BLUENE BLUe ENErgy for Mediterranean Value chain scheme for cooperation Project BLUENE Contract No. 1M-MED14-01 Work Package 2 - Action 2 Responsible partner: Hellenic Centre for Marine Research June 2015 1
This report has been prepared by the scientific team of the Institute of Oceanography of the Hellenic Centre for Marine Research (HCMR) and collaborators. The project is funded by Med transnational cooperation programme-maritime call. The content of this publication can in no way be taken to reflect the views of the European Union. Neither the MED JTS nor the European Commission is responsible for any use that may be made of the information contained therein. The sole responsibility for the content of this publication lies with the authors. 2
CONTENTS Summary... 5 1. Introduction... 7 1.1 General... 7 1.2 Economies of Renewables Key determinants for value chain... 8 1.2.1 Technology... 8 1.2.2 Economic environment... 9 1.2.3 Legal and regulatory framework... 9 1.2.4 Public support schemes... 10 1.3 Cost structure... 10 1.3.1 General... 10 1.3.2 Offshore wind energy... 11 1.3.3 Wave energy... 13 2. Market data... 14 2.1 Offshore wind energy... 14 2.1.1 General... 14 2.1.2 Geographical extent... 16 2.1.3 Key market players... 17 2.1.4 Interdependence of cost, infrastructure and technology elements... 18 2.1.5 Operation and maintenance... 19 2.1.6 Conclusive remarks... 20 2.2 Ocean energy... 20 2.2.1 General... 20 2.2.2 Market development... 21 2.2.3 Future perspectives of ocean energy... 23 2.2.4 Status in the Mediterranean... 25 2.2.5 Further remarks... 26 2.3 Market development: concluding remarks... 27 3. Value chain analysis... 29 3.1 General... 29 3.2 Value chain analysis for blue energy... 31 3.2.1 General... 31 3.2.2 Offshore wind energy... 32 3.2.3 Ocean energy... 34 3.3 Job creation... 35 3.3.1 Offshore wind sector... 35 3.3.2 Ocean sector... 35 3.3.3 Conclusive remarks... 36 3.4 Mediterranean basin... 37 3.4.1 Blue energy development in the member countries... 37 3.4.2 Feed in tariffs... 38 4. Clusterisation... 40 4.1 Introduction... 40 4.2 Towards a mega-cluster... 41 3
5. Final conclusions... 43 6. References... 45 4
Summary The Hellenic Centre for Marine Research is responsible for coordinating the Work Package 2.2 entitled Mapping strategic actors and building value chains of the BLUENE project and the preparation of the corresponding deliverables. The present report describes value chain and clusterisation strategy and activities that could take place within the frame of Blue energy at the Mediterranean basin. Following the mapping process on actors and technology developments at the sector (included in the relevant deliverable report of HCMR), a value chain system was built for managing all collected information and create a scheme of potential actions of clusterisation. This report is partly based on the existing experience as regards the market development of offshore wind, wave and tidal energy production at European level, and highlights-extrapolates the relevant key issues for market development at Mediterranean level. Market dynamics are analysed at European level as regards the different blue energy subsectors (offshore wind and wave-tidal energy production) and the main elements for further market development are determined. Technology drivers that determine the added value of each energy production are distinguished and the key drivers are pointed out for further development. Hereupon, the different elements of the value chain are described (for EU) along with their respective contribution to the size of the chain. Critical to the analysis is the geographical segregation between mature market fields (North and Baltic Seas) and new market fields (Mediterranean Sea), where the key drivers for development are described. Based on the relevant analysis and the existing developments at each blue energy sector, the ideal, so far, pathways of development are proposed for the Mediterranean basin. Mediterranean prevails as an attractive territory for blue energy development; hence, it contains certain characteristics that determine the final investments decisions. The extensive value chain analysis leads to the key pathways for clusterisation at Mediterranean level in order to facilitate an effective organization of respective actors involved. The process for value chain analysis required the preparation of the following procedure: the literature review, the identification and collection of available economic data and finally, the consolidation of the results. In this respect, value chain analysis helps to: 1. define and describe the current situation and visualize the demands of blue energy chain in the Mediterranean basin; 2. assess potential implications or anticipate future synergies among market players; 3. identify and evaluate scenarios as regards blue energy development in the Mediterranean basin, and 4. propose the suitable clusterisation organization at Mediterranean level. At this extent, we describe the clusterisation, which will be comprised by different public and private entities, clusters and associations, so to build competencies and lobby for the boost of activities at national and Mediterranean level. The successful cooperation of actors (in the form of a mega-cluster) would lead to the acceleration of reforms of national regulations, contribute to the increase of social acceptance of blue energy and, in overall, contribute to the further market development of Blue Energy. 5
The main finding of mapping analysis of stakeholders at Mediterranean level ( 1 ) claiming that The contradiction as regards the current situation in the Mediterranean Sea, is that the most important blue energy actors exist and act in other fields of renewable energy activities, while their specific activities to blue energy development are at the minimum stage could be also true for the value chain analysis. Furthermore, at Mediterranean level, key determinants for the organized economic development of the sector are the general macro-economic environment, which would constitute a favourable investment field, healing any potential conservations of banking sector to support blue energy projects, market development of sub sectors and logistic issues in sites. As a very general approach to the issue, the more favourable places for blue energy investments are the Gulf of Lions in France, the Messina Straight in Italy, and the coastal areas of the Aegean and Ionian Seas; see Pérez-Collazo et al. (2015). In addition, ecological and environmental issues arisen in the Mediterranean basin impose impediments to social acceptance of blue energy. Proposed scenarios for blue energy market development at the Mediterranean basin refer to the establishment of hybrid systems of offshore wind and wave energy production, as well as the development of energy islands (combining onshore-offshore hybrid installations). ( 1 ) this task was carried out at the same work package by HCMR 6
1. Introduction 1.1 General At a worldwide scale, the use of the term Blue Energy refers to all forms of renewable energy production from sea, including ocean energy (i.e. wave and tidal energy production, thermal energy conversion) and offshore wind energy production, and relevant technological developments ( 2 ). Offshore wind power is developing fast due to the maturity of technologies (stemming mainly by the maturity of technologies of onshore energy production), followed by ocean energy production, which is steadily developing, though more research is required at the corresponding technological, environmental and economical facets. The thermal energy conversion technologies are, in the best case, at early stages of commercialization. In general, Blue Energy, in order to face a full economic exploitation, needs to reach cost efficiency, profitability to investor schemes, under the condition of a stable regulatory environment, which affects directly the cost of installations (licensing, costs of energy production, energy prices, and prices of other energy production technologies, such as onshore fossil fuel production, oil prices). Blue Growth aims to define smart, sustainable and inclusive economic and employment growth coming from oceans, seas and coasts. Maritime economy consists of all sectoral and cross-sectoral economic activities related to the aforementioned spatial scales. This includes also job creation to relevant industries, which are related to blue energy production. Blue Growth includes all economic activities that lead to sustainable outcome and synergies among actors in order to create a critical mass. Innovation is a critical issue, combined with increased support to Research and Development (R&D) that can lead to the decrease of development and production costs, combined also with the adequate support from regional, national and EU policies. European Commission anticipates that final power demand in 2020 will be 11% lower than 2009. Furthermore, the target for 2020 sets that 35% of electricity will be generated from renewables, while 12% will come from wind power installations. Fundamental elements to achieve these goals and assure sustainability, acting as catalysts to the process, are the following: i) the security of supply and sustainability of technologies and installations, and ii) the stable political and regulation framework upon the energy production from renewables. In addition, the EU-27 baseline scenario anticipates that renewable energy share will be of the order of 20% of total energy demand in 2020. Additional estimates suggest that the goal will be exceeded by more than 1%. Renewable energy will supply 1.217TWh of electricity, meeting 34% of electricity demand, see EWEA (2011) ( 3 ), while wind energy will supply 14% (464.7TWh from 213GW of installed capacity). The annual net installations of wind turbines (for both onshore and offshore installations) will increase from 11.5GW (in 2011) to 15.4GW in 2020. See also EWEA (2014). The 2020 Scenario set by the European Commission is stipulated in Figure 1. ( 2 ) In the following, the general term blue energy will be used indiscriminately for all types of renewable energies in sea (wind, waves, tidal, current and thermal), and the term ocean energy will be reserved for wave and tidal/sea current energy. Offshore wind energy and thermal energy conversion will be mentioned explicitly. ( 3 ) EWEA: European Wind Energy Association 7
Figure 1: Renewable Agenda EU (Source: Roland Berger 2013) The aforementioned goals were set upon the following key assumptions: 1. Offshore wind energy is the most mature renewable energy technology in operation; 2. There is limited growth potential in onshore wind due to high population density in Europe; 3. Offshore wind provides higher and steadier energy yields on average 4000 full load hours; 4. Offshore wind is a technology with significant potential for development on energy production costs; 5. Offshore wind has a high potential for jobs growth on more than 35% by 2020. 1.2 Economies of Renewables Key determinants for value chain 1.2.1 Technology Blue Energy is essentially a technology driven sector; its development is heavily dependent on technology developments to meet desired outcomes and goals. Technology developments provide solutions, which facilitate investor s interest to new projects and new territories. Specifically, it provides cost-efficient and reliable solutions in order to decrease energy production costs, while it also secures longer installations period and decrease risks on investment from the technical point of view. Different technology solutions for energy production (offshore wind and wave energy production, tidal barrages, thermal energy conversion) face different stages of technology maturity, and this situation affects the competitiveness of the final investment, minimizes the investors risks and offers different financial management strategies. Technology maturity and development may provide a financial attractive scenario, which in turn will increase the value chain locally, regionally and globally. For example, to date, only offshore wind energy production can provide financial attractive solutions 8
