Offshore energy's headwinds could cost Europe dearly

MADRID/FRANKFURT Tue May 11, 2010 11:29am EDT

MADRID/FRANKFURT (Reuters) - A boom in offshore wind power sparked by the European Union's espousal of the technology runs the risk of becoming a bubble unless installation, running and repair costs are more clearly defined.

As major European countries backpedal over state aid for so called "immature technology" like solar power, other EU members are charging into offshore wind, despite cost estimates being notoriously unreliable after nearly two decades of working wind farms in European waters.

"The rise in costs for offshore wind is not so much due to the demand but because it is a market where there are few players and the risks are not well known" said Acciona Energia's

Wind and Marine Renewables R&D director Raul Manzanas.

Northern Europe, with its steady winds and shallow waters, is banking heavily on offshore to meet EU goals for 20 percent of energy from renewable sources by 2020.

The UK plans to raise offshore wind capacity to 33 gigawatts in 10 years, German is targeting 10 GW, France 6 GW and Spain 5 GW. Major offshore wind player Denmark has identified a total of 23 potential offshore wind parks in its waters.

The biggest increase planned is in the UK, which currently has just 1 GW of installed offshore wind power.

EXPENSIVE TO BUILD?

Land-based wind is one of the cheapest large scale renewable energy sources in the world, with costs of about 1.2 million euros per megawatt to have a turbine up and running. But costs surge threefold when you put turbines out to sea.

Current average capital expenditure for offshore wind doubled in the last five years to 3.2 million pounds ($4.88 million) per MW in 2009, driven by commodities prices, less accessible locations and bottlenecks, according to a UK Department of Energy and Climate Change report.

"Currently there aren't enough boats to install the wind turbines, let alone service the ones that are out there," said HgCapital renewable power infrastructure fund manager Tom Murley.

Sector players say however that current installation cost estimates for offshore wind power are distorted by a few expensive projects in a small, incipient market.

"If you have, for example, a 300 MW project whose costs overrun by 20 percent, that ruins the sector average, because we are only seeing a maximum of five projects come on stream every year," said Acciona Energia's Manzanas.

"I think if we look at the trend, we are talking about investment costs per MW of below 3 million euros," he added.

EXPENSIVE TO RUN?

Estimating operating and maintenance costs for offshore wind is no less a headache for financiers than the cost of installing the equipment.

"The first risk is operational: is the equipment really up to it and do we really know what the long-term operating costs are going to be?" said Murley.

Areas of high wind usually have high waves and the shallow waters where most turbines are located makes access by boat particularly difficult in the kind of severe weather which could damage wind turbines.

At Dong Energy's Horns Rev II windfarm in Danish waters -- currently the world's largest and the farthest from the shore -- access to turbines in winter can be restricted to only two days per month.

Dong has partially solved the problem at Horns Rev II by building a separate service platform near the turbines to help access the installations in adverse weather conditions.

Extra infrastructure like service platforms and boats -- expected to be de rigueur for most large windpower plants planned further out to sea -- also pushes up operating costs, which far from falling with sector development, have surged.

Operating costs for UK offshore windfarms increased to 79,000 pounds ($119,800) per year for each megawatt installed in 2009 from 48,000 pounds in 2005, and is expected to come close to 100,000 per year in 2012, according to a UK Department of Energy and Climate Change report.

Offshore wind is second only to solar power in terms of generation costs. It costs $147 to generate one megawatt of offshore wind electricity per hour, far higher than the $87 it costs with onshore wind, according to HSBC estimates.

EXPENSIVE TO FINANCE

Analysts and sector experts agree that the high number of variables combined with the just 2 gigawatts of offshore wind turbines Europe had on stream at the end of 2009 make for an unreliable cost analysis, and consequent higher capital costs.

"People have said to themselves after many suppliers went bust in 2000 to 2005, "I don't want this to happen to me" ... this is what has led to big risk premiums. In some cases these are real, but in others they are not," Manzanas said.

Once the about 3 gigawatts of offshore wind currently under construction in Europe are built, EU members might have a better idea whether their ambitious 2020 development plans are a real solution to Europe's energy problems or another renewables-based financial product.

(Additional reporting by Catherine Hornby and Karin Jensen, Editing by Sitaraman Shankar)

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