WoodMac: $1 Trillion Offshore Wind Market The Next Big Opportunity
Offshore wind is poised to become one of the key technologies powering the decarbonization of the global economy. The technology is proven, and investors have confidence in it. Costs fell 50 percent between 2015 and 2020 and are expected to fall further. In December 2021, the world’s first fully non-subsidized contract for an offshore wind project was awarded in Denmark.
Offshore wind has strong public policy support as another source of large-scale, carbon-free generation in land-constrained areas or regions with less attractive solar irradiance or onshore wind resources. Consequently, sectoral growth is set to explode.
Analyst firm WoodMackenzie projects that almost $1 trillion will flow into the offshore wind industry over the next decade. By 2030, they expect 24 countries to have large-scale offshore wind farms, up from nine today. Total capacity is likely to reach 330 GW, up from 34 GW in 2020. By 2030, as much money will be invested in offshore wind as in onshore wind.
There is further upside potential to this outlook, such as Europe’s accelerated push to capitalize on offshore wind and other renewable technologies to reduce its dependence on Russian gas and coal. Similarly, competitively priced offshore wind is likely to play an important role in powering electrolyzers to produce hydrogen, so some of its growth will be tied to the scaling up of the green hydrogen industry.
The project pipeline grew 66 percent last year and it is now nearly three times our forecast offshore wind capacity for 2030. The first commercial offshore wind tender held in 2010 attracted only one bidder, while tenders in recent years have in some cases attracted more than 20. We are seeing similar trends in lease auctions. In Scotland, this year, for example, more than 60 companies bid.
Winners in the last three lease auctions will be paying more than $10 billion in upfront lease payments, whereas previous lease auctions never attracted bids of more than $400 million.
Consequently, WoodMac estimates that project returns and supply-chain margins are falling, making it increasingly challenging to profitably seize the opportunities in the offshore wind sector.
Price not the deciding factor
To date, the route to market for offshore wind projects has been through government tenders, lease auctions, or a combination of the two. Competitors have won these tenders and auctions by bidding for the lowest price and proving their ability to deliver the project.
This has brought about a relentless focus on innovation to find ways of reducing costs and has been central to improving the competitiveness of offshore wind. But it has also contributed to falling margins.
Being cost competitive and working to reduce cost will always be a central element of winning in offshore wind. Competitive cost is necessary to compete with other power-generation technologies, to produce low-cost hydrogen, to succeed in wholesale power markets, and to be attractive to corporate buyers of power.
But a new set of factors beyond the bidding price is emerging, which will determine who wins and who loses in offshore wind and also offers an opportunity to improve margins by shifting focus away from just price and offering new avenues for innovation and differentiation.
There are four factors increasingly cropping up as criteria in the tender and auction process which will necessitate a strategic shift for competitors in the offshore wind industry.
The competitors will now have to consider local content, or the value a project can bring to a local, regional, or national economy, as well as systems integration, ecological mitigation, and sustainability in future bids, necessitating a strategic shift and greater cooperation.
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