Offshore Wind UK Market Study 2011

Transcription

1 Offshore Wind UK Market Study 211 A common initiative with

2 Preface Strong Norwegian competence lies within the offshore sector and stems from more than 1 years of maritime shipping and North Sea oil and gas activities. The fine-tuned capabilities are now transferred to the offshore wind sector for technology and services conceptualisation. Companies developing the North Sea wind resources could benefit from the lessons learned in Norway and add complementary expertise in order to achieve their targets. In order to inform the Norwegian offshore industry participants about the opportunities in the two most important markets for offshore wind competence, Innovation Norway and INTPOW Norwegian Renewable Energy Partners have collaborated to commission two studies - Offshore Wind Germany and Offshore Wind UK, both inspired by the two Norwegian Offshore Wind Clusters Arena NOWand Windcluster Mid-Norway. In order to promote the Norwegian offshore wind capabilities, Norwegian Renewable Energy Partners INTPOW and Innovation Norway have also commissioned a market Study and mapping of the emerging Norwegian offshore wind supply chain. Innovation Norway Innovation Norway promotes nationwide industrial development profitable to both the business economy and Norway s national economy, helps to release the potential of different districts and regions by contributing towards innovation, internationalisation and promotion. Norwegian Renewable Energy Partners - INTPOW INTPOW promotes the Norwegian renewable energy industries internationally and facilitates partnerships between Norwegian and international industry participants, including in offshore wind. It is a non-profit joint venture between the Norwegian renewable industry and the Norwegian Government. BVG Associates

3 Contents Contents... iii List of figures... iv List of tables... iv Executive summary... 1 Introduction Market conditions Political targets Installation forecast Offshore turbines and balance of plant demand Installation services demand Funding Permitting frameworks Test and demonstration facilities Contracting standards Market barriers Market structure Stakeholder organisations Offshore wind farm developers and owners Offshore transmission owners Supply chain Industry alliances and consolidation Projects and supply chain structure Project details Endnotes Contents iii

4 List of figures Figure 1 Forecast annual and cumulative UK offshore installation to Figure 2 Indicative outlook for UK offshore installation to Figure 3 Geographic spread of UK offshore wind farms to Figure 4 Forecast UK turbine demand to Figure 5 Forecast UK turbine foundation demand to Figure 6 Forecast UK subsea export cable demand to Figure 7 Forecast UK subsea array cable demand to Figure 8 Forecast UK substation HVAC transformer and HVDC convertor demand to Figure 9 Forecast UK turbine and foundation installation vessel demand to Figure 1 Forecast UK subsea cable installation vessel demand to Figure 11 Potential UK east coast manufacturing cluster locations Figure 12 Developer share of UK operating offshore wind farms (MW) Figure 13 Developer share of UK offshore wind farms under construction (MW) Figure 14 Developer share of UK offshore wind farms in planning (MW) Figure 15 Suppliers of wind turbines to the UK offshore wind market from 23 to Figure 16 Suppliers of turbine foundations to the UK offshore wind market from 23 to Figure 17 Installers of turbines in the UK offshore wind market from 23 to Figure 18 Installers of foundations in the UK offshore wind market from 23 to Figure 19 Suppliers of export cable to the UK offshore wind market from 23 to Figure 2 Suppliers of array cable to the UK offshore wind market from 23 to Figure 21 Installers of export cable in the UK offshore wind market from 23 to Figure 22 Installers of array cable to the UK offshore wind market from 23 to Figure 23 Suppliers of substation electrical systems to the UK offshore wind market from 23 to Figure 24 Breakdown of CAPEX costs for UK offshore wind farms in Figure 25 EPC supply chain structure Figure 26 Multi-contract supply chain structure Figure 27 UK offshore wind farm development sites (The Crown Estate, supplied April 211) List of tables Table 1 Abbreviations used Table 2 UK project description iv List of figures and tables

5 Executive summary General conditions As part of its efforts to meet targets under the EU s Climate and Energy package, the UK Government expects that about 3 per cent of its electricity will need to be generated from renewable sources by 22. In the longer term, the UK has also committed to reducing its greenhouse gas emissions to 8 per cent below 199 levels by 25. Offshore wind is expected to play a fundamental role in this shift in energy generation. A total UK pipeline of more than 5GW of offshore wind capacity has already been established, along with structured frameworks for delivery and it is expected that 2-25GW of offshore wind capacity will be installed by 22. This rapid rate of installation is expected to offer significant opportunities to the supply chain, with a particular focus on industrial development in the UK. Such growth is dependent on some key market barriers being addressed. Market mechanism. Current reforms to the UK s renewable market incentive mechanism must provide the same or improved level of support, as the economic case for offshore wind farm development currently is marginal. Changes need to be introduced in such as way that uncertainty causes minimal delay. Planning reform. The Government has introduced reforms via the Localism Bill that will see the Infrastructure Planning Commission replaced. Any changes that are introduced should avoid adding further delays into the development and consenting process. Supply chain investment. Investment in the offshore wind supply chain is expected to amount to billions of pounds and the UK s pipeline of offshore wind projects has attracted a number of the major Tier 1 suppliers to the point of committing to locate facilities in the UK. In parallel with this, the supply chain to these players needs to develop at all levels and especially at coastal locations. Early signs of this development are now quite visible but UK suppliers, often seen by the wind industry as risk averse, will face tough competition from overseas players who in many cases have a long track record of delivery to the wind industry. It should be noted that, while the UK Government and other public stakeholder bodies are actively encouraging interest from overseas companies in the UK offshore wind market, the intention is to increase collaboration, joint ventures and UKfocused inward investment rather than the import of more goods and services. Projects The geographic spread of UK offshore wind activity up to 22 is mainly focused on the North Sea with almost 6 per cent of developments to be installed off the east coast of the UK. Approximately 2 per cent of capacity will be installed in Scottish waters, predominantly in the east, up to 22 but, in the longer term, the development of floating foundations and improved grid capacity may well allow offshore wind farms to be developed in areas of deep water and higher winds close to the Scottish west coast. The remaining capacity will be installed off the west and south coasts of England and Wales. As the decade progresses, projects will be installed on higher wind sites in deeper waters further from shore and with larger turbines, creating new challenges throughout the project lifecycle for wind farm developers and supply chain. Due to the increasing size of turbine components, new manufacturing capacity is expected to be built near large deepwater port facilities. The focus of the UK offshore wind market on the North Sea means that it is expected that clusters of development will be located on the major estuaries of the east coast of England and Scotland. Experience and innovation for the future The UK s pipeline of projects has established a favourable foundation for future offshore wind development and the UK now holds significant experience from developing and installing what will be heading towards 3GW of offshore wind plants by the end of this year. Significant work is underway by the UK Government and other stakeholder bodies to Executive summary 1

6 encourage innovation and support the development of world class research and development facilities. While the UK supply chain is still comparatively young, recent years have seen a rapidly rising level of activity as new manufacturing capacity is planned and new and dynamic industry alliances and consortia are formed. Introduction The UK currently has the largest pipeline of offshore wind projects in the world with approximately 5GW of capacity installed, under construction or in planning. Massive investment will be required by the supply chain in order to meet the demand that this will create for turbines, foundations, cables, electrical systems and installation and O&M services. Offshore Wind UK: Market Study 211 is a report prepared by BVG Associates for Innovation Norway and INTPOW to inform potential Norwegian suppliers about the opportunities and challenges the UK market presents. The report introduces the main public and private stakeholders in offshore wind in the UK and explains today s key market barriers that project developers face, including the challenges of sourcing funding and meeting planning requirements. It also explores the motivations behind the UK Government s support for offshore wind and its strong focus on securing UK-based activity and creating domestic jobs. Our installation forecast through to 25 is included as well as detailed demand breakdowns for key components and services. These look at both companies who have already supplied to existing projects and the expected demand over the next 1 years. Significant investment decisions are already being made to locate major offshore wind production centres in the UK and new entrants need to move quickly to identify potential partners and customers to be in a strong position to supply this rapidly expanding market. 2 Introduction

