Horizon | May 2022

Offshore wind is poised to become one of the key technologies powering the decarbonisation of the global economy. The technology is proven and investors have confidence in it. Costs fell 50% between 2015 and 2020 and are expected to fall further. In December 2021, the world’s first fully non-subsidised contract for an offshore wind project was awarded in Denmark. It’s not just about cost; it’s also about location. 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. We project that almost US$1 trillion will flow into the offshore wind industry over the next decade. By 2030, we 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 our outlook, too, such as Europe’s accelerated push to capitalise 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 electrolysers to produce hydrogen, so some of its growth will be tied to the scaling up of the green hydrogen industry. The opportunity in offshore wind has not gone unnoticed and is attracting a growing number of competitors. As bidders flock in, Wood Mackenzie has come up with a new competitive framework to assist offshore wind players in determining the capabilities and competencies they need to improve their chances of success around the world. The framework sets out which bidding parameters will be important when and where in the rapidly changing sector.

HORIZONS

Sea Change:

Navigating the trillion-dollar offshore wind opportunity

May 2022

Søren Lassen, Head of Global Offshore Wind Energy Research Chris Seiple, Vice Chairman, Energy Transition and Power and Renewables

Contents

The trillion-dollar offshore wind opportunity Opportunity attracts Four new parameters How to win in offshore wind: a framework A parametric shift for offshore wind

1. 2. 3. 4. 5.

Opportunity attracts

The project pipeline grew 66% 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 US$10 billion in upfront lease payments, whereas previous lease auctions never attracted bids of more than US$400 million. Consequently, using our Lens valuation platform for offshore wind projects, we estimate that project returns and supply-chain margins are falling, making it increasingly challenging to profitably seize the opportunities in the offshore wind sector. Price is not the only competitive dynamic anymore 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 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. Cost reductions help enable competitive price bids in tenders and lease auctions.

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Four new parameters

This shift in competitive dynamics was born in 2019, when criteria other than price started making their way into offshore wind tenders. We expect the trend to accelerate in the coming decade and to include elements not prominent in today’s tenders. These new parameters are as follows.

Conclusion: A parametric shift for offshore wind

In this edition of Horizons, we present a new competitive framework to enable offshore wind players to determine the capabilities and competencies they will need to improve their chances of success in offshore wind auctions and tenders around the world. Our framework identifies how and when these parameters will be important and how they will vary from market to market. It enables success by helping offshore wind players identify the right criteria for each market and the capabilities needed to execute on those criteria, while understanding the trade-offs between parameters. As the industry rallies around these criteria and grows, it will have a significant impact on job creation, emissions reductions, turbine recyclability, marine ecology, local stakeholders and the grid. By shifting emphasis away from price, the new parameters combined with high industry growth rates hold the potential to improve margins across the offshore wind industry. Successfully delivering on the new parameters will not only benefit the sectoral winners, but offer broader societal benefits. The offshore wind sector is a US$ 1 trillion opportunity. By 2030, it will be deploying more than US$ 100 billion in capex annually, emitting as much CO2 as Sweden does today and occupying more than 1.5 million km2 of sea – equivalent in area to the 18th-largest country in the world. The parameters will be key to mitigating this level of emissions and optimising such expansive sea use.

