent disruptions, supply chain challenges, the Russian aggression and illegal full on war on Ukraine, the subsequent energy crisis and spikes in commodity (e.g. steel) prices had created a perfect storm.

In addition to the macroeconomic uncertainty, inflation started to rise and governments soon after started to sharply raise interest rates to combat the rising inflation.

This also resulted in a steep increase in the cost of capital.

Another element of the storm can be found in the supply chain, which itself started to come under pressure from raising inflation, but also from the developers who had to make the low price projects economically feasible.

Despite the global expansion and ambitious targets in many countries, the supply chain for offshore wind had not grown significantly. There was and still is a large dependency on a small number of suppliers with a regional concentration, who are serving the global market.

In particular one key supplier in the value chain, the WTG OEMs, were losing money quarter after quarter and subsequently started to review their contracts and pricing. Since 2021 they increased their pricing by over 30%, having a significant impact on the overall project economics due to the large share of the total costs.

It's hard to pinpoint the exact point of the "Peak of Inflated Expectations", but for me it's a combination of all of the aforementioned.

• The very low bids in particular in new markets with no local supply chain, but sometimes specific local requirements (e.g. Jones Act)
• the willingness to pay high prices for site control,
• the pressure on the supply chain to continuously reduce prices,
• The rapidly changing macroeconomic situation due two true Black Swan events

In 2023 we saw this unravel rather quickly and found ourselves firmly on the downward slop. In particular those project that had secured low offtakes in the previous low capital cost period, but had not yet secured construction contract and were close to execution stage started to struggle.

In retrospect, many had been warning for some time that governments need to adapt the regulatory framework to account for changing circumstance and that negative bidding is not good for the industry, but nobody likes rising prices I guess.

Trough of Disillusion & The Slop of Enlightenment

Again it's hard to pinpoint the exact trough, for me personally it was ?rsted cancelling Ocean Wind 1 and 2 while component were already being fabricated and shipped across the world. Something I have not seen in all the years I have worked in offshore wind. This sent the stock in a nose dive and destroyed a significant amount of shareholder value in a single day.

That said, there are several indicators that make me believe that we are back on an upward slop and perhaps on the way to a more sustainable market equilibrium. Some examples:

• The UK government took swift action and has significantly increased the maximum strike price for the upcoming Allocation Round 6.
• The North Seas Energy Cooperation (NSEC) issued it's Action Agenda 2023-2024 on Implementing the offshore ambitions in the North Seas . The NSEC member countries’ tender planning results in auctioning approx. 15?GW per year and thus awarding almost 100 GW until 2030.
• New York awarded approximately 4GW for a nominal weighted average strike price of $145.07 $/MWh without significant backlash / negative press due to these higher prices. New York also announced an expedited round 4 solicitation with bids being due in January 2024 to back-fill cancelled offtakes.
• In the US, which was particularly hard hit by project cancellations, other states reacted as well and further state auctions are already scheduled for 2024.
• In Poland the government amended the CfD rules slightly and as a result Northland Power Inc. (NPI) and ORLEN S.A. managed to achieve financial close for it's 1.1GW Baltic Power project.
• NPI also managed to achieve financial close for the 1GW Hai Long project in Taiwan following renegotiation of some of the corporate power purchase agreements (cPPAs) and keeping the project on schedule with some equity funded early works.
• RWE took the investment decision for Thor on the back of what is understood to be a optimistic outlook for cPPAs in the future as the energy transition progresses.
• ?rsted in December 2023 took the investment decision for it's 2.9 GW Hornsea 3 project in the UK. The project won a CFD in 2022 for 37.35 GBP / MWh (2012 money), the same tariff as Vattenfall 's 1.4GW Norfolk Boreas offshore wind farm, which in the meantime has been sold to RWE .
• Inflation seems to be slowing down as of early 2024
• 2023 was actually a record year for Final Investment Decision for offshore wind. Almost 12GW have been taken in Europe and APAC (excluding China).

In addition we are also seeing some encouraging signs and investments in the supply chain:

• CS WIND Offshore expanded it's facilities in Denmark to fabricate XXL monopiles and was in 2023 sold to CS WIND Corp , which may result in further global access and expansion.
• Sif Group is further expanding it's facilities in Maasvlakte 2 Rotterdam
• EEW Group has established the first phase of it's facility in Paulsboro, New Jersey and despite some initial struggles was fabricating the first monopiles for Ocean Winds 1 from segments built in Germany. The facility is well placed to serve some of the upcoming US projects looking to contract soon.
• Haizea Wind Group established a new monopile fabrication facility in Bilbao and recently won orders for Hornsea 3 and East Anglia 3
• SeAH Wind Ltd is building the worlds biggest monopile production facility in Teesworks , UK
• The new player Baltic Structures Company GmbH is planning to build a new monopile fabrication facility in the Port of Esbjerg
• In addition to the above, first project have secured monoplies from China and successfully installed them, something we have not seen since Greater Gabbard back in 2009/2010.

On the vessel side:

• 3 new dedicated floating vessels were delivered in 2023 including the Jan De Nul Group 's Les Alizes, the Green Jade, owned by CSBC-DEME Wind Engineering and aimed at the Taiwanese market and Seaway7 long delayed Alfa Lift
• Five new installation jack-ups were delivered in 2023 including Jan De Nul Group 's new flagship the Voltaire
• Seven new cable lay vessels were ordered in 2023, indicating that the industry is generally looking positive at offshore wind, but also the general offshore cable market, as more interconnection may be needed.
• In addition there are still some new build vessels still under construction at yards around the world including the first Jones-Act compliant jack-up, Dominion Energy 's Charybdis and Cadeler Wind Peak

While financials for the WTG OEM's seem to be improving and it is expected that GE will build a facility in the US to fabricate it's new 18MW flagship offshore turbine, I do remain somewhat worried about this part of the supply chain. In particular I am worried about a continuation of the "bidding war" for the biggest WTG as I hear of the western OEMs already offering a 20+ MW turbine and Chinese suppliers firmly pushing into the market outside of China with WTGs of that range.

I would hope to see us stabilize at the 18-20MW range and allow WTG OEMs get into a true serial production and allow the rest of the industry to plan around this range (i.e. vessels, foundations, etc.) and focusing on building modular projects.

In Summary

While there may be some projects that are still challenged and we will see some of this play out in 2024, I think that overall 2023 was another very good year for offshore wind with a lot of progress made towards becoming a truly global market. We may have hit a trough, but we also bounced right back and will as an industry emerge stronger from this.

This actually provides me with confidence that the fundamentals of the offshore wind market are fully intact. Government around the globe remain highly committed to offshore wind and have even doubled down in recent months and in light of some of the challenges. Offshore will play a crucial role in the #energytransition.

In conclusion, I do think that we tend to play more attention to the bad news than the good and sometimes it's worth to take a step back and look at the big picture and how far we have already come.