7 1. Market conditions 1.1. Political targets Renewable energy generation in the UK is still at relatively low levels compared with much of the rest of the European Union (EU) and the country is still heavily dependent on fossil fuels and nuclear power generation for most of its energy. Work to change this situation is underway, driven by challenging renewable energy targets and concerns about the energy security of supply. Under the EU s Climate and Energy package, the UK is committed to sourcing 15 per cent of its energy from renewable sources by 22. i The UK s target is based on its economic strength and high level of renewable energy resources. This target covers heat and transport energy consumption as well as electricity. Recognising that it will be difficult to achieve much renewable growth in heat and transport by 22, the Government expects that about 3 per cent of electricity will need to be generated from renewable sources if it is to meet its overall target. The UK has also passed domestic legislation to unilaterally reduce its greenhouse gas emissions to 8 per cent below 199 levels by 25. ii In its 29 Renewable Energy Strategy, the Government said that it expects a range of renewable technologies to contribute to the future energy mix but there will naturally be a focus on those that are both cost effective and can be deployed on a large scale. The UK has some of the best onshore and offshore wind resources in the world. While onshore wind is expected to account for a significant share of the renewable energy capacity up to 22, the stronger wind resource and reduced planning restrictions offshore means that it is anticipated that offshore wind will play a much larger role beyond 22. As well as helping to meet legislative targets, offshore wind improves the country s energy security of supply by decreasing its reliance on fluctuating fuel prices. It also reduces the UK s need for imported fuels at a time when political instability and growing world demand may affect supplies. The Government also seeks to create a domestic supply chain to support this new sector that could generate an estimated 7, UK jobs by 22. iii The value of these jobs could be further enhanced as they are likely to be clustered around large industrial areas that are suffering from high levels of unemployment. Offshore wind not only provides clean, green, secure energy, the investment that comes with it is great for the UK economy too. Chris Huhne, UK Secretary of State for Energy and Climate Change 1.2. Installation forecast Offshore wind development rounds The development of offshore wind in the UK has been facilitated by The Crown Estate, which has renewable energy development rights on the UK continental shelf (see Chapter 2 for more information). To date, it has run three main rounds of offshore wind development plus others focusing specifically on projects off the Scottish coast and demonstration sites. A further round in Northern Irish waters was announced in March 211. Round 1 was announced in 2 with an original capacity of 1.5GW across 17 sites and was planned as a pilot phase in which the industry could build up an understanding of the technical challenges of offshore wind. Round 2 was announced in 23 with a further 15 sites and a planned capacity of 7.2GW. More recently, extensions totalling a further 1.7GW were awarded to developers for existing or planned sites from Rounds 1 and 2. In 28, the Scottish Territorial Waters round saw a further 1 projects announced in Scottish waters with a total capacity of 6.4GW. In January 21, The Crown Estate announced the names of the development partners for nine Round 3 zones. This round marked a significant increase in the scale of development with a combined generation capacity of more than 32GW bringing the total UK pipeline of projects to 49GW. This is expected to grow to more than 5GW with the anticipated Northern Irish leasing round and new demonstration sites. Market conditions 3

8 Annual installed capacity (GW) Cumulative capacity (GW) Annual installed capacity (GW) Cumulative capacity (GW) While The Crown Estate has indicated that no announcements will be made before 214, it is understood a programme of further leases is likely to follow at some point. Installation forecast These rounds represent a significant pipeline but planning and financial issues have already resulted in the cancellation of some projects. Furthermore, the challenges of coordinating the large number of approvals and procurement contracts required for a large offshore wind farm means that delays are also expected to some projects. The market forecast in Figure 1 was prepared by BVG Associates for The Crown Estate in February 211. iv This forecast is based on our understanding of the status of individual projects, the commercial environment in which development and supply chain communities are working and an understanding of existing and future renewable targets. While this report is focused on the UK market, it should be noted that most of the companies involved will also be looking to operate in the wider EU market and will consider this when making investment decisions. By the middle of the next decade, some of the wind farms installed in Rounds 1 and 2 will be approaching the end of their operational life. Rather than completely decommissioning them, many will be repowered (replaced with new technology). We anticipate repowering of the first generation of offshore wind farms to include replacement of foundations, due to the expected increase in turbine size, while offshore substations and export cables may be partly re-used. This results in a difference between the gross installed capacity and the net generating capacity shown in Figure 2 up to 25. Such a long term prediction is necessarily indicative and is based on existing trends and an understanding of the likely contribution of offshore wind to the EU energy mix. By 25, we envisage it is possible that a gross installed capacity of more than 15GW will have been installed in UK waters with a net generating capacity of nearly 9GW. For some of the supply chain, such as component suppliers, the gross installed capacity is important, while the net installed capacity is more relevant to sectors involved in O&M, for example We anticipate that by 22 the UK will have an installed offshore wind capacity of almost 23GW compared with around 2GW at the end of 21. See Figure 1 for a breakdown of this installation capacity by development round. By 23, this will have risen to nearly 7GW '1 '2 '3 '4 '5 New build Repowering Cumulative (gross) Cumulative (net) Figure 2 Indicative outlook for UK offshore installation to 25. '11 '12 '13 '14 '15 '16 '17 '18 '19 '2 R1 R2 R1/R2+ R3 STW Future Rounds Cumulative Figure 1 Forecast annual and cumulative UK offshore installation to Market conditions

9 Figure 3 shows that the geographic spread of the UK offshore wind activity up to 22 is mainly focused on the North Sea with almost 6 per cent of developments to be installed off the east coast of England. We forecast that approximately 2 per cent of capacity will be installed in Scottish waters up to 22 but, in the longer term, the development of floating foundations and improved grid capacity may well allow offshore wind farms to be developed in areas of deep water and higher winds close to its west coast. The remaining capacity will be installed off the west and south coasts of England and Wales. East coast West coast South coast Scotland Figure 3 Geographic spread of UK offshore wind farms to 22. Market conditions 5

10 Annual number of turbines Cumulative number of turbines Annual number of foundations Cumulative number of foundations 1.3. Offshore turbines and balance of plant demand Turbines Offshore wind turbines installed today typically have a rated power of between 3MW and 5MW. The reduced cost of energy associated with larger turbines means that turbine size will increase in the future. The annual average rated power of installed turbines is expected to remain similar to current levels until 214 and then increase as larger units are introduced up to an average of approximately 6MW by 22. By 22, we expect that monopiles will only account for about 1 per cent of annual foundation demand, with the remainder including steel structures such as jackets, tripiles and tripods. To avoid the environmental noise impact of driving piles, suction buckets designs have also been proposed as well as concrete gravity-based designs which sit on the seabed. Concrete solutions also mitigate the risk of more volatile steel prices but the challenge of large scale production and a UK market preference for proven steel designs mean they are not expected to account for more than 1 per cent of foundation demand to 22. Figure 4 provides a forecast of UK demand for offshore wind turbines over the next decade. We expect that more than 4, turbines will be installed in UK waters by 22, when it is predicted that approximately 6 turbines will be installed each year. 1, , 4, 3, 2, 1, 5, 2 1, 8 4, '11 '12 '13 '14 '15 '16 '17 '18 '19 '2 Number of monopiles Number of other foundations 6 3, Cumulative monopiles Cumulative other foundations 4 2 '11 '12 '13 '14 '15 '16 '17 '18 '19 '2 Number of turbines Figure 4 Forecast UK turbine demand to 22. Turbine foundations Cumulative 2, 1, With the exception of the 27 Beatrice demonstrator project and the Ormonde wind farm, which is currently under construction, every UK project installed to date has used cylindrical monopile foundations. As can be seen in Figure 5, as projects are installed in deeper water with larger turbines, alternative foundation designs will be required that can handle the greater loads and decreased wind loading frequencies. Figure 5 Forecast UK turbine foundation demand to 22. Electrical systems Future offshore wind farms will also tend to be built considerably further offshore in the next decade, which will create greater demand for export cables to connect them to shore. The high transmission losses of long distance AC cables means that a significant portion of export cable demand will be for high voltage direct current (HVDC) systems. Between 211 and 22, almost 7,km of subsea export cable will be required, of which more than 6 per cent is expected to be HVDC. As shown in Figure 6, demand is expected to stay low until the middle of the decade when it will increase sharply. There is concern within the industry that, without prompt investment in new manufacturing capacity, there will be shortages in supply by 215. Demand is naturally related to turbine demand but is offset because, as is the case today, foundations are installed a year before turbines. 6 Market conditions