Get this insight as a PDF

The trillion-dollar offshore wind opportunity

August 2021

How to win in offshore wind: a framework

Governments own the seabed and award the subsidies. Developers need seabed, offtake or both to realise their projects. As the appetite for offshore wind soars, few opportunities will go uncontested and developers will, therefore, have to compete their way to success in the offshore wind sector through government tenders and lease auctions. The framework for tenders in the early years was built around subsidies; the bidder needing the lowest subsidy would invariably be awarded the tender. In six of the last 10 offshore wind tenders, multiple bidders hit the bidding floors, so the award of the tender either came down to parameters other than price or a lottery. In lease auction markets, where the highest bidder wins and prices have been soaring, there are concerns that lofty costs could be passed on to consumers or that prices are taking capital away from the offshore wind industry that could be put to better use. The focus, therefore, is shifting to multiple criteria to determine tender and lease auction outcomes, and the criteria in individual markets will differ. The key to success will be anticipating the criteria important in each market, having the capability and skills to meet those criteria, and understanding the trade-offs and synergies between them. Wood Mackenzie has developed a framework for assessing which criteria will be most important in all the major offshore wind markets around the globe. We have devised metrics to capture the economic, physical and political characteristics of each market. These include items such as closeness to grid parity costs, local content policies, available sea area, share of variable renewable energy and net-zero commitments by countries. By combining these metrics with our database of criteria for all known tenders, we have assessed the relative importance that different criteria are likely to play in upcoming tenders and auctions. The results of this analysis are summarised in the following chart.

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Søren Lassen

Head of Global Offshore Wind Energy Research

Based in Aarhus, he joined MAKE Consulting (today Wood Mackenzie) in 2014 and has since then tracked analysed and forecasted supply chain dynamics, technological advancements, project economics and policy developments across the vibrant offshore wind sector. During the past eight years, Søren has engaged with companies from across the offshore wind industry, ranging from the smaller sub-suppliers to the largest developers, through workshops, conferences, presentations and advisory projects. His advisory projects count multiple commercial due diligence of central companies in the offshore wind industry. Grounded in his engagement with the offshore wind industry and in-depth expertise, Søren steers the offshore wind research agenda to provide thought-leading intelligence.

Missed our previous editions of Horizons? Download them here.

David Brown, Head of Markets and Transitions, Americas Ram Chandrasekaran, Head of Road Transport Brian Mcintosh, Title

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Optimised use of the sea is most important in areas such as continental Europe

The key to success will be anticipating the criteria important in each market

We project that almost US$1 trillion will flow into the offshore wind industry over the next decade

Local content: Of the four new factors, the one that is already in many tenders and auctions is local content policy. Local content is the value a project can bring to a local, regional or national economy. We estimate that almost 80% of capacity connected between 2021 and 2031 will be influenced by local content policies, more than double the share of capacity influenced by them to date. The focus on local content has been particularly strong in new offshore wind markets in Asia and, more recently, the US, where commitments on economic contributions to local workforce and infrastructure investments are already exceeding US$1 billion, although the first commercial project has yet to be installed. The Covid-19 pandemic has placed stronger emphasis on jobs everywhere, however. Each market will have its own flavour of local content rules and require different strategies as countries work to ensure compliance with World Trade Organization regulations that restrict local content policies. The size of the economy compared with the size of the offshore wind opportunity will also influence local content rules. For offshore wind-industry participants, the ability to establish and mobilise local workforces and industries will be needed to compete effectively on local content. Systems integration: Systems integration involves combining offshore wind projects with other technologies and capabilities that help economies decarbonise and produce greater value from the offshore wind project. It can include, for instance, pairing offshore wind with electrolysers to produce hydrogen, energy storage, interconnections to multiple regions, providing ancillary services and floating solar projects. Systems integration will be most important in markets where the share of renewable resources is high, providing reliable supply is increasingly challenging and where governments are committed to reaching net-zero targets and will, therefore, support green hydrogen development. The three wind-energy islands proposed in Denmark and Belgium that pair together in different combinations offshore wind, interconnections to multiple markets, storage and hydrogen production are the most prominent and ambitious examples of systems integration to date. Wood Mackenzie expects more markets to adopt systems integration requirements as the share of renewables increases. Systems integration presents significant challenges to some offshore wind players, as the capital and range of capabilities needed spill over into additional technologies, power-market wholesale marketing and trading capabilities, and developing markets for green hydrogen. Ecological mitigation: This refers to maximising the use of the sea while minimising the environmental impact. The focus is on:

