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World - Offshore Wind Set For $1 Trillion Investment In Next Decade

In the next decade, $1 trillion is set to flow into offshore wind. Everyone – from legacy energy providers to Big Oil – is making moves in this space.

Despite being the global leader, the European offshore wind industry is still in its infancy and the largest opportunities lie ahead. In 2021, offshore wind supplied just 9% of annual power generation in the largest five offshore wind markets in the region. It did, however, surpass onshore wind generation in three of the top five markets: the UK, the Netherlands, and Belgium.

Comparing the European sector’s performance in 2020 against 2021 highlights the impact of the factors that the sector cannot control – wind speeds and power prices. While offshore wind production soared by 21% in 2020 year-on-year, a drop in demand driven by the global pandemic exposed the need for grid flexibility as capture prices fell to record lows.

In contrast, despite a year-on-year fall in total production in 2021, the reverse occurred. Offshore wind revenues hit record highs as power prices soared.

The revenue profile, which determines the level of exposure to power price volatility, varies significantly across Europe. Revenue profiles range from fixed revenues per MWh which are not exposed to power price changes – such as Feed-in tariff (FiT) or contract for difference (CfD) – to mechanisms where asset owners get a premium on top of the capture price – an example being green certificates or renewables obligation certificates (ROCs). The latter are therefore exposed to changes in power prices.

The annual revenue of a wind farm varies significantly, as both market conditions and offshore wind power production change over time. By understanding such dynamics, asset owners can diversify their portfolio not only within this growing offshore wind market but also better position offshore wind in their wider renewables portfolio – and get rewarded accordingly.

While all offshore wind project revenues are impacted by the volume of power produced, the year-on-year variance in wind speeds is far less volatile than the changes in power price. Subsequently, the largest share in a project’s revenue risk stems from the extent of exposure to power price, and the support schemes in place.

High-risk-reward projects, such as those operating on a merchant tail, benefitted from spiraling power prices in 2021. However, low power prices, like those in 2020, will hit owners’ annual revenues.

Lastly, low-risk-reward type projects, such as a contract for differences (CfD) and feed-in tariff (FiT) scheme projects, only face production risks, since lost production equates to lost revenue for them.

Spiraling power prices have hit consumers through record-high energy bills. High gas tariffs and a return of power demand post Covid-19 spiked European prices by as much as 220% in 2021. This is severely impacting consumers. In H1 2022 power prices have continued to climb across Europe, indicating high energy bills will continue troubling consumers unless governments intervene.

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