Offshore wind—now widely recognized as a proven and reliable source of renewable energy—is likely to grow in the coming years. According to our research, global installed offshore wind capacity is expected to reach 630 gigawatts (GW) by 2050, up from 40 GW in 2020, and with upside potential of 1,000 GW in a 1.5° pathway scenario.1
Rapidly expanding government commitments and technological progress are contributing to the positive outlook in established markets and countries new to offshore wind. More companies are pursuing offshore wind projects, some of which may involve challenges and risks, including commercial requirements from authorities, difficult project economics, and the requirement to build or bolster capabilities.
This article describes the offshore wind opportunity, progress at the regional and country levels, and tailwinds that could support growth. It also discusses the challenges companies could face and how success in four areas can help them win auctions, execute projects, and support profitable growth.
Global support and technological progress fuel growth in offshore wind
All regions globally are expected to contribute to growth in offshore wind, which can help curb climate change (Exhibit 1). Europe is starting from the largest base (25 GW in 2020) and is expected to increase capacity by 7 percent annually to 190 GW in 2050 in the base case.
The Asia–Pacific region (APAC), which had 11 GW of installed offshore wind in 2020, is projected to strongly increase its capacity, surpassing Europe, the Middle East, and Africa (EMEA) by the mid-2030s and installing 410 GW by 2050 in the base case, including 240 GW in Mainland China. In Asia, Taiwan has positioned itself as the offshore wind pioneer, alongside Mainland China. Japan issued its third tender—the instrument most governments use to allocate offshore wind capacity—in December 2021.2 Australia, South Korea, and Vietnam are also beginning to act on their ambitions.
Offshore wind in the Americas is still in its infancy, but the region is projected to build approximately 35 GW of capacity by 2050.3 In March 2021, US President Joe Biden issued an executive order calling for 30 GW of offshore wind capacity to be installed by 2030. Complementing the federal trend, states with access to marine areas suitable for offshore wind have set ambitious state-level targets. While much of this activity is taking place on the East Coast, areas in California, the Gulf of Mexico, Alaska, and Hawaii also are starting to recognize their offshore wind potential, including in floating technologies.
Meanwhile, many other countries are exploring offshore wind, including Azerbaijan, Brazil, Canada, Colombia, India, Oman, the Philippines, Sri Lanka, and Trinidad and Tobago.4
Technological progress is also boosting the outlook for offshore wind. Until recently, turbines have been installed onto bottom-fixed foundations that are grounded in waters with typical depths of up to 50 meters, requiring a relatively shallow continental shelf. Newer, floating foundations, however, can be installed irrespective of the terrain that lies below and may become viable for water depths of 1,000 meters and beyond5—an advancement that increases the viable sea area for offshore wind by a factor of five.6 France has already completed a tender for its first commercial floating project. Italy has identified more than 17 GW of offshore wind potential, 70 percent of which lies in deep waters requiring floating foundations.7
Additionally, excess offshore wind capacity can now serve as an alternative fuel source for hydrogen electrolysis, a versatile energy storage, transmission, and fuel technology that can be used to decarbonize many hard-to-abate industries and applications. Because electrolysis is so capital intensive to build, companies are eager to maximize utilization, an objective that offshore wind also supports due to its high capacity. In 2021, Denmark approved a project to construct an offshore hub with up to 10 GW of capacity in the form of an artificial island in the North Sea that, using on-site electrolyzers, can store electricity and produce green hydrogen.8
Finally, the power rating of wind turbines is growing significantly. Turbines with a capacity of more than 15 megawatts (MW) are expected to be available within five years. In comparison, the average turbine size installed in 2020 was around 8 MW. The leading three Western OEMs have announced that models in the range of 13–15 MW will be available for installation by 2024.9
As a result of these advancements, the levelized cost of electricity (LCOE) for offshore wind is falling substantially, from around €150 per megawatt-hour (MWh) in 2015 to a projected less than €50 per MWh by around 2024.10 In fact, 2021 has turned out to be a defining year for offshore wind. Established offshore wind veterans and oil majors, including BP, Equinor, Shell Energy, and TotalEnergies, have announced ambitious pipeline plans (Exhibit 2). This is advantageous because much of the capacity announced through 2030 had already been auctioned by the beginning of 2022.