due to the maturity of technologies stemming from the onshore energy production development. The development of offshore wind energy sector contributes to the increase of the added value of the chain (supply - demand chain), increases the number of new jobs, value of transactions and economic activities, and, finally, creates a new investment environment. The operation of offshore installations at North and Baltic Seas have shown that economic regeneration and local economic boost has been taken place to the greater territory of the investment ( 4 ), shaping a new investment environment at every level of operation. The main advantage of this renewable energy resource, refers to the stronger and more consistent offshore winds compared to onshore sites and thus the increase of the wind energy capacity factor. In this way, the relevant activities shape a more sustainable energy production scheme, which is available to the local economies. Furthermore, the absence of land use conflicts for offshore installations could contribute to the increase of social acceptance at local level. The positive outcome of North and Baltic Seas market development on offshore technologies shapes the paradigm for the Mediterranean, where new technological solutions (onshore offshore hybrid installations) could be an attractive investment scenario to the local-regional economic environment. 1.2.2 Economic environment The economic environment at macro-regional level (Atlantic Ocean, North, Baltic, and Mediterranean Seas) plays (or is expected to play) also significant role to the development of the value chain of ready-to-go technological solutions. The financial stability, the market organization, the readiness of national renewables energy plans, and the public acceptance play influential role to the increase of the value chain locally and at micro-region level. As mentioned above, the development of offshore installations at North Sea created a new regional economic environment, in which old harbour infrastructure was reengineered to the new economic reality and new jobs opportunities have been created either to the supply chain or logistics and transportation. Investments were created to all stages of power production, and, at the end, the new economic environment reshaped transnational energy policies to the increased shared benefit. The final impact to the value chain is the increase of value, dispersed to all actors involved, and, of course, to local economies. 1.2.3 Legal and regulatory framework Critical to the development of blue energy production is the legal regulatory framework for energy production. All member states have developed National Action plans ( 5 ) in the form of a road map in order to meet the overall goals at national level, and each EU country produced a renewable energy forecast in advance of their action plan. Energy prices, in principal, are a major political concern at national and European level, reflecting the market organization (entailing taxes and regulatory), constituting a favourable or less favourable environment for private investments. Concerning renewables, national regulation, licensing, cash liquidity costs and local prerequisites for offshore/onshore installations, cause significant impact on the competitiveness of investments, and determine the cost of energy production at national level. In general, at renewable energy sector, national regional policies, national energy market organization and licensing procedures are key ( 4 ) by redesign of old ports and operation to serve offshore fields, reuse of existing of transport facilities, and creation of assembling logistics and service infrastructure, etc. ( 5 ) http://ec.europa.eu/energy/node/71 9
determinants to the regional investment attractiveness and value chain development thereof. The European Directive goals and the economic reality have also fed through the stability of regulatory and market frameworks for wind energy for both offshore and onshore installations. This causes significant impact on investment plans, existing new orders for new projects and licensing procedures at new territories. One significant parameter is the financial support (assets availability) to investment plans and develop new projects. Continuous changes on regulatory and market frameworks play significant role to the assets management and support of new investments; therefore, the maturity of the market of Blue Energy can be enhanced. Regulatory instability, in conjunction with financial instability, leads to lower market development, causing the saturation of investments to existing investment consortia. Financial instability to European markets and changes of national policy frameworks for wind energy and market development at the supply chain of wind energy play influential role to the development of value chain of the sector. 1.2.4 Public support schemes Offshore wind energy is a public driven market depending highly on public support schemes and needs to become less dependent on public support mechanisms, but maintain political support. New players need to enter the market at all stages of supply chain, and the financial environment needs to support more actively new projects, new technologies and new market consortia. All these end up to improve risk return ratio, so that the market will be able to develop new investment models upon. The maturity of offshore wind energy market needs to entail the political support, cost efficiency and competitiveness, which, at the end of the day, will contribute to the industry development (by innovation and excellence). Ocean Energy is also a public driven market depending on public support schemes. Up today, ocean energy, in general, is less developed than offshore wind, and economic research has not provided yet an attractive model for investments ( 6 ). Risk return ratio is still significantly high and needs to be substantially improved, so the market is able to respond and invest at high levels thereof. Ocean energy can provide extensive possibilities on energy production, and its resource is estimated to 17TWh/year, albeit the uncertainties existing so far. 1.3 Cost structure 1.3.1 General The organization costs of renewable energy production determines the overall energy costs and can be divided into three basic categories: Capital expenditure (CAPEX): the costs required upfront to construct an offshore renewable ( 6 ) This is mainly due to suspending technological issues that need to be resolved, in order for the investment to reach cost efficient outcomes 10
energy structure including the entire project (e.g. planning activities, environmental and engineering studies, etc.), turbine components, foundation, electrical systems (e.g. cables, substations), and installation; Operational expenditure (OPEX): it is the cost related to the Operation and Maintenance (O&M) of the offshore renewable energy structure including health and safety inspections, monitoring of the environmental impacts, insurance premiums, etc.; Levelised cost of energy (LCOE): it is an estimate of the cost of electricity from an offshore renewable energy structure over an assumed financial life and duty cycle including CAPEX and OPEX. In Table 1, the cost organization is illustrated for ocean renewable energy production technologies, while in Figure 2, the costs of energy production are depicted for alternative sources of energy, including nuclear. Table 1. Estimated range of CAPEX, OPEX and LCOE by technology (see Salvatore et. al. (2011), Astariz, Iglesias, (2015)) % OF TOTAL % OF TOTAL EST. LCOE TECHNOLOGIES EST. CAPEX EST. OPEX COSTS COSTS /KWH Offshore wind energy 2800-4400 70-80 60-100 20-30 120-250 Wave energy 5200-10800 50-70 N/A 30-50 140-530 Tidal energy 5800-9600 50-70 N/A 30-50 110-220 Figure 2: Costs of energy production renewables targets and pathways (Source: Roland Berger, 2013) 1.3.2 Offshore wind energy Regarding offshore wind energy, CAPEX consists in the 70-80% of total costs and OPEX in the 20-30%. In this case, CAPEX includes the cost of turbine, gridding, construction and other costs (licensing issues), while OPEX includes the O&M costs, land rental, insurance and taxes, management and administration costs. Variations of costs exist between regions (i.e. Atlantic Ocean, North and Mediterranean Seas). The major costs of wind energy projects appear at 80% at the initial stages (licensing, planning, and installation) and at 20% during the rest stages. This causes the need 11
for companies to insure assets availability at initial stages, risks minimization and good repayment conditions. Costs of offshore wind energy need to be reduced at all stages of development and production, expanding to new sea territories, facing a reduction (of costs) of the order of 20-30% and this seems to be a realistic goal under the assumption of regulation and financial stability to EU-27 member states, see Roland Berger (2013). In addition, economies of scale need to take place, ensuring competition among actors in order to minimize costs. The maturity of offshore wind energy is focused mainly on two fundamental factors; i) political support at national regional level, and ii) industry/technological development. Figure 3 illustrates the maturity cycle of offshore wind energy. Technology developments contribute to industry developments; industry excellence contributes to cost competitiveness of the sector and increases the added value of the entire chain; the industry development (at both supply and demand side) needs to be supported by national regional policies and political support; political support constitutes a favourable investment environment, which contributes positively to industry development and excellence. On the other hand, industry excellence plays a significant role at the increase of the chain value at all stages or at the R&D part of the industry itself. Figure 3: Technology maturity (Source: Roland Berger, 2013) Key pathways for technology development at offshore wind energy are turbine and new material technologies and relevant cost optimization, as well as the development of new technologies on foundations. Underwater gridding is a key cost determinant and the timely grid connections are related to the investments pressure in the area. The development of offshore wind turbine installations pushes construction sector to specialization and cost competitiveness by reducing construction risks. Market development and competition reduce operation and management costs provided by specialized actors, while banking sector development and specialization at renewables (providing an array of investment opportunities on vectors) contributes to the sector development and increase of the value chain, respectively. Cost effectiveness pathway of offshore wind energy needs to meet lower LCOE during the next years 12