Source: Wood Mackenzie

There are few regions today where only the bidding price matters. In the US and several Asian countries, it is price and local-content policy that are most important, though ecological mitigation is starting to play a more prominent role. In much of Northern Europe, all criteria are now coming into play to some extent, depending on the country. It is also important to note that these criteria will continue to evolve and change in individual countries as costs fall, variable renewable energy generation increases, the sea becomes more crowded and sustainability policies evolve. Trade-offs and synergies between parameters To win in offshore wind, developers will need to be skilled at understanding the trade-offs between criteria, optimising their projects for the relevant criteria and developing innovations that counter the trade-offs or enable synergies. The most prevalent trade-off at the moment is on price. Local content policies often raise costs. A higher density of turbines to address ecological mitigation often decreases capacity factors, increasing prices. Reducing CO2 emissions in the supply chain, in contrast, can go hand in hand with supporting local content, which can reduce transport requirements. And systems integration, while increasing costs, will also result in additional revenue streams that can enhance project returns. Systems integration could also improve sustainability scores if it is linked to green hydrogen used to decarbonise steel or fuel the transport and services needed to install and maintain offshore wind projects. Implications for developers With tenders on the rise and a growing number of criteria in the bidding process, taking the same approach to all regions will not work. Developers, therefore, need to understand the parameters in each market, as outlined in our framework, and assess how their capabilities and skills align with the needs of that market, as well as their competitors’ strengths and weaknesses. They can then choose to compete in those markets that best align with their capabilities. Alternatively, they can build additional capabilities organically or through mergers or acquisitions, or forge alliances with companies with complementary capabilities in, say, green hydrogen or storage. It is, therefore, increasingly important to consider who you are partnering with, not just who you are competing against. Developers should also align their policy-shaping strategies with those criteria where they have the strongest capabilities. Meeting the new criteria will require continued innovation, so developers will also need to work closely with their suppliers to identify and fund the research and development needed to deliver on the new requirements. To fast-track these new streams of innovation, developers could benefit from looking beyond offshore wind to the growing number of players looking to break into the industry. Implications for the supply chain The new parameters identified in this report provide a lens through which supply-chain companies can evaluate their product roadmap and strategies. Depending on the market, developers will increasingly value locally produced products, ecological mitigation and a reduced CO2 footprint in the supply chain. Those in the supply chain will need to identify where innovation in these areas can bring new sources of competitive advantage. Also, as the incumbent offshore wind supply chain has consolidated significantly over the past five years and the industry continues to see less experienced developers entering the market in tandem with the new parameters, there will be an opportunity to re-evaluate how the scope of projects handled by companies in the supply chain should evolve. Implications for policymakers Policymakers need to balance a short-term and long-term view when deciding which of the parameters are most important for their markets and how they align with the policy goals and interests of various stakeholders. For instance, in North America, where offshore wind costs are still higher than wholesale power-market prices, further cost reductions may be most important. In Europe, in contrast, where costs are more closely aligned with wholesale power-market prices, other factors can play a more prominent role. Crucially, policymakers also need to consider the impact that introducing new parameters may have on the number of competitors who show up for auctions or tenders and the overall cost impact on customers.

a strategic shift for competitors in the offshore wind industry.

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• • •

The environmental impact the project will have on the immediate environment. This has predominantly been about reducing the negative impact during installation, such as the adverse effect on marine flora and fauna from hammering a 3,000-tonne, 10-metre-diameter pile up to 40 metres into the ground. But it can also be about enhancing the positive impact by, for example, creating natural oyster or coral reefs on the foundations. Coexistence with marine activities, which also incentivises the optimised use of the sea, but in this case by allowing other users of the sea, such as the fishing industry, to use the area designated for the offshore wind project. Optimised use of sea, which refers to how many gigawatt hours (GWh) the project can produce within the specified area.