11 Annual length (km) Cumulative length (km) Annual length (km) Cumulative length (km) Annual number of transformers/converters Cumulative number of transformers/converters 1,25 5, for other high voltage electrical equipment such as reactors and switchgear. 1, 4, , , , '11 '12 '13 '14 '15 '16 '17 '18 '19 '2 1 4 Length of HVAC export cable Cumulative HVAC export cable Length of HVDC export cable Cumulative HVDC export cable 5 2 Figure 6 Forecast UK subsea export cable demand to 22. There are more manufacturers of medium voltage subsea array cables used to connect the turbines to the offshore substations and there are fewer barriers to new companies entering. As shown in Figure 7, however, total demand up to 22 is expected to be more than 4,km of cable for the UK market with a peak annual demand of almost 7km. '11 '12 '13 '14 '15 '16 '17 '18 '19 '2 Number of HVDC converters Cumulative HVDC converters Number of HVAC transformers Cumulative HVAC transformers Figure 8 Forecast UK substation HVAC transformer and HVDC convertor demand to , 6 6, 5 5, 4 4, 3 3, 2 2, 1 1, '11 '12 '13 '14 '15 '16 '17 '18 '19 '2 Length of array cable Cumulative Figure 7 Forecast UK subsea array cable demand to 22. There will also be significant demand for offshore and onshore substations and DC converter stations. As can be seen in Figure 8, up to 2 high voltage AC transformers and six high voltage DC converters will be required annually by 22 for the UK market. There is currently concern over the supply of DC converter stations as they are only available from limited number of suppliers with proprietary technologies. The construction of onshore and offshore substations will also generate considerable demand Market conditions 7

12 Annual vessel charter demand Annual vessel charter demand 1.4. Installation services demand Turbine and foundation installation vessels The offshore wind industry needs vessels with large amounts of deck space, high transit speeds and cranes with hook heights of approximately 1m. This means that, while construction vessels from the oil and gas industry have been used in the past, there are significant advantages in using purposebuilt ships. Currently, the industry has a relatively small fleet of specialist vessels but, while there have been concerns about a lack of investment, there now appears to be a strong pipeline of turbine and foundation installation vessels under construction. As can be seen in Figure 9, by 22 we estimate that up to eight turbine installation vessels will be required to serve the UK market plus a similar number of foundation installation vessels. Furthermore, the expected growth in the size of turbines and foundations and the requirement to operate further from shore in water depths of up to 5m means the vessels themselves will need to conform to more demanding specifications. Cable installation vessels The UK market is expected to require up to 1 cable installation vessels by 22, of which at least two must be suitable for export cable installation. A key challenge for the offshore wind industry is a lack of export cable installation vessels with cable carousels large enough to be able to carry the length of cable required to connect wind farms located more than 1km offshore. Combined with high levels of competition from the interconnector market, this area of activity is considered a potential bottleneck for development. Array cable installation has proved technically challenging with problems reported on most projects. Many of these stem from pulling the cable through the turbine transition piece or damage during or after laying By the end of the decade, most projects will require vessels capable of working in water depths of more than 5m with a crane capacity of more than 75 tonnes. '11 '12 '13 '14 '15 '16 '17 '18 '19 '2 Number of export cable installation vessels Number of array cable installation vessels 15 Figure 1 Forecast UK subsea cable installation vessel demand to '11 '12 '13 '14 '15 '16 '17 '18 '19 '2 Number of turbine installation vessels Number of foundation installation vessels Figure 9 Forecast UK turbine and foundation installation vessel demand to 22. Ports To date, the UK has seen a growing level of port activity but has faced strong competition from the Continent. Future construction port facilities are expected to have a storage area of at least 12 hectares to allow for the laying out of turbine blades, towers and turbines in preparation for final delivery. In terms of quayside, ports will need at least 3m with access for vessels up to 14m long and 45m wide with 8m draft. Such a facility is expected to be able to handle up to 5MW of installation traffic per year. 8 Market conditions

13 There is also an incentive for developers to use ports as close to the wind farm site as possible. This minimises the steaming time for a jack-up, which reduces weather risk and therefore increases turbine installation rates. Discussion with the industry suggests that developers would prefer construction ports less than 12 hours steaming time from site (25km at 12 knots) and are unlikely to consider installing large projects from a port that is more than 24 hours steaming time (5km at 12 knots) from the wind farm. It is forecast that the UK market will require up to seven port facilities equivalent to that described above. In reality, it is more likely that the majority of activity will take place through a smaller number of large clusters able to handle 1GW or more per year. Due to the focus of the European offshore wind market on the North Sea, it is expected that such clusters would be located on the major estuaries of the east coast of England and Scotland. See Figure 11 for locations of likely key locations. - Tay - Forth - Tyne - Tees - Humber - Medway Figure 11 Potential UK east coast manufacturing cluster locations Funding Project funding It is estimated that the UK s offshore wind development will require more than 7 billion in investment by 22. To date, most of the UK s operating offshore wind farms have been funded from the balance sheet of asset owners without recourse to project finance. This investment has usually been provided by large power utilities but a number of investors have also bought shares in projects. Over the next 1 years, balance sheet funding is expected to account for around half of the capital investment required with the partial-sale of completed wind farms expected to be an important vehicle for raising capital for new projects. Although no UK wind farms have been projectfinanced yet, the scale of Round 3 means that banks will almost certainly need to become involved at an early stage. Interest from the financial community is expected to grow as new ways of reducing risks are developed. As a further means of encouraging investment, the Government has said it will establish a Green Investment Bank in 212 with a 3 billion reserve, some of which may be used to unlock private investment by filling potential funding gaps caused by overstretched utility balance sheets or underwriting risk to reduce the cost of capital. Supply chain funding As well as the investment that is required in offshore wind farm hardware, significant investment in new capacity is also required by the supply chain. This includes funding for the research and development required to bring products to market and investment in manufacturing infrastructure and facilities. The majority of this cost will be privately funded but public funding has also been made available. It is forecast that approximately 2 billion will need to be invested in UK infrastructure by 22 to support the expected levels of activity. In 21, the Government advised that it would provide up to 6 million to support the Market conditions 9