in order to reach higher levels of market exploitation. Market exploitation will lead to increase of value chain, especially for the supply part, with the involvement of more investors consortia, but this requires the more active contribution of banking sector on assets availability. To reach the target of 9 ct/kwh expected by Roland Berger (2013), it is anticipated that CAPEX will be reduced by 40% (especially at territories with existing offshore installations), and this reduction will sweep OPEX. The market maturity of the provision of services will lead to the decrease of costs (especially for management), which plays influential role at OPEX. 1.3.3 Wave energy Regarding wave energy, CAPEX consists in the 50-70% of total costs, while OPEX cost is between 30-50%. In this case, CAPEX includes the costs for preparation of the investment (licenses and permissions), costs of preliminary studies, Environmental Impact Assessment (EIA) studies, consenting procedures, as well as direction and coordination. This cost category varies with the type of installation, location and particular characteristics of the project related to the investment territory and can reach up to the 10% of CAPEX; Astariz, Inglesias (2015). CAPEX also includes installation costs, which are related to the type of equipment used, cabling and costs of electrical installations. Costs of wave energy need to be further reduced. This is related to the level of technology maturity and the learning curve upon new technologies implementation in order to provide attractive investment solutions. Wave energy technology maturity and learning on technologies include mainly the installation part and the life cycle of installation system. In addition, the implication of LCOE indicator in many studies shows that wave energy is economically viable only if subsidized, and varies significantly from country to country within the European zone. However, over time, it is expected that greater investments will take place based upon tested and more mature technologies; in this way, economies of scale will be achieved. This would lead to cost reductions and increased profitability, permitting thus operators to reach market prices similar to other renewables. Several studies describe that the time frame needed for wave energy to reach commercial stages for exploitation is a period of 10 years (learning curve of 10 years). Up to now, technology has not matured yet, and technology risks are significant compared to other renewable energy resources. The latter is key determinant for investment decisions, which in turn influence the value chain of the subsector. Conclusively, Blue Energy shapes an array of opportunities on renewables albeit the fact that offshore wind energy and ocean energy face higher costs at initial stages of project development. Overall, according to the accumulated expertise, planning restrictions, financial instability and regulation uncertainties induce delays on wind farms development. Tidal energy production seems to be more predictable than wind and wave, while and North and Baltic Seas and Atlantic Ocean seem to be more attractive investment fields. Supporting innovation is the key driver for the market development of wave energy (on devices supply and failure rate decrease), while hybrid energy plants (offshore windwave energy) seem to be an attractive option for the Mediterranean basin, at present. 13
2. Market data 2.1 Offshore wind energy 2.1.1 General All over the world, the development of wind renewables follows the technology developments of this sector. Figure 4 illustrates the distribution of wind energy resources at global level. Wind energy resources concentrate at North Sea, Baltic Sea, Atlantic Ocean and Australia. Mediterranean basin is among the least developed territories as regards wind and wave energy utilization. Figure 4: Global distribution of wind energy resource (Astariz, Iglesias, 2015) Market development on offshore wind energy ( 7 ), so far, shows a spatial diversification, which is a result of country investment attractiveness and energy efficiency. Access to capital and investor dynamics also play an important role on the market development, while economic situation influences the development of investments. The recent rapid reduction of fossil fuel prices determines the investors decisions on offshore wind energy, while the final outcome is yet to be seen by the end of 2015. The market development of offshore wind energy, in principal, is a challenge for all actors involved, which entails assets management and financial stability either at the side of public sector or at the side of financial markets. The market is growing substantially with even more transactions taking place. Financial choices to investors are also available at non-traditional sources. It is now possible ( 7 ) We focus on European Maritime space not examining investments and market development in US, although we will present key policy issues for market development in US 14
for investors to take part in offshore wind projects undertaking part of the risk. Larger offshore projects will open the opportunities for finance availability and therefore, expand the investment outcomes towards offshore wind energy production. Offshore wind energy production is evolving faster than wave or tidal for a set of reasons stemming by the maturity of technologies and complementarity issues with onshore energy production. However, energy from offshore wind farms needs a more efficient transmission system of subsea grids to connect with onshore networks. Several approaches are developing to this pathway including a mix scheme of offshore wind/wave-tidal farms, offshore/onshore wind farms. The industry still faces the early stages of development and this issue acts as a barrier for market exploitation. At the supply part, producers need to come up with more stable and cost efficient solutions in order to provide added value to the final outcome (installation). The complementarities that arise at more developed areas (i.e. North Sea, Atlantic Ocean UK) on gridding and installations management contribute to the overall competitiveness and cost effectiveness; hence, there is a long way to go due to a variety of factors arising to the market development. Offshore wind energy market in EU faces a constant growth, see Figure 5, and up to 2013 there have been carried out more than 69 offshore wind farms. It is estimated that offshore wind energy is about to reach the size of the onshore industry in the next years. In a global level, offshore wind energy will be a sector of more than 130 billion by 2020 with main focus on North Sea and Atlantic Ocean, Asia and Mediterranean Sea. It is also considered that offshore wind would create globally three times more jobs than oil and gas industry by 2020. Figure 5: Cumulative and annual offshore wind installations, MW; EWEA (2015) The current share of offshore capacity remains low compared to the onshore energy production for a number of reasons related to technological issues, which influence the overall investment cost and cash availability. The higher costs of offshore wind farms (compared to onshore), and supply chain 15
bottlenecks (small scale production of turbines, limited availability of installation vessels and logistic issues to certain territories, especially for the Mediterranean Sea) are considered the most significant drivers behind this gap. The market consolidation at the supply chain and the expansion of market to different geographical territories, such as the Mediterranean Sea, are about to contribute to the development and sustainability, adding more value to the entire supply chain. 2.1.2 Geographical extent Figure 6: Spatial development of Offshore Wind Farms; Installed Capacity, cumulative share by sea basin (MW). Source EWEA (2015) 63.3% of the total installed offshore wind farms in EU is located in the North Sea, 14.2% in the Baltic and 22.5% in the Atlantic Ocean; see Figure 6. In 2014, 408 new offshore turbines were fully grid connected in nine new wind farms and one demonstration project, adding 1,483 MW to the European system. The total installed capacity for Europe stands at 8,045 MW in 74 offshore wind farms in 11 European countries. According to Figure 7, the UK has the largest amount of installed offshore wind capacity. It is followed by Denmark, Germany, Belgium and Netherlands, which share a relatively significant share. 512 projects are in the pipeline and 536 turbines were placed during 2014. Twelve Figure 7: Installed capacity, cumulative share by country (MW); EWEA, 2015 Figure 8: Offshore territorial development; EWEA, 2015 16
demonstration projects are planned to be partially or fully connected, providing 2900 MW of capacity. It is anticipated that more pilot projects will be developed in the North Sea, while Baltic Sea and Atlantic Ocean remain among the most attractive investment fields for the development of offshore wind farms. See also Figure 8. On the other hand, Mediterranean Sea is considered as a new territory for offshore wind farm investments. Within the next five years, when a significant number of offshore wind projects will have been completed, EU will continue to represent the bulk of global offshore installations. However, as is suggested by EWEA, only 23.5 GW would be installed by 2020 in contrast to the National Renewable Energy Action Plan (NREAP) target of 43.3 GW. This gap illustrates the market delays on offshore wind energy sector (due to transmission issues and gridding) and delays at investments in the Mediterranean Sea and new fields due to national regulation and licensing procedures. Yet, investment dynamics at offshore wind energy are also influenced by economic crisis, where banking sector follows (today) a more conservative strategy to finance new projects and energy consortia at new markets and fields. Mid-term period investments are foreseen for the North, Baltic and Mediterranean Seas with consolidated projects (at territories where offshore fields exist) and with new projects at territories with non-existing offshore fields. 2.1.3 Key market players According to Figure 9, DONG Energy maintains by far its position as the biggest owner of offshore wind power in Europe with 24.1% of cumulative installations at the end of 2014. Vattenfall (10.5%) and E.On (7.3%) also maintain their position within the top three. RWE follows with 8.7%, Centrica with 5.5%, SSE with 5.3% and BARD with 4.8% of cumulative installations. Key market players are SIEMENS and BARD playing a dominant role on turbine Figure 9: Market organization in offshore wind; EWEA (2015) manufacturing. SIEMENS controls 69% of market share, while BARD holds 15%, and VESTAS 8%. New projects at the North Sea and Atlantic Ocean at larger depths and the entrance to the Mediterranean Sea constitute an attractive scenario for the industry. The market outlook for 2015 remains stable in terms of capacity to be brought online. There are twelve projects under construction representing 2.9 GW in the pipeline for the next 12 to 18 months. Five of these projects had some wind turbines connected to the grid in 2014; once completed they will result in a further 1.18 GW of capacity taking the cumulative offshore wind capacity to a minimum of 9.2 GW in Europe. However, predictions of reaching 10 GW by 2015 are well within industry expectations. It is also expected that in 2015, Germany will overtake the UK in annual grid 17
