Blog post

Offshore wind, an inflexion point

Energy Blog, 23 March 2022

Matthew Taylor reflects on key market movements in offshore wind.

In 2012, I bet with a French colleague that power-by-the-hour would emerge as a procurement option for offshore wind (OW). This was in reference to the approach pioneered by Rolls Royce for its jet engines. It has been nearly a decade since the bet and I am finally ready to admit I got that wrong. The bet was a bottle of something sparkling. My colleague, who shall remain nameless, is quite a French wine enthusiast but despite the obvious opportunity to buy something that would directly satisfy that enthusiasm, I decided to push the boat out and get him some Prosecco from my local supermarket. He may have won the bet, but I felt a sense of victory nonetheless!

At a similar time, I made an equally confident statement that full wrap EPC contracts would prevail, having seen a few of the early attempts almost get over the line. I was wrong again. This didn’t cost me a second trip to Tesco but it did put a stop to me making bets on OW. As a result I didn’t participate in a recent sweepstake on the OW auction results in England, New York or Japan, a wise decision it seems as I would have lost heavily!

These auctions, and especially most recently the New York Bight, have led to market dislocating bids from some energy heavyweights. The bids in the Crown Estate lease auction in England and in the New York Bight auction led (again) to new standards being set for the value of a lease. Similarly, albeit in the opposite direction, Mitsubishi won all sites available in the first offshore wind auction in Japan with a tariff significantly lower than its nearest competitor. Much has been written about these results and whether they are ultimately to the benefit of the energy transition or consumers. Of the NY Bight results, my colleague Randy noted in a recent blog, “these were rational, sophisticated companies acting according to plan”, and I agree with him there, but clearly the music needs to stop somewhere and I want to reflect a bit on some of the market movements that have enabled these results and how they may evolve from here.

Here are three key points for consideration:

  1. The continued emergence of global energy heavyweights into offshore wind, attracted by OW’s currently unique characteristics within renewables to facilitate the deployment of large volumes of capital in a small number of assets. These characteristics resonate particularly strongly with those active in conventional energy assets. Many of these players have large and relatively patient balance sheets so can afford these proportionately larger (calculated) bets much more than many of the early players in OW, especially as the increasing concentration of value creation to the development phase increases the relative attractiveness of getting in early;


  1. Reports of supply chain and especially wind turbine suppliers taking too much of the burden of reducing LCOE. The evolution of technology across offshore wind has been phenomenal, led by demand for (and supply of) larger nameplate capacity turbines and what are now seemingly endless wind turbine blades. Some markets have also imposed local supply chain requirements on the sector (tune in for a subsequent blog on this topic). Wind turbine suppliers, who have seen a predictable amount of consolidation over the last few years, have risen to this challenge but apparently largely to the demise of their own profits; and


  1. Experience from some of the assets under construction particularly in Taiwan is a stark reminder that these are major infrastructure assets, and while risk has significantly reduced, when it doesn’t go to plan it can require very deep pockets and high perseverance to rectify. Cost of capital has reduced as the industry matures but is perhaps reaching a resistance line, and may have overstretched itself already in certain instances.

But how will these points evolve in the future, or rather how should they evolve if we want to maximise OW’s potential as a central pillar of global decarbonisation in the long term.

  • Large players will dominate, especially if price remains the dominating differentiator in many auctions, but let’s all make sure there is room for the smaller players who drove a lot of the sector innovation to date; Scotwind was a ray of light in that respect and while it hasn’t raised proportionally the same volume of funds for the Scottish exchequer, it has successfully allocated concessions to a broad range of initiatives and developers;


  • We should ensure not one party or segment takes too much of the strain in further reducing the levelised cost of energy (LCOE). Developing a wind turbine generator (WTG) is a hugely capital intensive exercise and suppliers must be afforded the opportunity to recoup that investment and secure a reasonable return if the industry is to have healthy competition in the long term. Presently, we actually see a different trend; demand is outpacing supply, commodity prices and inflation (remember that?) are rising, as are base rates, all of which is indicating an increase in LCOE. Suppliers are now in the position where they are choosing their projects, rather than the other way around (which is a better, albeit less entertaining, example of schadenfreude than my Tesco prosecco purchase!);


  • Cost of capital will naturally remain a key discussion of course, however with ever increasing competition in established markets and some of the emerging markets (US, Japan, Taiwan to name a few) catching-up, the more pioneering firms will continue their exploration into frontier markets such as here in South-East Asia (I am writing this from Green Giraffe’s Singapore office). We expect the emergence of new markets to only accelerate. I’ll comment more on this in another blog post.

I have said little of another key topic which cannot be ignored of course, and that is the impending decoupling of offshore wind power generation from power as its final delivery/ revenue stream. The rapid emergence of new end products, not least hydrogen and its derivates, offers another exciting opportunity and with emerging appetite from all parts of the sector, this will offer a very viable alternative revenue stream for offshore wind in the coming decade. It will however require different thinking; such projects should be built in locations that minimise the cost of hydrogen delivered to its end use, which is not necessarily the same as where “conventional” offshore wind farms would be built.

How these points evolve will surely have a strong influence on the next auctions and the upcoming 15 GW auction in Taiwan will be a fascinating test case for that. I hope that we can keep our eyes on the actual big prize, which is OW’s immense potential to support energy security and our collective response to climate change. Offering lower intermittency and higher capacity factors than other renewable technologies, OW can play a vital role in reducing our reliance on fossil fuels for baseline generation. You’ll have guessed by now that I’m not going to take bets on the outcome of those results but I will say this: I hope offshore wind continues to make improvements on its LCOE, but that it is done in a way that builds a sustainable sector for a diverse range of parties and stakeholders. And maybe there will be space for power-by-the-hour in there at some point, although maybe in today’s world we’ll call it “TaaS – turbines as a service”.