14 development of large scale offshore wind manufacturing facilities at port sites in England. A further 7 million was also announced by the devolved Scottish Government with similar objectives. We are making these investments so that major manufacturers will decide that this is the place they want to come and build their offshore wind turbines. David Cameron, Prime Minister On a regional level, support for individual companies has been delivered through the English Regional Development Agencies. Although some will be abolished by the current Government in 211, this support is likely to continue in some form through local economic partnerships (LEPs) which are being introduced in their place. Enterprise zones are also expected to be established in the Tyne and Tees areas to encourage offshore wind manufacturing activity by offering business tax relief for up to five years Permitting frameworks Planning authorities Since 21, offshore wind projects with a capacity of more than 1MW have been subject to the Infrastructure Planning Commission (IPC) for consent. The IPC was set up by the previous Government as an independent body to streamline the planning process and reduce uncertainty about timescales for obtaining a decision. The IPC process is broken down into five stages: - Pre-application consultation - Application - Acceptance of the application by the IPC - Examination of the application, and - Decision. According to the IPC, it should take a year to make a decision from accepting an application. The new Government has stated that it intends to replace the IPC in 212 with the Major Infrastructure Planning Unit (MIPU). It is intended that this will maintain the IPC s timescales and processes but the final decision on whether to grant consent will be taken by the Secretary of State to provide democratic accountability. Consultees The IPC process has introduced a framework through which a range of public and private bodies are consulted on the plans of developers. This framework has been established to ensure that all the relevant stakeholder submit their views within an established timeframe. Statutory consultees which must be consulted for offshore wind projects include: the Environment Agency; Natural England; English Heritage; the Ministry of Defence; OFCOM (the telecommunications regulatory body); the Civil Aviation Authority; the Marine Management Organisation; and local authorities. Non-statutory consultees are invited to participate in the consultation process as well and include local businesses and residents as well as trade associations and special interest groups. Examples relevant for offshore wind include the Chambers of Commerce, the Chamber of Shipping, the National Federation of Fishermen s Organisations, Trinity House and the Royal Yachting Association. An ongoing concern about the planning process is the possible delays caused by the need for statutory and non-statutory consultees to feed into applications in a timely manner. Due to the current economic climate and government cuts, many of these bodies have limited resources and may struggle to handle the rapidly increasing pipeline of offshore wind projects. A further challenge for developers is that the IPC process requires them to have greater certainty over the cumulative impact of their projects at an earlier stage than previously demanded. The need to define the maximum potential adverse effect of a project could limit a developer s ability to optimise the design of offshore wind farm once consent has been granted because it may need to definitively establish its turbine and infrastructure choices and not be able to benefit from subsequent technology developments. 1 Market conditions

15 1.7. Test and demonstration facilities The UK already has strong research and development (R&D) capability in a number of sectors relevant to the offshore wind industry including aerospace, environmental analysis, composites and some aspects of drive train development. In recent years, increasing levels of R&D activity focussed specifically on offshore wind has developed across the country s universities, research and technology organisations and private companies. Funding Offshore wind R&D funding has been made available in the UK from a number of sources. To date, funding sources have included the Department of Energy and Climate Change (DECC) ( 3 million), the Carbon Trust s Offshore Wind Accelerator ( 5 million) and the Energy Technologies Institute (ETI) ( 15 million). University research into offshore wind is generally funded by the Engineering and Physical Science Research Council (EPSRC). Facilities Doctoral training centres. There are a number of universities with offshore wind-related centres of excellence supported by EPSRC. Centres of relevance to the offshore wind industry include: Wind Energy Systems (University of Strathclyde); E-Futures (University of Sheffield); Technology for Low Carbon Futures (University of Leeds); and the Advanced Composite Centre for Innovation and Science (University of Bristol). A renewable energy doctoral training centre is currently being planned. Research and technology organisations. There are a number of relevant open access R&D facilities in the UK that provide both expertise and facilities that are relevant to offshore wind. Two notable examples are TWI, which provides a range of services including reliability and asset management and Narec, which houses the UK s only open access full scale blade and drive train test facilities. Changes in the UK R&D landscape The UK R&D landscape is currently undergoing significant changes. In 21, the UK government announced a new strategy to maximise the commercial impact of UK R&D and launched the Technology Innovation Centres (TICs). These will be a network of elite centres with different specialities. Each TIC may consist of several centres, with an overarching management organisation. The centres will have open access R&D facilities for testing and prototyping and will be primarily run by industry. Six centres have been announced and the first that will be developed is the High Value Manufacturing TIC. Others that may be relevant to the wind industry are the Energy and Resource Efficiency TIC and the Electronics, Photonics and Electrical Systems TIC. The intention is that much of the near to market R&D in the UK will focus around these TICs with the university network providing underpinning research Contracting standards The process of awarding major contracts in the offshore wind industry generally utilises a competitive tendering process in which bidders are subject to a rigorous evaluation of submissions against specific weighted criteria. Standard requirements of purchasing organisations cover a company s health, safety and environmental performance, experience, local knowledge and financial standing. Suppliers will be expected to be aware of, and be able to comply with, the relevant provisions of: UK health and safety legislation such as Construction (Design & Management) Regulations 27, Health & Safety at Work Act 1974 and Management of Health and Safety at Work Regulations 1999 Appropriate compliance with design standards and methods of construction such as relevant marine environment DNV, BS and IEC codes, and Market conditions 11

16 Management systems such as BS EN ISO 91, 141 and 181 for quality, environmental and health and safety methodologies respectively Market barriers The development of the offshore wind rounds by The Crown Estate means that the UK offshore wind market currently has the largest defined pipeline of projects in the world. Market barriers still exist, however, that could hamper progress. Market Mechanism. The UK s main market incentive to develop renewable electricity generation is currently the Renewables Obligation (RO). This places an obligation on retailers of electricity to obtain an annually increasing proportion of their electricity from renewable sources. Under its planned Electricity Market Reform, the Government has said it intends to replace the RO with a feed-in tariff (FIT) which is a fixed revenue that a wind farm owner receives for the energy it sells. It is currently consulting on whether to adopt a contract for difference or premium FIT. More information about the existing and planned market support mechanisms can be found in DECC s electricity market reform consultation document published in December 21. v There have been concerns raised about the impact that the proposed change could have on the UK s market. Unless the new regime provides the same or improved level of incentive and risk for developers, there is risk that projects will not proceed. This market reform is being undertaken with the aim of reducing electricity price risk but the uncertainty caused by replacing the existing scheme may also cause delays as developers postpone making investment decisions until the impact of the reform is clear. Planning Reform. As discussed above, the Government has introduced reforms via the Localism Bill that will see the IPC replaced. restricting the UK s onshore wind market both in terms of the difficulty of obtaining permission for projects themselves, and for the necessary associated reinforcement of the electricity transmission network. A key justification for forming the IPC was to ensure that the major projects required to meet the UK s renewable targets were not unreasonably delayed. While the Government has confirmed that the replacement for the IPC will maintain the same timescales, any changes that introduce further delay into the consenting processes are expected to discourage investment. Supply chain investment. As discussed above, the investment required for the development and construction of the UK s offshore wind farms is considerable. Investment in the supply chain is comparatively smaller but is still expected to amount to billions of pounds and is required to achieve the cost improvements that will be required to sustain long term activity. The UK s pipeline of offshore wind projects has attracted a number of the major Tier 1 suppliers to a point of committing to locate facilities in the UK. To support this development, investment will be required by the UK supply chain. UK companies have often been seen by the wind industry as risk averse to investing in new facilities. One reason for this is a lack of confidence in the long term nature of the market due to the relative lack of UK onshore activity compared with the Continent, where there have been long periods of year on year growth. There are a number of reasons why it is in the interest of both the offshore wind industry and the UK government to support supply chain development: Growing a focussed supply chain for large components in and around the ports closest to offshore wind farms offers significant logistics savings. Planning issues have already had an impact on the wind industry by causing significant delays for onshore and offshore projects. The uncertainty caused by the planning system has been blamed for There is a large amount of relevant experience available from North Sea operators in the UK s oil and gas sector. 12 Market conditions