connected capacity. The largest wind farms that will be fully completed will be RWE s Gwynt y Mor (576 MW) followed by Global Tech 1 (400 MW). However, in 2016, a market slump is expected to take place, featuring a low level of wind turbines being connected. The UK is unlikely to fully commission any hundred-mw scale offshore wind farms, though the 50 MW Kentish Flats Extension may be started and commissioned. Except for the UK, only Germany and the Netherlands are expected to bring Figure 10: Competition between wind turbine manufacturers (Source: Roland Berger, 2014) capacity online in 2016 with DONG s Gode Wind and Westermeerwind. Forecasts refer to 26.4 GW of consented offshore wind farms in Europe and future plans for offshore wind farms totalling more than 98 GW (Source: EWEA Market outlook 2015 2016). The competition over the turbine manufacturers is depicted in Figure 10. 2.1.4 Interdependence of cost, infrastructure and technology elements Market organization indicates that there is a large number of new entrants, while big players still play a dominant role. Market increase is anticipated in the forthcoming years with production overcapacity in order to meet the increased demand. Regarding turbines, the industry development will ameliorate the whole production side (supply chain), which in turn will push further the market into cost effectiveness. New territories (e.g. the Mediterranean basin) become attractive to investments, while, at the same time, the integration of renewable energy production induces further fields for investment (e.g. Atlantic Ocean). Critical to the market integration is the turbine technologies used and the respective associated costs. Larger turbines will improve the total CAPEX, the capacity factor and the respective O&M costs. The integration of technologies used coupled with the turbine market (more market players) will induce more stable and efficient constructions in larger sea depths. The trend at this part suggests that, until 2020, offshore wind farms will be deployed at larger depths and at greater distances from shore. This trend will improve LCOE at 17% on average, combined with improvement of capacity factor, decrease of CAPEX and respective decrease of O&M costs. Similarly, foundation technologies are another critical element to the integration of offshore energy production. The shift to larger sea depths demands different and more sustainable foundations; shifting from gravity based foundations (GBF) to floating foundations, which is subject of intensive R&D for the industry today. Nowadays, GBF and monopiles are the most widespread foundation 18
technologies, while jacket and floating foundations are in the pipeline for intensive commercialization. Gridding is another cost element of offshore wind energy development and operation. Gridding costs integration will improve substantially the market development of the offshore wind energy sector. Connectivity (availability and liabilities for use) and operation issues of converters and transmission systems are key elements to the overall costs organization and integration thereof. HVDC connections cause significant delays and cost overruns at established wind farms, contributing significantly to the overall costs of offshore wind farms. The main bottlenecks are: i) the development and operation of offshore converter stations (servicing certain number of wind farms), ii) the offshore HVDC cables and cable laying, and iii) the availability of cable installation vessels and the transmission systems operators. The aforementioned issues become even more significant cost contributors to new territories, like the Mediterranean Sea. Installation vessels and logistics infrastructure are factors that are subject to development following the demand at European level. This issue (especially for the Mediterranean Sea) is of most importance, since it influences installation costs and time. Installation vessels costs are significantly high and, in many cases, non-accurately predictable, while availability of vessels for Mediterranean is rather restricted. In addition, logistics are another issue where transport networks and ports need to be adjusted to support offshore construction and eventually operation. In many cases, the lack of infrastructures restricts investments, and the potential investors need to facilitate market synergies with local actors for ports modification and/or storage so as to organise construction and an economic efficient manner. Even at the operation stage, infrastructures ( 8 ) need to be established in order to support maintenance while maintenance services provision need to be established nearby. It is anticipated that the increased demand will push the development of more installation vessels, which will decrease costs. Similarly, logistic issues (especially in the Mediterranean) will be resolved due to the investors push and local markets maturity (modification of transport networks, ports modification, etc.). National regulation effectiveness on local policies and social acceptance at localregional level will contribute significantly to the adjustment of construction and O&M costs. 2.1.5 Operation and maintenance Operation and maintenance of offshore wind energy sector is a key value driver, since it contributes to the profitability and sustainability of the investment (25-35%). Cost reduction of O&M at 10% delivers 4% additional to EBIT ( 9 ) of the operator. Up today, efficient proven O&M concepts are still not available due to the developing technologies routines and new experience of all actors. Key issues in O&M are: a) the location of services delivery (service station); b) the logistics management on shore (coastal management and transportation costs of personnel to the platform) and ( 8 ) For example, helicopter fields nearby the offshore field ( 9 ) EBIT: Earnings (loss) Before Interest and Taxes 19
c) the availability or large components replacement. Critical for determining the O&M costs are the distance of the wind farm from the coast and the architecture of the wind farm, providing or not the availability of trespassing and maintenance at site. Drivers for the integration of O&M are: i) the increase of the offshore capacity, which in turn reduces O&M costs per kwh, ii) the increased reliability of turbines and components, which will need less unplanned service activities, and iii) the geographical clustering of offshore, which will create business synergies among actors. 2.1.6 Conclusive remarks Offshore energy market development needs to challenge certain financial issues regarding access to financing at pipeline ( 10 ), new investment models with improved risk return ratios in order to attract more financial investors. At this part, financial engineering models exercised at the UK shows the pathway; hence, the economic instability at EU level plays determinant role at all levels. Technology development coming by industry s excellence and R&D investment will be able to provide financial sustainable opportunities to market players; market development thereafter will lead to sector competitiveness. Offshore wind sector needs to raise its cost competitiveness, which will be reflected into substantial lower LCOE. Costs reduction by 20-30% in overall, and 40% reduction at CAPEX will drive LCOE at 5-9 ct/kwh at mid-term, see Roland Berger (2013). Offshore wind energy is the driving force for blue energy development, setting a course towards product development excellence leading thus to cost competitiveness. More investments need to be utilized at the last end of R&D in order to maximize effectiveness and derive market profitable solutions. The value chain of the sector is expected to grow significantly, at all stages, albeit the economic instability and financial risk. 2.2 Ocean energy 2.2.1 General Regarding ocean energy production, there are more barriers for development, i.e. there are uncertainties regarding coastal and marine impact and they are still considered an uneconomical non significant profitable investment at regions. The latter issue is of significant importance for the Mediterranean Sea due to the impact of ocean energy installations to the tourism added value of the territories ( 11 ). Public acceptance (especially in the Mediterranean) plays significant role to the provision of big scale investments. Up today, ocean energy production seems to be the energy production solution, which needs to be subsidized ( 12 ) by the state due to the costs of development and operation. To date the costs are significantly higher relevant to the energy price. Mixed/hybrid ( 10 ) R&D optimization and excellence at all stages of value chain ( 11 ) However, this is expected to be one of the main problems for offshore wind energy as well. ( 12 ) subsidy issue prevails as a quite ambivalent scenario for EU at the current economic momentum 20
energy production solutions (e.g. offshore wind wave, or onshore offshore wind energy production schemes) seem more feasible especially to the more consolidated energy production fields (e.g. North Sea). The idea of taking advantage of different renewable ocean resources at the same offshore installation gains significant importance for a number of issues, e.g. the co-location of wind and wave energy installations, the use of hybrid converters and the development of energy islands using common gridding installations. 2.2.2 Market development Market development of wave and tidal technology has made significant progress the last years, and a number of installations have been developed in Europe. Further development is necessary in order to secure a reliable and cost-effective deployment, which will lead to a full exploitation of the market. Figure 11: Global distribution of the wave energy resource (average wave power in kwm -1 ); Source: The Economics of Wave Energy: A review, Renewable and Sustainable Energy Reviews, 45(2015) 397-408 Wave energy is even more at initial stages of development (in comparison with offshore wind energy), albeit that wave energy farms have been funded for development at the UK and Australia. Until today global wave energy resource is estimated to 17TWh/year, with largest capacity between 30 o -60 o latitude; see Figure 11. A number of EU Member States have indicated that part of the renewable energy contribution within their National Renewable Energy Action Plans by 2020 will come from the ocean energy sector, see Figure 12. 21
