Offshore wind sector at the mercy of subsidy whims

Fri Jul 12, 2013 12:26pm EDT

* Industry fights back as governments rethink subsidies

* Companies says subsidies essential for investment

* Opponents cite inflated energy prices

* European Commission working on new policy

By Barbara Lewis and Vera Eckert

BRUSSELS/FRANKFURT, July 12 (Reuters) - Bremerhaven, the bleak, windswept home to high unemployment and the remnants of a once-mighty shipping industry, is striving to reinvent itself as an offshore wind hub.

It seems logical for the north German port to redeploy skills common to building ships and giant turbines, but success depends on guarantees of the green subsidies that are stoking fierce debate across Europe.

Those who oppose subsidies say they inflate energy prices and undermine Europe's competitiveness at a time when the United States is benefiting from cheap shale gas.

Such concerns have prompted some European governments to rethink their subsidies policy. Germany has already said it plans to scale back support, and all bets are off in Spain as the recession-hit country conducts an extensive overhaul of its entire energy sector.

Offshore wind offers the prospect of eventually providing large-scale power generation with zero fuel costs.

But the industry says subsidies are essential in the early stages to ensure the enormous upfront investment required for the infrastructure because of its sheer size and distance from land.

"In the short term, it's absolutely necessary (to subsidise)," Areva Wind CEO Jean Huby told Reuters. Without subsidies, he warns, there will not be any new projects or new customers for Areva turbines.

So far, output at the Areva Wind plant in Bremerhaven, which has been producing turbines since 2011, has reached a plateau at about 50 percent of capacity. Beyond half a dozen German offshore parks under construction, investment decisions are frozen, the industry says.

TOO MUCH AT STAKE

Areva's aim is to operate without subsidies, starting some time between 2020 and 2030, which is when Huby estimates that offshore wind will be able to compete with fossil fuel energy.

German Chancellor Angela Merkel has said that subsidies will shrink, though she will avoid the kind of retroactive changes that have triggered threats of legal action from bruised investors in Spain.

Industry and analysts say there is too much at stake to remove all support for offshore wind.

"There is still a lot of commitment to low-carbon outcomes and to not using nuclear. That does not leave too many degrees of freedom," said Stephen Woodhouse, of the Poyry consultancy.

The advantages of offshore projects include their scale and the greater certainty that wind will blow at sea. On average, one offshore turbine produces 3.5 times as much power as an onshore turbine.

The blades of offshore turbines can be bigger than the wingspan of a jumbo jet. Although that increases productivity, it also boosts the initial cost. The miles of undersea cable to the mainland grid is another huge expense.

Yet costs will begin to decline if higher demand encourages factories to increase production, with accompanying economies of scale, streamlined supply chains and technological advances.

Depending on the project, offshore wind power is two to three times as costly as its onshore counterpart, which is partly reflected in current subsidy levels.

For Germany, the price guaranteed by the government, known as the feed-in tariff, is an average of about 10 euro cents per kilowatt hour (kWh) over the 20-year life of an offshore turbine, compared with 6 cents onshore, according to German wind energy agency WAB.

Additional costs turn up in consumer bills, hence the political arguments as the European Union continues to grapple with the financial crisis and Germany gears up for elections in September.

Cost comparison with other energy forms is extremely complex, analysts say, because there are so many variables, such as shifting prices for fossil fuels.

Depending on gas purchase prices, generation from natural gas can be the cheapest power at 50-70 pounds sterling ($76-110) per megawatt hour, analysts say.

As a rule of thumb, offshore wind power costs about 120-150 pounds per megawatt hour (MWh), though the British Treasury is working on the basis of 155 pounds/MWh for 2014/15.

For nuclear power, analysts say that France's EDF is in talks with the British government over a long-term fixed power price of about 95 pounds for it to proceed with Britain's first new nuclear station in 20 years. There has been no official comment.

COST REDUCTION

Dong Energy, the world leader in offshore wind power, says that all new energy sources need support initially.

"We are working on continued industrialisation of offshore wind and reduction of cost," said Karsten Anker Petersen, head of group communication at Dong Energy.

The Danish company, which operates in Britain and Germany as well as in its home market, has a target to bring down the cost of offshore wind by 40 percent in 2020.

As part of Germany's shift from nuclear to renewables, its government has set extremely ambitious goals. They include a target of 10 gigawatts of offshore wind capacity by 2020, enough to power 10 million homes.

So far, it has managed about 0.3 gigawatts and analysts are increasingly sceptical about it hitting the 2020 target.

Utilities such as RWE were the first in Germany to make the leap of faith to invest in offshore wind. More recently, pension funds have bought stakes in projects.

The Institutional Investors Group on Climate Change (IIGCC), which represents pensions, insurers and other funds responsible for 7.5 trillion euros ($9.75 trillion) in assets, says its members have poured millions into renewable energy.

It did not give specific details on wind investment, but said that regulatory certainty is crucial.

"Experience has shown that when the policy framework is in place, investment follows," said Stephanie Pfeifer, the IIGCC's chief executive.

The European Commission, the EU executive, says it aims before the end of the year to publish draft policy up to 2030 to succeed EU energy and climate goals that expire in 2020.

Bremerhaven needs all the certainty it can get. ($1 = 0.6615 British pounds)

(Additional reporting by Steve Jewkes in Milan and Geert de Clercq in Paris; Editing by David Goodman)

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