17 As revenue from developers UK wind farms will be in pounds, the fact that they can buy goods and services in the same currency means they can protect themselves from exchange rate fluctuations. The industry is expected to generate significant levels of employment and tax revenue. As well as serving the UK market, companies setting up facilities will also have significant export opportunities. Supply chain events run by The Crown Estate have sought to educate companies about the opportunities offered by the industry as well as introducing suppliers to potential customers. It should be noted that, while stakeholders are actively encouraging interest from overseas companies in the UK offshore wind market, the intention is to increase UK-focused inward investment rather than importing more goods and services. Indeed, the UK is unlikely to be satisfied with continued high levels of overseas content in domestic projects. Market conditions 13

18 2. Market structure An increasing number of companies from a range of sectors are already involved in the UK s offshore wind market, ranging from multinational conglomerates to small component manufacturers. Behind the scenes, various Government and nongovernmental organisations are also working to develop the structure and frameworks that will support the industry. This section identifies the key stakeholder organisations and industrial players and provides a summary of the current market structure in each of the main sectors Stakeholder organisations The Crown Estate The Crown Estate is a private organisation that administers a large property and land estate and pays its profits to the Treasury. Its portfolio covers urban property, the Windsor Estate, large rural holdings and its Marine Estate. The Marine Estate covers most of the seabed out to the UK s 12 nautical mile territorial limit and includes the rights to explore and utilise the natural resources of the UK continental shelf (not including oil, gas and coal). The Energy Act 24 also gives The Crown Estate the right to license the generation of renewable energy within the Renewable Energy Zone out to 2 nautical miles. As discussed in Chapter 1, The Crown Estate has sought to exploit these offshore wind assets through a series of leasing rounds with a potential total capacity of more than 5GW. Revenue is generated by The Crown Estate by charging developers a seabed lease that is based on the amount of revenue generated by the offshore wind farms. To assist with the rapid development of Round 3, The Crown Estate is co-investing with developers up to half of the cost of obtaining planning consents. It also seeks to address issues common to all projects such as seabed archaeology and works with key stakeholders such as the fishing industry, the oil and gas industries and wildlife groups. The UK Government Department of Energy and Climate Change. Until 28, mitigating the impact of climate change had been the responsibility of the Department for Environment, Food and Rural Affairs (DEFRA) while energy policy was owned by the Department for Business, Enterprise and Regulatory Reform (BERR). The need to ensure these two policy areas were aligned meant that in 28 these two functions were merged to form DECC. The remit for DECC extends to Scotland, Wales and Northern Ireland but not to the Isle of Man and the Channel Islands. Its main policy direction under the previous Labour Government was set out in the 29 Renewable Energy Strategy which describes how the UK intends to meet its binding EU renewable energy target described in Chapter 1. vi The current coalition Government has largely adopted these ambitions in its 21 UK Renewable Energy Action Plan. vii DECC has sought to stimulate UK offshore wind supply chain activity and draw inward investment to the UK through grants to both wind turbine manufacturers and suppliers. DECC also sets the policy on market support mechanisms and is the host department for the Office of the Gas and Electricity Markets (Ofgem) (see below). Department for Business, Innovation and Skills. BIS is responsible for business support and regulation as well as research and higher and further education. Its jurisdiction is mostly restricted to England although its research funding covers the whole of the UK, as does its promotion of overseas trade. BIS sets the UK s low carbon economy policy, in close dialogue with DECC. It is overseeing the allocation of the 6 million fund for offshore wind port infrastructure announced in the Government s 21 Spending Review. BIS delivers most of its impact through associated public bodies. It is the host department for UK Trade and Investment (UKTI) which promotes overseas trade and inward investment through the UK s worldwide network of embassies and consulates. BIS also oversees regional economic 14 Market structure

19 development and inward investment which is mostly delivered through the Regional Development Agencies (RDAs) and the devolved administrations (see below). The RDAs have also delivered business support programmes and a number have treated offshore wind as a major strategic priority. As such, they have been important players in educating companies about the opportunities offered by offshore wind and providing support to businesses. The Coalition Government is abolishing the English RDAs in 211 but it is anticipated that BIS will continue to provide business support funding through a network of local enterprise partnerships (LEPs) that will replace some the functions of RDAs. Devolved government Northern Ireland, Scotland and Wales have elected administrations with devolved powers from central government. The power of each body is defined by a separate piece of legislation and the scope of their responsibilities varies. Energy policy has typically been retained by central government while economic development and planning has been devolved. In practice, the separation of energy policy is not clear cut as the Scottish Government has been able to stop new nuclear power stations being built despite the decision nominally falling to central government. The Scottish and Northern Ireland governments have also set up public bodies, including Scottish Development International and Invest Northern Ireland, to supplement the work of UKTI. Regulators and consenting bodies Infrastructure Planning Commission. The IPC was established in 29 to streamline the planning system for nationally significant infrastructure projects and overcome the lengthy planning process that has affected a number of high profile projects. In England, it examines applications from the energy, transport, waste water and waste sectors while, in Wales, it examines applications for energy and harbour developments. The current coalition Government has stated that it will abolish the IPC, leaving the final decision with the Secretary of State. The process will be retained within a Major Infrastructure Unit in the Department for Communities and Local Government. Office of the Gas and Electricity Markets. Ofgem regulates the energy market across England, Scotland and Wales. Its primary role is to protect electricity and gas consumers by maintaining healthy competition between providers but it is also required to take account of the environmental impact of the energy generated. Ofgem administers the RO but it does not set the level of support which is the responsibility of its parent department, DECC. Ofgem s role incorporates the regulation of the offshore transmission network. So far, offshore wind farm developers have built and owned the grid connection but EU law means that the generating assets and transmission network must now be under separate ownership. Ofgem is currently overseeing the transition of existing grid connection assets to independent offshore transmission operators (OFTOs) to comply with this requirement. Ofgem had initially proposed that future grid connections would be built by the OFTOs but this raised concerns among developers that the connection may not be ready in time. It is now more likely that developers will build the connection but then transfer the asset to an OFTO once the project is completed. Electricity transmission The UK onshore high voltage transmission grid is operated by National Grid in England and Wales, Scottish Power and Scottish and Southern Energy (SSE) in Scotland and Northern Ireland Electricity in Northern Ireland. National Grid transmission is typically at 275kV or higher while the Scottish and Northern Irish grids are at 132kV and 33kV respectively. National Grid is also the National Electricity Transmission System Operator (NETSO) for England, Scotland and Wales, so is responsible for overseeing and managing the flow of electricity across the whole of the transmission network. This includes the elements owned and operated by Scottish Power and Scottish and Southern Energy. Connections for new generators such as offshore wind farms are also co-ordinated by National Grid. Market structure 15

20 Acting in its role as NETSO, National Grid publishes an annual Offshore Development Information Statement, which aims to help the development of a coordinated and economical offshore electricity transmission system. viii Scottish Power, SSE and National Grid all also have interests in the development of offshore wind projects beyond their transmission remits. As power generators, Scottish Power and SSE both have significant portfolios of developments while National Grid has been awarded preferred bidder status by Ofgem to become an offshore transmission operator (OFTO). Trade bodies RenewableUK. RenewableUK, formerly the British Wind Energy Association, is the primary trade body for the offshore wind industry. Its membership extends to companies involved in wave and tidal energy and onshore wind but its activities do not currently include other forms of renewable energy generation. Key activities include national conferences, political lobbying, and policy development on issues such as skills, and health and safety. Renewable Energy Association. REA is a more broadly based trade association than RenewableUK, with membership covering solar and biofuels as well as wind and wave and tidal. While there is some overlap with RenewableUK s membership, the REA is generally not seen to represent the UK offshore wind sector. NOF Energy. NOF energy is a membership-based business development organisation. Its focus has traditionally been on oil and gas but it has recognised the synergies that could be achieved with offshore wind and has extended its activities accordingly. These include networking and events, international business support, industry intelligence and consultancy services. 16 Market structure

