Dong to build an offshore wind project without a subsidy…

Among all the doom and gloom of a quiet offshore summer this struck me as good news:

On Thursday, the Danish company Dong Energy, the largest offshore wind developer, won the right to build two large wind projects in the German North Sea with no government subsidies — a highly symbolic first for the industry.

There are some unique circumstances as this article in the FT makes clear: obviously not having to pay substantial interconnection to the grid, and being close to existing infrastructure makes a difference. Also, the reduction in offshore installation costs will be flowing through into the tender spreadsheets of the contractors for the long-term. It does feel like a milestone, and from a contracting perspective in the North Sea and eon since we picked over the wreckage of Subocean.

But it is also a sign of change at the margin with increased productivity in offshore wind, economies of scale and scope, knowledge development, and all the other factors that contribute to a drop down the long run cost curve.

Day rates in offshore remain at nearing OPEX in the North Sea, given the surplus of oil and gas vessels and the more benign environments of the locations. Clearly, offshore wind will not displace oil and gas, it’s nowhere near as efficient on a calorie output/cost basis, but it is moving down the cost curve quicker than many thought possible. Vessel owners will be hoping day rates move in the opposite direction, but as long as offshore wind sticks to the civil contracting formula and vessel operators need utilisation, I fear that a faint hope.


A miracle at sea apparently… or an oversupplied vessel market?

Offshore windfarm costs.png

A really good article from Bloomberg on the unit cost reductions occurring in the offshore windfarm space:

Across Europe, the price of building an offshore wind farm has fallen 46 percent in the last five years — 22 percent last year alone. Erecting turbines in the seabed now costs an average $126 for each megawatt-hour of capacity, according to Bloomberg New Energy Finance. That’s below the $155 a megawatt-hour price for new nuclear developments in Europe and closing in on the $88 price tag on new coal plants, the London-based researcher estimates.

Clearly, as the cost reductions started five years ago, some of this is all about economies of scale and the experience curve. But I am willing to wager a good chunk of the 22% reduction last year came from cheaper vessels for installation as the oil and gas vessels hunt for work.

In the UK the newer locations are in deeper water that theoretically should have increased installation costs but the major programmes are going ahead just as the vessel market hits its lowest point. Diving at 60m is SAT diving not air (Greater Gabbard I think?). A breakdown of the source of cost savings would be very interesting. But as I always say regarding shale versus offshore: be wary of betting against industries that can standardise and turn the output into a manufacturing process, as in the modern age this should lead to dramatic cost reductions (as we have seen with shale).

Oil and gas contractors hate offshore wind because the use civil contracting documentation, and as there is no first oil pressure rates are lower. But offshore wind could be an important source of vessel demand moving forward with productivity gains like this.