Companies pursuing offshore wind can expect challenges
The industry’s growth prospects and the race to net-zero emissions are attracting more companies with adjacent capabilities. In addition to offshore wind veterans, utilities, oil majors, and other large capital project developers are entering the market.
Along with increasing competition, governments are strengthening commercial requirements that apply to companies bidding for offshore wind projects. Some governments use tenders to determine either the electricity price for a long-lasting offtake agreement11 or the seabed lease price. In some geographies, this has led to inflated seabed lease prices. Along the US Atlantic coast, for example, lease prices increased more than tenfold from 2017 to 2018.12 Companies are also trying to improve their competitive positions with low offtake pricing (Exhibit 3).
In several recent European tenders, zero-subsidy bids have won capacity. A recent tender in Denmark even required what could be interpreted as developers making payments to the government in the form of a bid that included full construction of both generation and transmission assets.
After being awarded capacity, some companies may face risks to their capital-project development costs. Offshore wind projects typically take several years to complete but are based on cost calculations made months in advance of the auction—and several years before the project is commissioned into service. In the meantime, raw-material prices fluctuate; for example, prices for steel, which makes up 70 to 80 percent of the total mass of each offshore wind turbine, were at all-time highs for most of 2021.13 Additionally, some construction equipment and wind turbine installation vessels (WTIVs) are scarce for the larger turbine sizes that are being deployed; globally, there are only about ten WTIVs that can accommodate ten-MW turbines.
Moreover, many offshore wind projects require extensive upgrades to port infrastructure and local supply chains, partly based on explicit government requirements that aim to create local jobs. In the face of this increasing variability and uncertainty, offshore wind participants need to build capabilities in several areas to effectively participate.
Strategies to support growth in offshore wind
Established producers and newcomers can overcome the challenges by committing to excellence along the offshore wind value chain by excelling in several foundational, high-value areas (Exhibit 4).
The goal of development is to open new markets, acquire strong sites, and succeed at auctions. Currently, local markets can be divided into two archetypes with respect to development. In some countries, such as the United States and the United Kingdom, sites are selected and leased by government entities, and then developed by companies to secure remuneration at official capacity tenders for those locations. In other countries, such as Denmark and the Netherlands, sites are centrally developed by government entities, and offshore wind bidders then compete in the tender process for one or several locations. In both archetypes, the starting point for success in offshore wind is a clear strategy. Excellence in development also demands bidding prowess and a smart approach to predevelopment, such as building connections with the local community.
Clear strategy: A clear offshore wind strategy starts with a company deciding which technologies to include in its portfolio. Solely focusing on offshore wind is a high-stakes, high-capital-expenditure undertaking that poses more clustered risk than a diversified portfolio that also includes, for example, solar photovoltaic (PV) and onshore wind.
Second, companies could consider which geographic markets to target for participation. Offshore wind markets vary widely, especially with respect to their regulatory and political environments and maturity. Viable target markets typically have regulatory environments supporting renewable energy and for offshore wind specifically. Most leaders of viable markets either have already established a market and regulatory framework or have made plans to do so. Notably, a broader portfolio comes with the upside of diversification but also with increased complexity.
Third, companies may want to understand their capabilities and limitations. For example, an experienced project developer such as an oil major may build on its extensive experience securing financing for and managing large-scale capital projects. A regulated utility may choose to build on its knowledge of local communities and institutions. Following a thorough capabilities assessment, participants can determine where and how to add capabilities (for example, develop them in-house, selectively hire, or partner with others).