Figure 12: National targets for Ocean Energy in Europe. Source: National targets for Ocean Energy in Europe; European Ocean Energy Association (2011) Figure 13: Overview of European Ocean Energy testing facilities. Source: Wave Energy Centre market development are: Many prototype devices have been deployed within Member State territorial waters, and have put in place incentives in terms of both revenue support and capital grants, with the aim of achieving the 2020 ocean energy targets set out in the Member States National Renewable Energy Action Plans. To support this, Member States have also developed world-class testing facilities for ocean energy, as is shown in Figure 13 (mainly the UK, Denmark, Spain and Sweden). The main barriers for further 1. technology development that is still at an early stage (regarding converters, mooring systems, gridding connectivity, electrical installation methodologies and organization); 2. uncertainties regarding coastal and marine impacts of wave farms. This issue prevails as one of the top at the coasts of the Mediterranean Sea; 3. many countries in EU do not have a clear and defined policy for ocean energy; 22
4. lack of Maritime Spatial Planning, which hinders any investment idea/venture at certain territories and, consequently, results to complex licensing procedures ( 13 ); 5. lack of social acceptance of wave farms installations at small sea areas; 6. wave/ocean farms are perceived as an uneconomical field for intense investments. Technology solutions towards full commercialisation and the respective technology providers are very few, and this keeps costs at high levels. At all stages of an ocean energy farm, costs for project planning are significantly high (due to regulation and legislation delays), costs of construction are higher than offshore wind farms due to the weak technology supply either in terms of market players (which will steam competition) or in terms of actual technology solutions. Furthermore, and at the same line, construction costs are high while operation and project support costs (from the coast) are at respective high levels due to the lack of critical market players to steam competition to all levels of operation. Finally, water salinity issues (especially for the Mediterranean) place uncertainties to the life cycle of the ocean (wave) farm, and this in turn determines decommission costs as an incremental rather undetermined cost. Taking into consideration the above mentioned uncertainties (on costs and profitability), in relation with the fact that such project ventures are very demanding regarding assets availability at the early stages of project development ( 14 ), leads the fund managers and banking sector to be very careful to proceed on funding, restricting investors to move to more mature and profitable ventures (i.e. offshore wind energy). 2.2.3 Future perspectives of ocean energy More EU policy initiatives need to be undertaken in order to induce convergence among member states and regions to a common understanding of ocean energy potential to resolve energy and economic issues. National and regional public authorities need to resolve local reservations on legislation and regulation in order to establish a more attractive and stable framework for private sector engagement and operation. The Public Administration needs to take over initiatives to promote ocean energy production, and steam research and industry in order to end up with economically attractive investment proposals. European funding needs to fuel market intake of technology readiness solutions to the sector. The UK is the one paradigm to wave development sector, where energy prices (set by the state) are the key driver for investments of energy consortia. Main incentives are the energy prices, government support and perceived ROI (Return on Investment); these lead the investors to include wave farms into the energy portfolio. British Government decided to promote investments of 2,3b to the period 2013 2020 to the UK and Commonwealth states (Australia) providing all necessary support to potential investors. UK s Renewables Roadmap estimates that up to 300 MW (producing approximately 0.9 TWh) could be deployed in the UK by 2020, with much larger-scale deployment anticipated in the period beyond 2020. Relative to overall population, countries including Ireland, Portugal and Denmark have set very high ocean energy targets, potentially involving a significant proportion of the overall budgets available to support renewable energy. ( 13 ) Clearly, the lack of solid and clear regulations at national level causes significant delays on project development ( 14 ) almost 80% of costs are requested at the initial stages of the project 23
Since wave energy technology is at initial stages of commercialization and many issues are not fully analysed, this creates insecurity to investors and the banking system reacts accordingly ( 15 ). Furthermore, the cost structure of wave - ocean energy is still under research in order to determine profitability. At many issues of wave energy production chain, technology solutions stem by a few number of constructors (i.e. mooring systems produced by only two corporations) and a small array of technical solutions. This situation shapes a non-profit efficient solution, due to the fact that sets CAPEX and OPEX to non-manageable rates, guiding the industry to anticipate that the sector will be subsidized to go on commercialization. Recent studies set LCOE costs at significant high rates and the implication is that at present, wave energy is only economic viable, if subsidized. However, overtime, it is anticipated that promoters will realize greater investments based upon tested new technologies, which will lead to economies of scale (at a greater energy portfolio). This would lead to costs reduction and investors will realize grater profits, therefore promoters could operate at market prices similar to other renewables. It is expected that the commercialization will be improved within ten years. Actions to be taken on fully commercialization of ocean energy include: 1. Development of full-scale range ocean energy devices: a R&D programme focused on new ocean energy conversion designs with scale capacity of MW, materials and components addressing cost reduction and improved survivability, coupled with a demonstration programme dedicated to the development and testing of a large-scale prototype (1-2 MW). 2. Ocean energy technology development targeting improved generation capabilities, though a development and demonstration programme for new ocean energy devices. 3. Grid integration techniques for large-scale penetration of variable electricity supply. Identify best ocean energy resource locations and match them with the available transmissions infrastructure. Assess best connection methodologies for connecting moving ocean energy devices with the electrical export cable. 4. Resource assessment and spatial planning to support ocean energy deployment within sustainable development. 5. A R&D programme for forecasting distribution of ocean resources and energy production that includes: ocean measurement campaigns, database on ocean data, environmental and other constraints, spatial planning tools and methodologies for improved designs and production. 6. Policy and regulatory framework on ocean energy development in the Mediterranean Sea. Mediterranean countries need to organise Maritime Spatial Planning studies, and improve national legislation for Maritime Environmental Assessment in order to provide a stable regulatory environment for the potential investor. In addition, regulation, implementation and licensing need to be short in time in order to avoid incremental time delays to investments approval. 7. Economic research on the following topics: cost structure and value chain analysis, marketability and commercialisation of technologies, hybrid scenarios economic impact assessment. Assessment of the economic impact of policy impediments to the investments development and assets leverage. 8. Studies on social acceptance of technologies to territories with complex coastal activities (tourism, commercial) in order to examine levels of acceptance, increase information level of public at ( 15 ) Economic uncertainty at EU level is perceived as a significant drawback on market development and the banking sector operates at a conservative approach to the financial management of this kind of investments 24
territories and induce market uptake measures at local and regional level for the new technologies. Costs saving solutions are to take advantage of different ocean renewable resources with hybrid farms of wave and offshore energy production. Under this approach, there are different possibilities to facilitate synergies for wind and wave resources exploitation; a) co-located wind and wave energy production, b) existence of hybrid converters and, c) development of energy islands. In all cases, wave energy increases the availability and smoothens energy output by compensating in part for the variability of offshore wind power. Furthermore, ocean energy development is anticipated to open an array of job creation opportunities at different levels of engagement: research to contribute to the development of technologies to move to commercialisation levels (Technology Readiness Levels 8-9), R&D for industry (synergies of private sector with Research Institutes), experimentation of technology by industry, legal advice to public sector on the implementation of measures to promote ocean energy, provision of services on planning studies (preliminary studies) for investor schemes, environmental impact assessment studies, specialised experts to the industry (construction), provision of maintenance and operation services, provision of support services on the coast, part time employment to the construction of offshore wind farms at territories, experts and consortia to the construction of transmitting stations at the coastal area, specialised experts (of multidisciplinary competence) for consultancy services to provide technical assistance to investors at local level, etc. It is expected that job creation within Europe at ocean energy will reach offshore wind energy levels focusing (at EU level) primarily on the UK and Atlantic while, at a later stage, on the expansion to other territories as well (i.e. Mediteranean). Overall, wave and tidal energy production show significant potential in terms of market development; hence, technology needs to provide cost effective solutions in order to meet competitive energy prices. Research needs to undertake issues regarding successful commercialization at all stages of the value chain; pre-operation phase, construction phase, operation, management and decommission. In addition, technologies need to provide cost effective solutions on converters, mooring systems, transmission and gridding. Wave Energy Convertors (WECs) need to reach more commercialisation with more players entering the market (manufacturing), tidal stream technologies need to reach maturity, tidal barrages have to reach a more sustainable (at commerce terms) outcome, grid planning processes have to reach a sufficient and attractive time frame (reduce delays). Economic research has to analyse in more detail sectors competitiveness to reach significant profitability and attract investors. Up to date, geographical expansion of wave energy resources exploitation could be achieved with hybrid wind wave energy farms or alternatively with energy islands development. 2.2.4 Status in the Mediterranean Mediterranean is a closed sea with deep waters and up today is the least developed for both wave and wind energy production. According to HCMR ( 16 ), the overall offshore wave potential of the basin ranges close to 3-5 kw/m, while the extended area between Balearic Islands and Sardinia, along with the Ionian and Levantine basins are characterized by the highest values of mean offshore wave ( 16 ) Final Report HCMR Study on Relevant territorial Actors, 2015 25