Addressing environmental impact and coexistence with fishing and aquaculture will be critical to quelling stakeholder opposition to projects. Most offshore wind projects are closed off to other users of the sea, which impacts commercial fishing, in particular. With offshore wind acreage set to grow rapidly in the coming years, finding ways to enable coexistence with other uses will improve the chances of success for developers. Optimised use of the sea is most important in areas such as continental Europe, where space is more limited. This is pushing developers to use larger turbines to enable greater MW per square kilometre. However, increasing MW/km2 can also have a detrimental impact on capacity factors. Successfully addressing ecological mitigation requires an understanding of and willingness to collaborate with other users of the sea early in the project lifecycle. Technological innovation will be required to diminish the environmental impact during installation and optimise the output of the turbines, which will, in turn, reduce the acreage required per GWh and, ultimately, not only reduce the environmental impact but possibly leave it improved. Sustainability: One final factor that is just starting to enter tenders, but which will soon become another frequent parameter, is sustainability. Sustainability will primarily take two forms in offshore wind – reducing the lifecycle emissions of offshore wind projects and the recyclability of the projects. Offshore wind is one of the lowest CO2-emitting renewable technologies per KWh. Still, there are opportunities to reduce emissions intensity such as procuring green steel, reducing the length of supply chains to cut emissions from transport, and purchasing parts produced in countries with greener electricity supplies. With 85% to 95% of offshore wind turbines already recyclable, the challenge has been turbine blades, which are made of composite materials such as glass or carbon fibre. Innovations over the past year have created a path for the blades to be recycled, paving the way for policymakers to use recyclability as a bidding criterion in tenders. Indeed, recyclability is already lined up to be part of three upcoming tenders.

the ability to establish and mobilise local workforces and industries will be needed to compete effectively

Note: Please note that each tender has unique criteria. For the purpose of providing an overview, Wood Mackenzie has segmented these in to three categories shown in this graph. Source: Wood Mackenzie

Source: Wood Mackenzie

Note: *Assuming emissions/MW remains stable over the next 10 years. **Assuming MW/Km2 remains constant. Source: Wood Mackenzie

The trillion-dollar offshore wind opportunity

Offshore wind is poised to become one of the key technologies powering the decarbonisation of the global economy. The technology is proven and investors have confidence in it. Costs fell 50% between 2015 and 2020 and are expected to fall further. In December 2021, the world’s first fully non-subsidised contract for an offshore wind project was awarded in Denmark. It’s not just about cost; it’s also about location. 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. We project that US$1 trillion will flow into the offshore wind industry over the next decade. By 2030, we expect 24 countries to have large-scale offshore wind farms, up from nine today. Total installed 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 our outlook, too, such as Europe’s accelerated push to capitalise 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 electrolysers to produce hydrogen, so some of its growth will be tied to the scaling up of the green hydrogen industry. The opportunity in offshore wind has not gone unnoticed and is attracting a growing number of competitors. As bidders flock in, Wood Mackenzie has come up with a new competitive framework to assist offshore wind players in determining the capabilities and competencies they need to improve their chances of success around the world. The framework sets out which bidding parameters will be important when and where in a rapidly changing market.

We project that US$1 trillion will flow into the offshore wind industry over the next decade

This Horizons article is a summary of a recent report into the drivers of the new offshore wind new parameters, how and where they are emerging, and the implications they raise for the offshore wind industry. Our offshore wind customers can access the full report here.

Note: *Assuming emissions/MW remains stable over the next 10 years. **Assuming MW/Km2 remains constant. Source: Wood Mackenzie

Søren Lassen

Head of Global Offshore Wind Energy Research

Join the debate. Get in touch with Søren

Apr 2022 Security alert: Five lessons from the energy crisis Mar 2022 Utility 3.0: How Africa is remaking the grid Feb 2022 Power Play: How China's boom year is changing the path of the energy transition Jan 2022 No Pain no gain: The economic consequences of accelerating the energy transition Dec 2021 Back to the future: the Horizons year in review Nov 2021 Plastic surgery: reshaping the profile of the plastics industry Oct 2021 The blue green planet: How hydrogen can transform the global energy trade Sept 2021 One giant leap: President Biden's vision for repowering America Aug 2021 Commit and collaborate: squaring the carbon circle for oil & gas July 2021 Champagne supercycle: taking the fizz out of the commodity boom Jun 2021 Location, location, location: the key to carbon disposal May 2021 Swimming upstream: a survivor's guide April 2021 Reversal of fortune: oil and gas prices in a 2-degree world Mar 2021 Tectonic shift: China’s world-changing push for energy independence Feb 2021 Fast and Furious: Europe's race to slash emissions by 2030 Jan 2021 Total eclipse: how falling costs will secure solar’s dominance in power

Missed our previous editions of Horizons? Download them here.

