FOCUS: UK Plans To Boost Wind Energy, Costs Pose Challenge

The U.K. is set to take its next step towards boosting offshore wind power capacity as it seeks to enhance energy security and meet European Union environment targets. But wind farm developers face a huge engineering challenge and massive costs from an industry still in its infancy, developers and analysts say.

The U.K. government will Friday unveil the winners of its third and largest round of offshore wind tenders. Bidders for the nine sites up for development include the U.K.'s big six energy suppliers as well as other European utilities and energy groups. E.ON AG (EOAN.XE), RWE AG (RWE.XE), Scottish and Southern Energy PLC (SSE.LN), Centrica PLC (CNA.LN), Statoil (STL.OS), Iberdrola SA (IBE.MC), EDP Renovaveis (EDPR.LB) and Vattenfall are reported to be among the winners of development leases which will install around 25 gigawatts of renewable generation capacity.

But the challenges they face are enormous. According to the U.K.'s Carbon Trust, an independent body set up by the government to accelerate the move to a low-carbon economy, the U.K. needs to develop a total of up to 29 gigawatts of offshore wind power from the 1GW currently installed if it is to meet E.U. targets to increase the share of renewables in its energy mix to 15% by 2020, and to compensate for the closure of ageing power plants. Costing around GBP3 million per megawatt, investment to develop the nine sites is estimated at up to GBP100 billion through 2020.

The U.K. is hoping to use some of its expertise in North Sea oil and gas production to give it a head start in what is an expanding global market.

However, although growing, the industry's supply chain is still relatively immature, and robust technology and new engineering solutions need to be developed for the greater water depths and stormy North Sea conditions in many of the Round 3 license areas.

"In terms of the scale of the challenge, it's not dissimilar to the U.K.'s coal power generation build out in the 1970s, and the dash for gas in the 1990s," said Benj Sykes, senior technology acceleration manager at the Carbon Trust.

"The technology has to evolve and be accelerated because it's a very different game from building turbines in less than 10 meters of water within a couple of miles of shore - whether it's to do with how the turbines are fixed to the seabed or how you get people on and off them," Sykes added.

Currently, most of the wind farms being developed under the U.K.'s first two offshore tender rounds--totaling 8 GW of capacity--are in water less than 20 meters deep. Most of the Round 3 turbines will be located in water over 30 meters deep, and up to 285 kilometers offshore.

According to the Carbon Trust, developers will need to install around 6,000 turbines over the next 10 years, which equates to around 2.5 a day from 2017 to 2020.

Development costs are expected to rise initially as supply chain capacity is squeezed during completion of remaining Round 1 and Round 2 projects. Costs are then forecast to come down as suppliers expand their operations and more companies enter the market.

A recent report by the British Wind Energy Association estimated that Europe needs to add around 5 GW of new offshore wind power a year for the turbine supply market to reach maturity and for costs to start falling. Under this scenario, development costs could fall to around GBP2 million per megawatt by 2015, according to the BWEA.

Demand is rising for turbines and other components, and the industry is facing bottlenecks such as shortages of both the fabrication yards where the sub-structures and other infrastructure can be built, as well as suitable vessels required to install the huge wind turbines offshore

According to the Carbon Trust, a typical 3 to 3.5 MW offshore wind structure of the type likely to be used at Round 3 sites measures around 220 meters in length--taller than London's famous Gherkin skyscraper--and reaches 160 meters above sea level when installed in sea depths of thirty meters. The rotor blades extend 60 meters each, providing a rotation diameter of more than 120 meters, similar to the diameter of the London Eye observation wheel.

There are already signs that some of the supply constraints are starting to ease however: turbine manufacturer Siemens AG (SI) is ramping up production of offshore wind turbines and developing larger ones. And ship builder MPI Offshore Ltd., a subsidiary of Netherlands-based Vroon Group, is building two new wind turbine installation vessels due to be delivered and commissioned in 2011.

Supply chain development is only going to speed up as more wind projects are built, says Ronnie Bonnar, director of SeaEnergy Renewables, one of the companies that is expected to win a site in Round 3.

"Round 3 is a game changer. Overnight it will springboard the U.K. to be the prominent market for offshore wind and that will mean huge opportunities for the supply chain as well as the developers who will be involved," said Bonnar.

The offshore wind sector has the potential to result in a total net economic benefit to the U.K. of GBP65 billion by 2050 when the industry is fully mature, the Carbon Trust estimates. It could also result in the creation of 70,000 jobs in the U.K. by 2020 and 220,000 by 2050.

-By Selina Williams, Dow Jones Newswires [phone]; [e-mail]

(James Herron and Nick Heath in London contributed to this item)