21 2.2. Offshore wind farm developers and owners The scale of investment required in offshore wind means that many developers of UK projects are large companies with interests in a number of European countries. They fall into three categories: Large energy companies such as Centrica, SSE, RWE and Statoil Financial backers, such as Masdar, Siemens Project Ventures and Stadtwerke München, and Independent developers, such as Warwick Energy and Mainstream Renewable Power. Most projects are likely to change hands at least partially either before or after construction. In many cases the new owners have existing offshore wind assets and their acquisitions enable them to broaden their portfolio of assets. Centrica Energy, 135 Vattenfall, 15 Statoil, 158 Statkraft, 158 E.ON Climate & Renewables, 189 Siemens Project Ventures, 68 Masdar, 126 RWE npower renewables, 252 DONG Energy, 52 SSE Renewables, 298 Developer share of operating projects and those under construction or in development are shown in the figures below. As of March 211, about 45GW is in development, 1.7GW under construction and 1.3GW operating. Figure 13 Developer share of UK offshore wind farms under construction (MW). Centrica Energy, 142 RWE npower renewables, 15 Other, 17 Vattenfall, 39 E.ON Climate & Renewables, 131 SeaEnergy Renewables, 146 Fluor, 17 DONG Energy, 1994 Siemens Project Ventures, 258 Statoil, 225 Other, 321 SSE Renewables, 5628 RWE npower renewables, 5548 Centrica Energy, 534 E.ON Climate & Renewables, 244 DONG Energy, 38 Statkraft, 225 Mainstream Renewable Power, 236 Vattenfall, 3737 Scottish Power Renewables, 5267 Figure 12 Developer share of UK operating offshore wind farms (MW). Figure 14 Developer share of UK offshore wind farms in planning (MW). Market structure 17

22 2.3. Offshore transmission owners In order to comply with European legislation, the UK has introduced a system that separates the ownership of the generating assets from the ownership of the offshore grid connection. Offshore wind farms that do not have an offshore substation are excluded from the process. Only companies identified through a tendering process run by Ofgem in 21 are qualified to act as OFTOs. These are: Balfour Beatty Capital DONG Energy Sales and Distribution (subsequently withdrew) Green Energy Transmission (a consortium of Equitix and AMP Capital Investors) Macquarie Capital Group (a consortium including Macquarie Capital Group, Barclays Private Equity and NIBC Infrastructure Partners) National Grid Offshore, and Transmission Capital Partners (a consortium of Transmission Capital International Public Partnerships and Amber Infrastructure Group). The tendering process for maintaining each connection to offshore wind farms that are operating or under construction is currently underway. The first contract was awarded in early 211 to Transmission Capital Partners for the Robin Rigg wind farm. It is anticipated that further awards for Gunfleet Sands, Sheringham Shoal, Thanet, Walney and Ormonde will be made during 211 while the tender for the Greater Gabbard project is to be rerun. The tendering processes for the London Array and Lincs projects, which began offshore construction in 211, have not started. An OFTO is paid a fixed fee based on its bid for the transmission line by National Grid, which recovers the cost through transmission charges paid by the generator. 18 Market structure

23 Annualinstalled capacity (MW) 2.4. Supply chain This section outlines the supply of key components and services to UK projects between 23 and 211. Construction of a wind farm usually runs over several years and generation by some turbines often begins before a wind farm is completed. Here, projects have been assigned to calendar years as presented in data published by the European Wind Energy Association. ix Data has been included for the Walney 1, Ormonde, Sheringham Shoal and Greater Gabbard projects on the assumption that they will be completed by the end of 211. Wind turbines The UK offshore wind turbine market to date has been dominated by Vestas and Siemens who have supplied all completed projects apart from two turbines by REpower on the Beatrice demonstrator project and the Ormonde wind farm which is currently under construction. See Figure 15 for a breakdown of turbine supply to the UK market by company since 23. The dominance of Siemens and Vestas is unlikely to change significantly in the short term as they are already earmarked or contracted for many of the projects planned up to the start of Round 3. This lack of competition in the market has been a challenge for the industry but REpower are expected to gradually increase their market share and Areva and Bard are now establishing a track record on the Continent. Looking beyond 215, about 3 companies are known to have offshore turbine designs at various stages of development with the majority targeting the European market. The fact that future offshore projects are unlikely to be smaller than 3MW, however, will limit the ability of players to capture small market shares and this means that the European offshore wind industry is unlikely to support more than ten wind turbine suppliers. 1,4 1,2 1, REpower Siemens Vestas Figure 15 Suppliers of wind turbines to the UK offshore wind market from 23 to 211. Turbine foundations With the exception of the Beatrice demonstrator project and the Ormonde wind farm currently in construction, all completed UK projects have used monopile foundations and the large majority of these have been supplied by the Belgian joint venture between SIF and Smulders. The Scottish-based companies Cambrian Engineering and Isleburn jointly delivered the foundations for Scroby Sands in 23 but have not delivered any since. More recently, a consortium of Erndtebrücker Eisenwerk (EEW) and Bladt Industries were contracted to build the foundations for the Walney 1 project and they also won the contract for the 175 foundations for the first phase of London Array. The monopiles for the Greater Gabbard wind farm were produced by Chinese manufacturer Shanghai Zhenhua Heavy Industry (formerly ZPMC). In the UK, north east-based company Tees Alliance Group (TAG) has invested approximately 2 million in a production facility which is expected to start operations in 211 and other players have signalled intent to enter the market. Market structure 19

24 Annualinstalled capacity (MW) The Beatrice demonstrator project used jacket foundations that were manufactured by Burntisland Fabrications (BiFab) which has also supplied the jacket foundations used on the Ormonde and German Alpha Ventus projects. See Figure 16 for a breakdown of foundation supply to the UK market by company since 23. 1,4 1,2 suit offshore wind. In future, it is expected that turbine installation will largely be undertaken by specialist wind farm installation vessels. There are about 15 installation vessels currently in construction. In a number of cases, these have been commissioned by new players to the installation market, for example, Master Marine, Beluga Hochtief and Swire Blue Ocean. 14 1, BiFab Camcal/Isleburn Erndtebrücker Eisenwerk/Bladt SIF/Smulders Shanghai Zhenhua Heavy Industry Annual installed capacity (MW) A2SEA Gulf Marine KS Energy MPI Offshore Seacore Seajacks Scaldis SMIT Figure 16 Suppliers of turbine foundations to the UK offshore wind market from 23 to 211. Turbine installation The leading turbine installation companies to date have been A2SEA and MPI Offshore. While a number of other companies have been active, few have built up an extensive track record. Deriving market shares is problematic since in many projects, more than one supplier has been used. This has been done to accelerate installation or because project schedules have slipped and vessels have needed to be mobilised for other projects. In Figure 17, the challenge of establishing the contribution of different suppliers in delivering a given project has been addressed by dividing the installed capacity equally between those players active on the project. Figure 17 Installers of turbines in the UK offshore wind market from 23 to 211. Foundation installation Many of the issues seen in the turbine installation market also apply to the foundation installation market. A further complication is that foundation installation may require more than one vessel and often from different suppliers. In Figure 18, we consider the main installation vessel used. A2SEA and MPI Offshore have had a significant share of the market. They are joined by several operators of heavy lift vessels, notably Ballast Nedam, and its heavy lift crane Svanen, and Scaldis, and their sheer leg crane Rambiz. Such vessels have also been used for offshore substation installation. There are also differences in the way vessels are contracted. The vessel operator may be contracted directly by the wind farm developer or via a third party. Figure 17 shows the share of the charter market rather than the share of installation contracts. For 211, we assume that the vessels earmarked for use will complete each project. Many of the vessels have been used in other sectors such as oil and gas and been modified to 2 Market structure