potential (above 6 kw/m) ( 17 ). Nevertheless, Mediterranean Sea presents weak potential for viable conversion and the combined wave/wind energy resources exploitation seems to be a favourable scenario. The most favourable sites at this basin for hybrid energy farms are the French Blue Coast, Sicily straight, and Greek Islands. Hence restrictions on market investments development prevail mainly due to the tourism orientation of sites, public acceptance and national regulatory drawbacks, which in turn mitigate investors interest. Further studies indicate that wave energy production would be at the areas with rather high resource, which are the straits of Gibraltar, Messina and Dardanelles. 2.2.5 Further remarks Studies have shown that among renewables, onshore wind energy production gains significant maturity and commercialization, followed by offshore wind and latter ocean energy. The following figure (Figure 14) illustrates also technology and market development in due time for each economic sector ( 18 ). Figure 14: Onshore, offshore wind and ocean energy projected growth; Source: EU Energy Trends to 2030 Overall, ocean energy (wave and tidal) resources globally exceed the present and future energy needs. At EU, the highest potential for the development of ocean energy is on Atlantic Ocean, Mediterranean and Baltic basins and in outermost regions. The exploitation of these resources would help EU to mitigate dependence on fossil fuel and enhance energy security. Ocean energy sector will become in the future an important subsector of Blue Economy by fuelling coastal regions with economic growth as well as islands (especially in the Mediterranean). In addition, ocean energy electricity output could help to balance the output of other renewable energy sources (i.e. offshore and onshore wind energy, solar energy) to ensure a steady aggregate supply of renewable energy to the system. To this extent, the scenarios of hybrid installations (especially for the Mediterranean) gains vital importance to market development. European supply chains could be developed as industry expands, involving both innovative SME s and larger manufacturing companies with relevant capabilities (i.e. shipbuilding, mechanical, electrical and maritime engineering). Increased demand for specialized sea vessels is ( 17 ) In the same report it is seen that the eastern Mediterranean Sea may be a favourable area for the potential development of salinity gradient installations. ( 18 ) Source: Oceans of Energy; European Ocean Energy Roadmap, 2010-2050 26
also expected, as well as sea platforms infrastructures and gridding equipment. Up to now, European industry holds a strong position, albeit the fact that technology needs further advancements to meet cost commercial market requirements. Most of technology developers are based in Europe, while competition from China and Canada is expected (e.g. the competition from China in the offshore wind sector is growing steadily as regards equipment and turbine manufacturing). UK Carbon Trust estimates that wave and tidal energy market could reach the 535billion up to 2050 ( 19 ). 2.3 Market development: concluding remarks Market development for offshore wind and wave energy resources follows developments at the production level, where the stability and market development of supply chain determines the competitiveness and the investment attractiveness. Higher and steadier offshores at deeper water depths would make farms more productive (higher energy capacity, smaller back up costs). In contrary, costs of building are significantly high, and there are bottlenecks in the supply chain that maintain CAPEX at significant high level. Industry development at supply chain at the perspective of offshore wind and wave energy production development will determine the construction and maintenance costs, shaping a more attractive investment option. Hybrid energy farms are also an attractive development scenario, most applicable in the Mediterranean basin. Key drivers for market development on renewables will be the development of technology and the solutions that will stabilize the overall installations in terms of financial capacity and competitiveness (especially, for offshore wind energy). On the contrary, technology maturity will be the key driver for the market development of wave and tidal energy production, providing cost efficient solutions. Substantial role to the market development plays also the national and international public context regulation and the internal energy production and distribution organization at national level. Different policies have been implemented to support the market development and increase of added value at all stages of the value chain. Positive examples from the national policies, implemented at Denmark, show the positive pathway for market development; the explicit segregation of energy actors provide significant market incentives for pioneers and investment schemes of low capacity to enter the market, while the partnership with the World Bank provides significant assistance to the competitiveness of the market ( 20 ). On the other hand, the significant costs of licensing, regulations implementation and gridding permissions, at national level, act as impediment to the market growth at regional-national level, causing the deployment of significant capital from actors; the latter issue may be the case only for big scale investment consortia, which may dominate the market at nationalregional level. The consolidation of a small number of (important) players to all levels of energy production cannot provide significant added value to the energy production chain, affecting the overall sector competitiveness. The active involvement of banking sector to the cash flow provision determines the market organization and sustainability; stable economic environment contributes to the sustainability of investments, and market development through the entrant of new players at all ( 19 ) Source: Carbon Trust (2011) Maritime Renewables Green Growth Paper ( 20 ) World Bank. Sustainable Energy for All: http://blogs.worldbank.org/energy/ 27
stages of energy production. In overall, the weak public policies of member states to facilitate an attractive investment environment, complex regulation, absence of MSP, absence of licensing procedures, the absence or weak defined policy for ocean/wave energy production, send negative signals to the industry to invest on new technologies and R&D on cost efficient solutions. The absence of technology uptakes to steam the market, leads industry to invest in more profitable areas of Blue Energy, leaving behind this sector, while the banking sector and Fund operators follow technology and market signals to guide investment assets to more ready-to-go technologies and solutions. While hybrid scenarios (ocean offshore) are proposed to resolve capacity factors issues, however, technology does not provide cost efficient evidence to attract investments assets. Last but not least, we need to mention that due to the current economic climate, several member states have substantially scaled back plans to support investments at renewables, and in many cases introduce at short term retrospective changes. Such developments erode investors confidence putting further development of the subsector at risk. The lack of financial support to the technology development can lengthen the time necessary for potential projects to move towards acceptable profitability ratios. Further economic research needs to be undertaken in order to evaluate strengths and weaknesses of this sector, analyse in depth the costs determinants and profitability of associated technologies, while, at the same time, industry needs to provide more cost efficient solutions to the whole chain of energy production. Technology developments need to resolve issues regarding the cost operation of blue energy farms, leading more players to the market. Market uptake to new technologies needs to take place so as to drive producers to provide cost efficient solutions and decrease installation and operation costs. 28
3. Value chain analysis 3.1 General A value chain reflects most of the life-cycle of an energy project, starting with the necessary preparatory works and studies to develop the project (e.g. local resource assessment, EIA studies, planning of infrastructure, approval processes, etc.), the construction processes (e.g. installation, connection to the grid, transmission infrastructures, etc.), the O&M of the project and finally, the decommissioning actions. An example of typical product requirements for the case of wind farms are listed in Table 2. Table 2: Typical requirements for wind farm development DESIGN CONSTRUCTION OPERATION Feasibility studies Site assessments Testing Environmental assessment Design Studies Project development Licensing Financial services Turbine construction Rotor components Foundations of turbines Access platforms Transmission cables Heavy lifting facilities Logistics Inspections Monitoring Repair & maintenance Painting coating Value chain analysis includes also the analysis of the framework conditions (i.e. regulations, financial opportunities, support by the banking sector to organise investment portfolios and funds, logistics, market dynamics, consulting services, etc.). All the processes are of supporting nature, but need necessarily to be taken into account for the successful implementation of the project. Value chain analysis for Blue Energy allows an assessment of functions across different sectors pointing out synergies that can occur at supply chain. It also describes the impact of sectors to the local and regional economies (e.g. by creation of new jobs), while it also highlights the issues to be improved and the targets to be met in the future. Core activities of each function (mainly for wind and wave energy production) are shaped identified as upstream and downstream: Upstream activities of value chain are suppliers of equipment and downstream activities are processing sectors and, subsequently, distribution and sales. The analysis that follows is mainly focused on offshore wind energy, while wave and tidal energy are expected to follow, more or less, the same path. However, let us point out that the economic potential is different for each type of blue energy technologies. For example, the technology costs at wave and tidal energy production, up to now, are significantly high and the development of the relevant technology needs to provide less expensive solutions. On the other hand, the overall costs (including technology) for offshore wind energy are significantly lower and industry (at the equipment part) is leaded to more cost efficient outcomes, which lower the overall costs and increase the value of investments (in terms of ROI and IRR Internal Rate of Return). 29