Predevelopment including links to local communities: As offshore wind tender processes become more competitive, participants need to successfully manage a broad range of stakeholders. Some companies use innovative strategies to involve local communities in their offshore wind plans from the start. For example, the joint venture between Ørsted and Eversource solicited opinions from the local fishing community when scouting and monitoring sites off the coast of Rhode Island. The two companies also upgraded a fleet of local fishing boats to meet industry safety standards to minimize the risks of incidents at sea.14
Additional complex decisions that need to be made before development may include whether and where to build a local manufacturing footprint for turbine assembly. This can be a critical differentiator for tender participants, given the economic impact on communities. Ultimately, organizations such as turbine OEMs and foundation manufacturers are responsible for building their respective manufacturing footprints, which means the offshore wind developer needs to work closely with these stakeholders and, often, to navigate and resolve competing interests.
Entering new offshore wind markets is challenging given the local knowledge required. Only a few experienced international players have managed to organically penetrate new markets around the world, although many partner with or acquire local utilities, companies, or projects to gain market entry (Exhibit 5). Notably, there could be large adjacent value pools forming for infrastructure players. For instance, in the United States, the Biden administration projects that multibillion-dollar investments in ports and vessels will be needed to meet the 2030 target.15
Implementing successful bidding: As new participants enter the market, companies could focus more time on planning and executing their bid process to improve their bid success. A thoughtful approach to auction excellence can help companies remain level-headed and focus on the critical elements of an auction.
First, participants need to establish a fact base about the auction. This involves scrutinizing the government’s core assessment criteria and auction rules. Collecting and analyzing previous auction results can provide meaningful insights into long-term price trends to inform bid development. Auction participants can also attempt to estimate ranges of bids from competitors for a given auction. Combining deep industry intelligence, competitive economics, and informed assumptions can help participants anticipate competitors’ likely auction behaviors. By using publicly available information, auction participants can approximate competitors’ walk-away prices, hurdle rates, and minimum required rate of return on a project.
As new participants enter the market, companies could focus more time on planning and executing their bid process to improve their bid success.
Second, after establishing a deep understanding of competitors, companies may want to determine their own valuation of the project, including a business case for capital expenditures, operating expenditures, and commercial risk. Best practices include defining the specific walk-away price for a given lease by solving backward from the expected offtake price and taking into account project risks along the value chain.
Multitechnology integration: As the offshore wind industry matures, governments and experienced companies are increasingly linking offshore wind projects to a specific use rather than simply feeding into the larger electricity grid. For example, integrating offshore wind with hydrogen electrolysis will become more commonplace; developers may benefit from investing in technology integration capabilities. Ørsted recently announced plans to connect one of the world’s largest electrolyzer projects to 2 GW of new offshore wind capacity in the North Sea. It plans to power the electrolysis process with electric power from offshore wind and thus enable the build-out of infrastructure required to sustainably produce steel, ammonia, ethylene, and other hydrogen-based chemicals and materials in Europe.16
Securing offshore wind capacity is the first step in a long journey. The next step is to effectively execute engineering, procurement, construction, and installation (EPCI) processes to achieve the cost targets that informed the successful auction strategy.
Fit-for-purpose operating model: Successful offshore wind projects require a well-structured organization and a detailed strategy for in-house versus outsourced activities. Key elements—including the organizational structure, staffing model, and governance—must be designed with the company’s core competencies and the specific opportunity in mind.
EPCI package structure: Participants can consider a number of offshore packaging archetypes. For example, in a full EPCI model, the developer contracts both supply and installation for each group of components (most importantly, turbine, wind-turbine-generator foundation, array cables, export cables, and offshore substations). In multicontracting, in contrast, the developer contracts out supply and installation separately for all components.
In mature markets, offshore wind veterans can often achieve cost advantages by using a multicontracting approach—procuring key components or packages directly from suppliers and handling installation separately (Exhibit 6). A multicontracting strategy, however, requires a complete understanding of the offshore wind value chain, good availability of supply and installation resources, and deep in-house project execution capabilities—which is why it is typically only available to experienced participants. Furthermore, not all local markets offer the supplier landscape required to contract out in packages using this strategy.