A new set of factors beyond the bidding price is emerging, however, 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. These four factors – increasingly cropping up as criteria in the tender and auction process – will necessitate a strategic shift for competitors in the offshore wind industry.

The project pipeline grow grew 66% 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 US$10 billion in upfront lease payments, whereas previous lease auctions never attracted bids of more than US$400 million. Consequently, using our Lens valuation platform for offshore wind projects, we estimate that project returns and supply-chain margins are falling, making it increasingly challenging to profitably seize the opportunities in the offshore wind sector. Price is not the only competitive dynamic anymore 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 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. Cost reductions help enable competitive price bids in tenders and lease auctions. A new set of factors beyond the bidding price is emerging, however, 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. These four factors – increasingly cropping up as criteria in the tender and auction process – will necessitate a strategic shift for competitors in the offshore wind industry.

As the appetite for offshore wind soars, few opportunities will go uncontested

Moreover, the new parameters offer opportunities to solve larger challenges that are tough to tackle in isolation, not least green hydrogen, where offshore wind tenders can be combined with projects that will help to grow the green hydrogen business. It is crucial, therefore, that developers consider who they are partnering with, not just who they are competing against, and that they chose the markets that play to their strengths. This is where our competitive assessment framework will prove invaluable.

In this edition of Horizons, we present a new competitive framework to enable offshore wind players to determine the capabilities and competencies they will need to improve their chances of success in offshore wind auctions and tenders around the world. Our framework identifies how and when these parameters will be important and how they will vary from market to market. It enables success by helping offshore wind players identify the right criteria for each market and the capabilities needed to execute on those criteria, while understanding the trade-offs between parameters. As the industry rallies around these criteria and grows, it will have a significant impact on job creation, emissions reductions, turbine recyclability, marine ecology, local stakeholders and the grid. By shifting emphasis away from price, the new parameters, combined with high industry growth rates, hold the potential to improve margins across the offshore wind industry. Successfully delivering on the new parameters will not only benefit the sectoral winners, but offer broader societal benefits. The offshore wind sector is a US$ 1 trillion opportunity. By 2030, it will be deploying more than US$ 100 billion in capex annually, emitting as much CO2 as Sweden does today and occupying more than 1.5 million km2 of sea – equivalent in area to the 18th-largest country in the world. The parameters will be key to mitigating this level of emissions and optimising such expansive sea use. Moreover, the new parameters offer opportunities to solve larger challenges that are tough to tackle in isolation, not least green hydrogen, where offshore wind tenders can be combined with projects that will help to grow the green hydrogen business. It is crucial, therefore, that developers consider who they are partnering with, not just who they are competing against, and that they chose the markets that play to their strengths. This is where our competitive assessment framework will prove invaluable.

Chris Seiple

Vice Chairman, Energy Transition and Power & Renewables

Chris works with the more than 150 researchers in our Energy Transition team to bring thought leadership to our research and business strategy, leveraging his more than 25 years of global power industry experience. Chris began his career as a consultant working on electric deregulation policy and strategy development at Cambridge Energy Research Associates (CERA), now part of IHS, where he worked first in the US on the global power team and then led the European gas and power research based in Paris, France. Chris later joined GE Energy Financial Service where as the SVP of Investment Strategy, he helped underwrite debt and equity investments in power assets. He then moved into a role managing a 2,000 MW portfolio of gas and coal assets owned by GE EFS, as well as overseeing the development and startup of Linden VFT. Chris spent the past decade leading Genscape’s power analytics, software and monitoring businesses and came to Wood Mackenzie through its acquisition of Genscape.

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