Combined offshore wind and wave energy production are proposed to meet cost targets and facilitate financially sustainable projects. The estimated added value of various forms of ocean energy (renewable and non-renewable) to the EU market (as a part of maritime economy) is shown in Figure 15 ( 21 ). Figure 15: Current size of Energy in EU; Source: Blue Growth Scenarios and Drivers for Sustainable Growth for Oceans Seas and Coasts, DG MARE, 2012 need to reduce the cost of energy production. Up today, Blue Energy holds a small share, but with steady growth at energy sector, it is expected to reach the target of 130 billion by 2020. Main risks to global and EU development growth are economic stability, lack of grid connections among blue energy farms, and the The cost for offshore wind farm development is comprised by CAPEX and OPEX. Based on these Table 3: CAPEX and OPEX for offshore wind farms measures, cost construction CAPEX (70-80% OF TOTAL COSTS) OPEX (20-30% OF TOTAL COSTS) for offshore wind farms is Operation & Maintenance illustrated at Table 3. Lands rental According to this table, the Insurance costs and taxes key parameters as regards Management and administration cost construction are: Cost of turbines & foundations Gridding Civil works and licensing Capital costs (assets managements and financial costs) Cost of turbines; Foundations: the cost depends on water depth and construction principle and may vary from 4-6% up to 21%; Construction costs (including licensing and EIA studies); O&M costs (<30%); Gridding (21%); Capital costs and financing; Labour costs. For CAPEX, it is estimated that the labour costs are at 38%, while for OPEX is 44%. The market development of subsectors (turbine construction, foundations, etc.), the specialization of market players and competition among actors will significantly reduce costs. Technology and regulation play influential role on the final cost of offshore wind farms, while the minimization of risk revenues (due to regulation) is a key parameter for investors and financial institutions to provide with capital or partially participate in the consortium. As regards wave energy, the picture is quite similar, although the costs of technology solutions seem up to now to be higher than offshore wind energy. ( 21 ) Evidently, the cost and the respective added value at each stage determine the final added value of the value chain. See also below. 30
3.2 Value chain analysis for blue energy 3.2.1 General Figure 16: Framework conditions for the value chain analysis; Source: Value chain analysis https://bettyfeng.wordpress.com/ Value chain analysis for Blue Energy is relatively more focused on offshore energy production due to that market development and economic research provide a significant amount of tested information. On the contrary, for wave, tidal and OTEC energy production there is rather lack of data on economic research, and thus value chain development cannot be clearly illustrated ( 22 ). It is expected that value chain analysis will follow the same pattern for all Blue Energy subsectors. As a first approach, value chain analysis at Blue energy (offshore wind and ocean) is focused on the following parameters, see also Figure 16: the framework conditions (access to capital, investors availability, regulation, and availability of farm territories as aftermath of MSP at national level, social acceptance, financial conditions); the backward links and the associated activities (supply and availability of technology); the core activity (energy production by offshore wind farms or hybrid systems) The forward links (comprising the input services provision to energy production). Framework conditions are fundamental to shape an attractive field for development of investments. Offshore projects need to meet assets availability at early stages of the project and this parameter plays significant role on financial engineering. Projects need to be more bankable and attractive to investors by minimizing the risk factor. Risk is related primarily on licensing and regulation at places, while, at the same time, is also related to turbine models and its energy capacity factor, site s technical parameters and logistics. Cabling issues determine the delays thereof, and the associated costs are related to the existence of other wind farms and/or the potential of territories at technical level. Regulation and licensing of the projects determines delays (and respective incremental costs) at primal stages of project development, which in turn affects the overall project profitability. Overall, the costs and value of backward links determine investors choice, the assets availability and cash flows. Backward links are associated to the technologies used and corresponding costs along with the ( 22 ) It is thus evident that for ocean energy there is need for more research in order to illustrate in detail the dynamics of the value chain 31
respective value. Turbine technologies, foundation installations and its support services, gridding and related logistic issues determine the value of the activity. The development of the backward links is more associated with R&D for the provision of more efficient technology solutions and more intensive R&D investments by the industry. Forward links are associated with energy distribution and energy sales, synergies among distributors and national policies thereof. Core activity and operation is related to O&M, service and repairs provision, insurance costs, liabilities period and taxes of the overall investment. 3.2.2 Offshore wind energy The aforementioned elements determine the value chain of the subsector, which is comprised by five characteristic stages that determine the costs and added value. Specifically, the general project development includes, at specific stages of development, the wind turbine, the foundationssupport structures, the Figure 17: Value chain for offshore projects; Source: Roland Berger 2014 gridding of wind farm and network, the logistics and installation, and finally the O&M of the wind farm; see also Figure 17. Figure 18: Actions for project development (Offshore); Source: Roland Berger, 2014 The time frame for project development depends also on the market development at the wider regions (i.e. Atlantic Ocean, North and Mediterranean Seas), where the mature professionalism, the gained expertise and the specialized operators can decrease time required. On the other hand, into new territories lack of expertise and lack of local experience would induce significant delays. The banking element of the 32
project plays a determinant role to the access of capital at initial stages of project development, and is related to the economic context of territories. Strategic partnerships among actors determines also the time frame of project development. Figure 19: Key issues of value chain analysis; Source: www.wind-energy-thefacts.org Regarding the analysis of value chain, the key issues are categorized into the following fields, see also Figure 19: i) field development and licensing, ii) development of transport solutions and installation, iii) logistics and transport and iv) O&M. The detailed development of a wind farm (offshore or hybrid) follows the time frame shown in Figure 20. The major finding is the fact that cost is saturated at the initial stages of the project (up to 80% of total), while the main revenues will come after the operation of wind farms (24-30 months). Figure 20: Typical time frame for the development of an offshore wind farm; Source: www.gamesacorp.com Table 4 summarizes the challenges and solutions to be undertaken at the value chain for wind energy. Overall, as regards the value chain (mainly for offshore wind energy), the key determinants of the size of the value are: i) the local economic environment and the interest of investors, ii) the project development time, iii) the availability of key equipment at site (turbines and foundations), and iv) the installation vessels availability and its respective costs and logistics at the onshore part to support construction and maintenance. The development of offshore wind energy at new geographical territories creates an array of opportunities to local economies and facilitates the creation of subsectors at local/national level. The transformation of existing infrastructure to respond to the needs of offshore wind energy would facilitate local development by increasing the size of value chain. At the downstream end, national energy market organization plays a deterministic role to the speed of wind energy development. Market liberalization at distribution part and energy wholesaling 33
provides incentives for market actors to invest, whereas regulation policies, which create regulatory barriers to entry, create a reality at which only big market consortia will be able to respond, leading the market to the creation of monopolies or oligopolies. Table 4: Development solutions to value chain for wind energy SUPPLY SIDE DEMAND SIDE REGULATION POLICY 1. Investment in turbine R&D 2. Assistance in regional grid planning 3. Identification of synergies with existing industries (i.e. oil and marine based) 4. Creation of stimulus for ship-building 5. Support of financing streams for Investors 6. Identification or restructure of existing businesses in supply chain 7. Provision of workforce training with local partners 8. FDI and promote partnerships 1. Support innovation for offshore wind 2. Structure incentives 3. Production incentives provision 4. Government procurement program act as catalyst 1. Approval process 2. Coordinated review provision 3. Tax credit programs 1. Align communication strategies 2. Use of proactive growth strategies in EU 3. Public education to get understanding and support for offshore wind 4. Stable regulatory policy for all EU 3.2.3 Ocean energy Regarding ocean energy, the elements that determine the value chain of the sub sector is comprised by six characteristic stages that determine the costs and added value: the project development; barrages construction, mooring systems installation, Wave Energy Converters installation transmission settling and support services; gridding of wave installation and network; logistics and power transmission system costs; O&M; Decommissioning. The respective costs for project development are up today at high levels also due to the lack of organised coastal marine national policies at specific areas. In addition, the estimation time for project development (only to the UK) is about 5-10 years. The lack of availability of commercial solutions to tidal barrages and WEC devices (only 2-3 market players operate) keep at high levels the respective costs, while issues on gridding of installations cause significant delays to the successful commercial implementation of wave energy power production. Decommission of wave energy devices (within a period of 10 years of operation) seems to be an issue, which needs to be resolved at the direction of cost minimisation. Therefore, technology development in order to meet market demands will determine the added value of the sub sector s value chain, see Astariz, Iglesias (2015). 34