25 Annual installed capacity (MW) A2SEA Ballast Nedam MPI Offshore Scaldis Seaway Heavy Lifting SMIT The issue of cable supply is of equal concern for projects requiring HVDC cable. HVDC cable suffers lower transmission losses and projects more than approximately 8km from shore are likely to use DC systems. HVDC cables will not be required for UK projects before 215 but investment will need to be in the near term due to the long lead times for the testing and certification for new cable products and manufacturing lines. Early wind farms that do not have substations have a medium voltage grid connection. The market shares shown in Figure 19 only include projects using high voltage export cable. Figure 18 Installers of foundations in the UK offshore wind market from 23 to 211. Subsea export cable Apart from a few early projects that were close to shore, most UK offshore wind farm projects have incorporated offshore substations. The primary function of the offshore substation is to step up the medium voltage of electricity generated by the turbines (typically 33kV) to high voltage (typically 132kV) in order to minimise transmission losses. The substation also includes protective switches (circuit breakers) to allow faults in array cables from the turbines to be isolated. There is a trend towards fitting two or more transformers and related switchgear which allows the wind farm to continue to operate, albeit at reduced capacity, in the event of a fault in one of the two independent export cables from the offshore to onshore substation. All projects in the UK to date have used AC transmission systems. DC transmission systems for wind farm export will be employed when the distance to the onshore connection point exceeds about 1 kilometres. The availability of high voltage AC export cable is a significant concern for the industry because of the restricted number of companies able to supply the market. Currently only Prysmian and Nexans have a track record in supplying high voltage export cable to UK projects. ABB has supplied projects elsewhere in Europe and nkt cables and General Cable have recently entered the high voltage subsea cable market. The UK-based supplier JDR Cables Systems is also establishing capability to enter the high voltage subsea cable market. Annualinstalled capacity (MW) 1,4 1,2 1, Nexans Figure 19 Suppliers of export cable to the UK offshore wind market from 23 to 211. Subsea array cables Prysmian There are more manufacturers producing 32kV array cables used to collect power from the turbines than export cable. So far, seven companies have supplied UK projects and, while AEI Cables no longer manufactures 32kV subsea cable, there are a number of potential new entrants to the UK market, including LS Cable and General Cable/NSW. Market structure 21

26 1,4 1,4 Annual installed capacity (MW) 1,2 1, Annual installed capacity (MW) 1,2 1, ABB AEI Cables JDR Cable Nexans NKT Parker Scanrope Prysmian MPI Offshore Oceanteam Subocean Visser & Smit Figure 2 Suppliers of array cable to the UK offshore wind market from 23 to 211. Subsea cable installation Cable installation has been a problematic area for the offshore wind industry. It has been the biggest source of insurance claims to date and few projects have been completed without the need for repairs. Of the companies supplying the UK market, CNS Subsea, Oceanteam, Submarine Cable and Pipe and, most recently, Subocean have all had financial difficulties and have either withdrawn from the market or been acquired by larger players. Export cables. Export cable installation has typically been undertaken by shallow draft barges that are manoeuvred by tugs and which can beach in shallow water between tides. These vessels will not be suitable for projects further offshore and it is anticipated that, from 215, most export cables will be laid by DP2 vessels with carousels capable of handling up to 1km of cable. Figure 21 Installers of export cable in the UK offshore wind market from 23 to 211. Array cable. Array cable installation has proved technically demanding with the need to move vessels close to the turbine foundations and pull the cable through the J-tubes. Again, barges have been used but there is an increasing use of smaller DP2 vessels. There have also been concerns on the part of cable installers that foundation design has not adequately recognised the challenges of cableinstallation. The risks and difficulties associated with cablelaying may be a cause for the large number of players in the array cable installation market shown in Figure 22. Only Subocean has had a sustained presence in the market but it went into administration in early 211 and has been acquired by Technip. There are very few of these vessels globally and they been employed primarily for the power interconnector market. Investment in new-build or modified vessels will be needed but there are encouraging signs that demand will be met. Significant new entrants to the market are likely to include Beluga and P&O Maritime Services in partnership with Offshore Marine Management. 22 Market structure

27 1,4 1,4 Annual installed capacity (MW) 1,2 1, Annual installed capacity (MW) 1,2 1, CNS Subsea CTC Marine CT Offshore Global Marine Systems MPI Offshore Submarine Cable & Pipe Subocean Visser & Smit ABB Alstom/Areva Siemens Figure 22 Installers of array cable to the UK offshore wind market from 23 to 211. Figure 23 Suppliers of substation electrical systems to the UK offshore wind market from 23 to 211. Offshore substations To date, most UK projects have only required a single substation but it is anticipated that future projects will use multiple substations if the expected energy output is more than approximately 5MW. Only ABB, Alstom (which acquired Areva Transmission and Distribution in 21) and Siemens Transmission and Distribution have the capability to supply high voltage transformers, reactors and switchgear, although there are other companies that can supply individual components. For most UK projects, developers have sought to tender a single topside substation contract and this has typically been awarded to one of the electrical suppliers listed above, who then subcontract the fabrication of the offshore topside. An alternative strategy is to contract the fabricator, who subcontracts the electrical supply. As an example, this strategy was adopted for Gunfleet Sands where Bladt procured ABB electrical components. The market share shown in Figure 23 shows the share of substation electrical supply. Market structure 23

28 2.5. Industry alliances and consolidation As the size of UK and Continental offshore wind projects has grown, there has been an increasing number of industrial alliances within the supply chain. Such alliances allow for greater access to funding and promote the pooling of experience. Developer consortia Round 3 gave companies the opportunity to bid for the rights to develop wind farms in zones that were far larger than anything that had been offered before. One result of this increase in scale was the formation of developer consortia for most of the larger zones. In some cases, including Dogger Bank (Statoil, Statkraft, RWE and SSE) and Norfolk Bank (Vattenfall and Scottish Power), these consortia are composed of utility-developers who have chosen to pool their financial and organisation resources as well as technical knowledge and offshore wind experience. In other cases such as the Moray Firth (EDP Renováveis and SeaEnergy Renewables), the Irish Sea (Centrica and RES) and the Firth of Forth (SSE and Fluor) a utility-generator has teamed up with an EPC (engineer, procure and construct) contractor or a engineering consultancy who can either project manage the development or advise during the process. A final consortium option was devised for the Hornsea zone in which the independent developer, Mainstream Renewable Power, formed a joint venture with the project venture division from Siemens. In this case, agreements are made with strategic partners to supply components and services and generate funding. Turbine framework agreements Where a developer has a sizable pipeline of offshore wind projects, it may be preferable for it to arrange framework contracts with supply chain companies. Such agreements can offer long term commitment in return for improved prices, increased certainty of supply and deeper sharing of technical information compared with contracting on a project-by-project basis. There have been two significant offshore wind turbine supply framework contracts announced to date. In 29, RWE and REpower signed an agreement worth 2 billion for the supply of 25 turbines. The majority of these turbines will be used on the German Innogy Nordsee I project and the Belgian Thornton Bank II and III projects. Also in 29, DONG and Siemens signed a similar agreement for the supply of 575 offshore turbines, many of which are being deployed in UK projects including Lincs, Walney I and II and London Array. While Mitsubishi has yet to bring an offshore wind turbine to the market, in 21 SSE signed a strategic agreement with them to cooperate on their renewable energy development. Innovation-focused cooperation As well as the alliances that have been established independently by companies, a number of partgovernment funded think-tanks have sought to bring together companies with the aim of advancing technology and reducing costs. The Carbon Trust s Offshore Wind Accelerator programme is co-funded by eight developers of UK projects: Statoil, DONG Energy, SSE, Statkraft, Scottish Power, E.ON UK, RWE npower renewables and Mainstream. The programme has a budget of more than 9 million to support the development of innovative solutions in foundation, access, transmission and yield calculation technology, focussing delivering on a short-to-medium term impact. ETI is a public/private organisation funded by BP, Caterpillar, EDF Energy, E.ON UK, Rolls-Royce, Shell and the UK Government. To date, it has supported the development of novel offshore wind systems including a vertical axis turbine, a floating turbine/foundation concept and an advanced condition monitoring system to improve reliability and operational costs. Acquisitions and alliances A number of turbine manufacturers have entered into strategic partnerships with specialist companies for the development of their blades. 24 Market structure