Procurement excellence: Material costs have been rising, mostly driven by an unprecedented surge in steel prices, making procurement excellence an essential skill for offshore wind developers. Overall, material cost fluctuations create uncertainty that can pose a significant risk to projects. To decrease fluctuations and lower EPCI costs overall, offshore wind developers can employ advanced procurement tools and strategies to ensure low cost and early technology access. These include rigorous spend analysis, clean sheeting—analyzing a product’s cost structure from top to bottom to optimize design and capture savings—and excellence in supplier negotiations.
Claims management excellence in construction: Excellence in construction in a number of key areas, including claims management, is crucial. Claims can amount to 10 to 20 percent of total contract cost. Best-in-class claims management can decrease penalties and build thriving, collaborative relationships with contractors. This includes having the right organizational structure and standardized processes in place for recording and processing claims; creating transparency to identify, analyze, and counteract the most common, high-value causes of claims; and changing the culture to anticipate and prevent claims—rather than simply respond to them—by collecting evidence on contractor behavior and carefully reviewing contract terms to eliminate clauses that previously led to claims. These practices can help limit the overall number of claims.
Operations and maintenance (O&M) excellence can be a major source of competitive advantage. Based on today’s installed capacity in Europe, our research suggests there would be a savings opportunity of more than €600 million per year if all participants adopted best-in-class O&M practices. Turbines to be installed in the future will have significantly more mature technology but also more complexity resulting from significantly larger blades, gearboxes, and generators, for example.
O&M costs are hard to predict and heavily based on assumptions such as the number of major component failures expected over a 20- to 30-year asset lifetime. Given the significant reduction in offshore wind capital expenditure over time and the longer lifetime of assets, achieving low O&M cost and reliable performance is crucial. As a starting point, companies may want to decide whether to have third parties (for example, OEMs or other O&M service providers) perform maintenance services or to perform O&M in-house.
In the case of third parties providing O&M services, rigorous performance measurement and consequence management in case of deviations from contractual obligations are key to ensure that risk and cost are adequately passed on to the service provider. If O&M is performed in-house, excellent execution based on lean principles and the use of digital technologies—for example, to enable predictive maintenance—can help bolster effectiveness.
While cost fluctuations are the norm in large offshore wind projects, government pricing mechanisms and long-term offtake agreements have historically ensured relatively stable revenues. However, going forward, the exposure of the industry to market prices (so-called merchant risk) and thus to revenue fluctuation is likely to increase significantly. More and more existing assets are leaving the subsidy phase, and new assets that are selling electricity at current wholesale prices are coming online “subsidy free.” At the same time, any additional volatility on the revenue side comes with a potentially significant impact on financing terms.
Managing merchant risk starts with defining a clear strategy: How much merchant exposure is a company comfortable with, and what share of revenues should be locked in? The question becomes even more challenging with power prices skyrocketing in some regions of the world and demand for green electricity likely continuing to surge.
For the portion of revenues that are locked in, companies may want to develop the right approach to identify and secure offtake. Options for corporate offtakers range from investing outright in a project to striking deals with a limited number of large offtakers to having a broader portfolio of offtakers. For production, the company will need to decide how much to hedge and over what period of time.
Ultimately, participants could consider developing the right operating model across the front-, middle-, and back-office systems underpinning their strategy. Options include maintaining full trading and structuring capabilities in-house and outsourcing most activity while retaining a small but highly capable team in-house to avoid excessive value leakage.
By the end of this decade, thousands of turbines will likely be turning along the coasts of Asia, Europe, North America, and other regions. The offshore wind industry has the potential to create significant value for companies, communities, regions, and countries while making a major contribution to reliable, low-cost, and clean electricity. Companies that intend to capture their share of this value pool have considerable work to do to build excellence along the value chain. Sizable investments—in organizations, processes, technology, and people—will be required to master the challenges ahead and to effectively compete with other players.