Wind-Power Sector Hopes for Sea Change

Date: 01-08-2014

Source: The Wall Street Journal

Companies Behind Sea-Based Wind Farms Have Learned From Past Mistakes That Led to Budget Overruns

HAMBURG, Germany—For years, Germany’s ambitious effort to generate bountiful electricity with wind farms rising from the deep blue sea has been drowning in red ink. Now, investors like Blackstone Group LP and suppliers like Siemens AG are looking to buck that trend.

Offshore wind holds enormous potential for plentiful, environmentally friendly energy because the open sea is almost always windy. But ever since Germany started planning investments in the sector—around the start of the century—obstacles have piled up, including a lack of component suppliers and the absence of equipment needed to link turbines to the national power grid. Even the ships needed for construction out in open water were unavailable.

As a result, early offshore-wind projects blew through budgets and schedules because developers had to invest billions of dollars in ports, special barges and power connections. 

Siemens, the world’s largest manufacturer of offshore wind turbines, and its partners concede they underestimated the challenges behind offshore wind. The financial fallout from these challenges was highlighted on Thursday, when Siemens said it booked €128 million ($171 million) in new charges related to connecting offshore wind farms to the power grid. It blamed unexpectedly high costs for shipping, installing and starting up grid components.

They say, however, that they managed to learn new skills in the process. And with huge investments made and painful lessons learned, confidence in the sector is returning—with a dose of realism.

Private-equity firm Blackstone and German project developer WindMW have invested €1.2 billion in the Meerwind—German for „sea wind“—project, more than 50 miles (about 85 kilometers) off Germany’s coast on the North Sea. Meerwind, which counts 80 massive Siemens turbines, is expected to start delivering electricity late this year—about a year behind schedule.

Building Meerwind proved daunting, despite its relatively shallow water of 85 feet, or 26 meters, at its deepest). Engineers had to anchor foundations for turbines, transformers and converter stations more than 130 feet beneath the surface, which proved far more difficult than expected.

Another problem was wiring the system to move gigawatts from the sea to consumers on land. This requires offshore converter stations the size of factories, which Siemens builds at a price of around €1 billion each.

Siemens says delays in manufacturing and preparing the converters have cost it roughly €900 million in the last two years, including the latest charges announced Thursday. The company finally installed the last two stations in July.

Tim Dawidowsky, chief executive of Siemens’s electricity-transmission unit, said Siemens has nearly doubled the amount of time allotted to build offshore converter stations to five years.

Despite its challenges, wind power remains a crucial element in Germany’s strategy to replace nuclear and fossil-fuel plants with more environmental sources. The country’s exit from nuclear energy was speeded up after a tsunami crippled Japan’s Fukushima nuclear plant in March 2011. Germany closed eight of its oldest nuclear plants immediately following the disaster and plans to close the other nine by 2022.

Other wind farms, including the Nordsee Ost project developed by German utility RWE AG, are under construction.

Last year, renewable energies accounted for 24% of Germany’s power generation. And with a share of more than one third of that, wind energy is by far the biggest generator of „green“ electricity in the country, according to energy lobby BDEW.

Offshore wind only accounts for a fraction—less than 1%—of the Germany’s renewable-energy generation, but the densely populated country already has allocated its most promising onshore wind spots, leading investors to look to the sea.

To date, Germany has an offshore capacity of around 630 megawatts of offshore wind power and plans to boost that tenfold by 2020 to 6.5 gigawatts. By 2030, it aims for offshore capacity of 15 gigawatts.

Technological challenges behind offshore wind may be shrinking, but the economics remain daunting.

One kilowatt-hour of electricity generated offshore costs up to 18 European cents, compared with 11 cents for solar power and 8 cents for onshore wind. Coal and gas plants generate electricity for as little as 4 cents per kwh. 

„Long-term subsidy programs need to be in place to cover this gap,“ said Magnus Dale, senior analyst at consultancy IHS Energy in Paris.

Germany is offering long-term support to the sector, guaranteeing subsidies for offshore wind farms for up to 12 years, despite having slashed its capacity target through 2030 by 40% as part of an effort to curb spiraling costs.

The country still expects total renewables subsidies to rise to around €24 billion this year, a bill that electricity consumers are paying through a surcharge on their power bills.

The industry believes that further industrialization and technological progress will help reduce the cost of offshore wind.

Michael Hannibal, head of Siemens’s wind-power division, said the offshore industry aims to cut costs by around 40% by 2020. This would still be around 35% higher than onshore wind today—and 2.7 times more expensive than coal and gas—but more reductions are expected to follow. To achieve this, Siemens is looking to develop bigger and more efficient wind turbines. Siemens’s biggest wind generator has a capacity of 6 megawatts but the company needs to begin looking at 8 MWs, said Mr. Hannibal. Rivals Areva SA and Vestas already offer 8 MW units.

Over the long-term, the goal is to bring down cost, so that offshore wind can compete with coal and gas, Mr. Hannibal said.