3.3 Job creation Blue energy production investments do not only contribute to a greater energy security, cleaner environment and economic growth, but they also generate social benefits with the employment dimension receiving growing attention. Blue Energy provides a significant number of job creation into all stages of a blue energy project development and a broad range of occupations can be found along the various segments of the supply chain for each blue energy technology, specifically: at the Project development stage where expertise (new jobs) is needed to be deployed, at the construction stage where new companies are needed and expertise is sought to be engaged, at O&M stage where expertise is needed. All these demands constitute an array of opportunities for employment either at permanent base or at part time (at construction). 3.3.1 Offshore wind sector It is estimated that offshore wind will create three times more jobs compared to offshore oil and gas industries. EU target by 2020 sets the employment at the number of 400.000 new jobs, while the UK expects to create between 1-1.7 full time jobs for each MW of offshore wind power installed. In the Mediterranean Sea, National action plans foresee the creation of 50.000 new jobs, while the rest of Europe will face job creation of 350.000, respectively. Up today, the industry development (especially on turbines foundations and logistic) creates an array of new jobs opportunities due to new market players, and the integration of new more efficient production models and final outcomes. In addition, the redesign and transformation of onshore facilities (i.e. harbours and local logistic facilities) creates an array of new jobs and services to be placed in order to provide cost efficient services to wind farms. 3.3.2 Ocean sector It is expected that wave and tidal energy would also create an array of job opportunities at manufacturing, transportation and O&M; see Figure 21. Studies in the UK estimate that 10-12 direct and indirect jobs will be created for each MW of ocean (wave and tidal) energy installed ( 23 ). Ocean energy has the potential to create new jobs at project development, manufacturing and operations. Indicative job estimates suggest that 10.000-26.500 permanent new jobs and 14.000 temporary jobs would be created up until 2035, while, according to the European Ocean Energy Association, 450.000 jobs could be created by 2050, if the European target of 188GW installed capacity of ocean energy will be fulfilled. ( 23 ) Oceans of Energy, European Ocean Energy Roadmap, European Ocean Energy Association, 2010 35
Figure 21: Job creation per MW of Ocean Energy installed capacity by 2050; Source: European Ocean Energy Association 3.3.3 Conclusive remarks Table 5: Job growth on the offshore wind and wave energy industry; Source: International Economic Council, 2013 Place Job creation Capacity Jobs/MW Europe 400.000 194GW 57 USA 70.500 38GW 50 Globally 470.500 232GW 107 Table 5 summarizes some of the most widely referenced projections for job growth in the offshore wind and wave energy industry in Europe and the United States through 2020 and/or through 2030. The main purpose of this table is to show the range of projections by industry expert, establishing thereby a barometer for the employment potential of the industry and a benchmark for analysis, since these numbers are always being updated through several studies. Overall, Blue Energy provides a new array for employment opportunities at all functions of value chain, namely, project development, construction and manufacturing, support services provision, transportation and logistics and finally, onshore support services at existing infrastructures (harbours, port authorities, etc.). Europe will be a glooming employment market, followed by the USA, while Asia (China) enters at the turbine construction market. Costs of labour are mainly focused at project development and construction, while subsectors specialization will provide incremental employment opportunities for all actors involved in the Blue Energy value chain. 36
3.4 Mediterranean basin 3.4.1 Blue energy development in the member countries Mediterranean Sea is a deep water basin, characterized by suitable hot-spot areas for offshore wind farm development and, in a lesser degree, for wave and tidal/current farm development. On the other hand, it is a territory in which significant tourism investments take place, while it also hosts important commercial, coastal and tourism recreation activities ( 24 ). Despite the immature stage of implementation, it appears that Blue Energy would be well suited to the Mediterranean Sea and can be combined with other (complementary) activities and sectors, such as construction of equipment, aquaculture, transport activities, ports, etc. Nonetheless, progress has to be made in order to deal with environmental considerations and social acceptance, as well as to increase involvement from investors. Since Mediterranean basin is tourism-oriented with significant investments to operate to all coastal areas (including islands), the development of Blue Energy is expected to meet significant social resistance by local environmental groups and societies. Strong opposition for the development of Blue Energy has been already arisen in France and Italy, based on the assumption that Blue Energy causes the deterioration of local landscapes and local economies. Reservations aim also to the negative effects of Blue Energy on fisheries, mammals and migratory bird s population, the development of tourism industry at local level, the marine ecosystem effects, the disruption to commercial and private vessels and the noise and visual pollution of renewable energy facilities, especially at touristic sites. On the other hand, economic and political instability to the European South, coupled with the lower renewables energy market development, constitutes a least favourable investment territory for big scale investments. Demonstration projects took place in Spain and Italy, whereas Greece and Croatia demonstrate rather slow development at this level. Up today, at national level (for Greece, Italy, and Croatia) the existing development lags significantly behind the national Energy plans goals. Regulation, harmonisation and licensing has not been fully developed, causing severe uncertainties to potential investors. In parallel, the so called boom in Green Economy was not coupled with the liberalization of the energy market (wholesale and retail distribution) and this, in turn did not contribute to the overall market development of renewables. The significant regulation instability, combined with the respective licensing and insurance bureaucracy, delays sign investment decisions more to the north than to the South. Many actions need to be taken in order to boost further the social acceptance at the Mediterranean Sea (where significant tourism activities take place) and smooth prejudices related to the deterioration of landscape of offshore and ocean energy production facilities. On the contrary, research undertaken at the Mediterranean provides significant contribution to the industry, shaping a competitive environment on technology expertise to the sector. A number of entities at regional and national level are active in the promotion of Blue Energy, but local and ( 24 ) Let us note here that many studies indicate that the hybrid renewable energy production model (combination of onshore and offshore energy production) would be the ideal scenario for the coming years, especially for the Greek islands of the Aegean Sea. The combination of onshore and offshore seems to deserve further assessment as a potential renewable energy model. 37
regional administrations need to work more intensively to release local barriers for investments. Bottlenecks at national markets on renewables need to be released in order to establish an attractive investment environment. In this respect, clusterisation could contribute significantly to this pathway, acting at regional and national level at the entire basin. The formation of a mega-cluster on Blue Energy for the Mediterranean would undertake lobby and promotion activities to certain regions to push social acceptance and formulate conditions for infrastructure investments of public sector. In addition, the mega-cluster would facilitate the readiness of existing clusters with the aim of diversification in order to boost competitiveness and market acceptance of new solutions locally and regionally. The fragmentation of blue energy investments and pilot projects could constitute a critical mass for the financial sector to organize venture funds and boost investments under the condition that local regulations would not cause significant delays on investment plans. However, for the rational assessment of the available blue energy potential in the coastal areas of the Mediterranean Sea, further research is necessary. Relevant studies so far, provide general suggestions as regards blue energy potential in the Mediterranean Sea, and are appropriate only for a first assessment towards large industrial developments. In addition, uncertainties inherent to the specific source of ocean data used in the analysis is another important factor very relevant to the economics of blue energy installations, and should be taken into consideration in any blue energy project development. Therefore, an in-depth analysis should focus on the local-regional level in order to identify specific locations with utilizable resource and corresponding potential actors at this spatial level ( 25 ). 3.4.2 Feed in tariffs Feed in tariffs seem to be an attractive scenario for market development of Blue Energy in the Mediterranean Sea. The implementation of such policy mechanism to the sector would accelerate investments by providing long term contracts for developers to invest. Feed in Tariffs (FiTs) would contribute to the development of the sector at a macro-regional level, as well as to the development of blue energy subsectors (e.g. gridding, O&M). In many cases, these policy instruments were used as a response to activate sector investments in an area, as a tool to response to financial crisis, but this requires the support of banking sector. The model of implementation of FiTs to the development of Blue Energy in the Mediterranean, is an attractive pathway with reference to the following: i) shorten time of technology development, ii) the development of blue energy installations, and more specific the offshore development or the promotion of hybrid renewables (onshore offshore), iii) reach a cost saving investment outcome and iv) improve the Risk ratio indicator. With regard to wave energy, the lack of clear and defined policy by member states of the Mediterranean, seems to act as an impediment to its development ( 26 ). On the other hand though, the economic stability (of Mediterranean and EU in general) is the ultimate catalyst to reach successful outcomes. According to European Ocean Energy Association (2010 Position paper Report), EU member states have decided to place in action a set of support systems to promote all forms of Blue Energy production. An overall table of support policies is illustrated in Figure 20, however figures should be revisited under the new economic changes. ( 25 ) HCMR Study on Territorial Actors, 2015 ( 26 ) Hybrid solutions (offshore wind wave installations) seem to be more attractive to be financially supported 38
Figure 20: Overview of Member State Support Schemes (2010); Source: European Ocean Energy Association, Position Paper Towards European industrial leadership in Ocean Energy in 2020 39