29 REpower entered into a joint venture in 27 with blade manufacturer SGL Rotec to set up a production business called PowerBlades, capable of producing blades for its 6M turbine. In 211, Alstom, while developing a 6MW turbine that will be optimised for the UK North sea market, announced a strategic partnership with LM Wind Power to develop what they describe as the world s longest wind turbine blade ever produced. In 29, Danish developer DONG Energy acquired turbine and foundation installation vessel owner A2SEA in a move to secure its own project pipeline by ensuring vessel availability. This acquisition was followed a year later by the news that Siemens had agreed to become a minority shareholder in A2SEA. More recently, DONG Energy has also become a 3 per cent minority shareholder in cable installation and maintenance specialists CT Offshore. As an alternative to a partnership, in 29 Areva acquired the German manufacturer of blades, PN Rotor, in order to meet demand for its offshore turbine. In terms of towers, in 211 SSE and Marsh Wind Technology announced that they had formed a joint venture call Wind Towers that is set to complete the acquisition of a tower production facility in Campbeltown on the west coast of Scotland. This facility, which had belonged to Vestas before it was sold to Skykon (since in administration), currently produces towers for onshore turbines but has benefited from recent investment that will enable it to make offshore towers as well. SSE has also agreed a long term framework contract with jacket foundation manufacturer BiFab to buy at least 5 units a year for up to 12 years from 214. This followed SSE s purchase of a 15 per cent stake in BiFab. In a potentially wider framework agreement that would cover a range of offshore wind activity, SSE also announced a memorandum of understanding in 211 that included BiFab plus the turbine and transmission and distribution divisions of Siemens, engineering and vessel supplier Subsea 7 and consultancy Atkins with the aim of delivering cost improvements. It is expected that the arrangement will be formalised later this year. The restricted supply of turbine installation vessels has been considered a constraint in the past and this has triggered a number of alliances and acquisitions. Heavy lift vessel specialist Beluga and construction giant Hochtief entered into a joint venture to order a next-generation jack-up vessel capable of installation up to 8 turbines a year in water depths of 5m. Market structure 25

30 2.6. Projects and supply chain structure Background Currently, the capital cost (CAPEX) of developing and installing a UK offshore wind farm project is estimated to be approximately 3 million per MW. As Figure 24 shows, the expenditure for development and consenting accounts for approximately four per cent of the total cost. The procurement of the turbine and the balance of plant accounts for more than 7 per cent of the total cost while the installation of the project accounts for almost 25 per cent. Unlike sources of conventional generation, offshore wind farms have no primary fuel costs but do have ongoing operational costs (OPEX). These are currently estimated to be approximately 1, a year per MW. The complexity of an offshore wind farm means these costs are spread over a wide supply chain and a range of skills and technologies. The developer of the offshore wind farm will typically always undertake most of the planning and funding activities but the way in which contracts for other activities are arranged can vary and has evolved over the last 1 years. Over the next decade, factors such as increasing turbine size and projects moving into deeper water sites further offshore will force CAPEX costs up. On the other hand, cost savings will be found through greater efficiency and technology advances which will act to improve CAPEX costs. By 22, not including the impact of inflation, we expect CAPEX costs to remain similar to current levels. Looking in more detail, however, we expect to see turbine costs per MW increase in proportion as larger designs are used. On the other hand, installation costs will reduce. This is because the additional expense of handling larger foundations and turbines is compensated by the fact that fewer units need to be installed per MW which reduces the number of vessel moves and installation operations required. Development/consenting Turbine Balance of plant Installation Figure 24 Breakdown of CAPEX costs for UK offshore wind farms in Market structure

31 Turn-key model A number of UK offshore wind farms built to date were developed using the turn-key contracting approach. A simplified example of this type of structure is shown in Figure 25. This approach means that a project developer would hire an EPC (engineer, procure and construct) contractor to handle most aspects of the project including the procurement of the turbines and the balance of plant and coordinating installation activities. The EPC contractor will also take on the risk of installation delays or issues. For early projects, it was common for the turbine manufacturer to act as the EPC contractor. In other cases, specialist EPC contractors such as Fluor and KBR have been used. The EPC model minimises risk for the wind farm developer and, in the early days, was a way for wind turbine manufacturers to enable projects to be constructed. As competence in the supply chain increases, we anticipate at least a partial return to the single EPC construct model. In terms of the long term operation and maintenance of the offshore wind farm, all UK projects to date have been operated initially by the turbine manufacturer under a warranty arrangement that generally lasts around five years. Once this period is over, the developer can extend the contract with the turbine manufacturer, take on the activities itself or arrange for a third party to do so. Developer Project management Construction management Development studies Turbine design and manufacture Turbine installation Electrical design, manufacture, Foundations design, manufacture, Cable manufacture Wind farm O&M Turbine O&M installation installation installation Figure 25 EPC supply chain structure. Market structure 27

32 Multi-contract model For more recent projects, the EPC model has been used less frequently in favour of a multi-contract strategy in which the developer acts as the project manager and agrees separate contracts with component and service suppliers. This strategy allows developers to assume more of the risk of a project and reduce costs at the expense of increased internal contracting complexity. Contracts can be packaged and sub-contracted in a range of ways but a typical structure is shown in Figure 26. The preferred model is for some of these contracts to be bundled into EPC works for identified areas of the offshore wind farm with the developer project managing the integration of these elements. Another model has been adopted by the developers of the Round 3 Hornsea zone, Mainstream Renewable Power. As the only non-utility Round 3 developer, they operate a model in which a development fund is created through partnering with key supply chain players. Costs are shared among the partners in exchange for supply contracts. Once a project within the zone is consented, Mainstream will be in a position to sell it as a complete package with all the major suppliers already in place. Developer Project management Construction management Development studies Turbine design and manufacture Turbine installation Electrical design, manufacture, Foundations design, manufacture, Cable manufacture Wind farm O&M Turbine O&M installation installation installation Figure 26 Multi-contract supply chain structure. 28 Market structure

33 2.7. Project details The following list compiles the key details, where available, of all UK offshore wind projects built, in construction or planned. Table 1 Abbreviations used. UK Round Demo Project Status Dev Constr Developers SSE RWE EON AMEC Shell Dong SPR Supply chain Siemens Siemens T&D BiFab ABB Prysmian Demonstration project In development In construction Scottish and Southern Energy Renewables RWE npower renewables E.ON Climate and Renewables AMEC Border Wind Shell Wind Energy DONG Energy Scottish Power Renewables Siemens Wind Power Siemens Transmission and Distribution Burntisland Fabrication The ABB Group Prysmian Cables & Systems Market structure 29

34 Figure 27 UK offshore wind farm development sites (The Crown Estate, supplied April 211). 3 Market structure