Reflecting on October 2019

What has happened?

On 25th October, the International Energy Agency released its first dedicated report on the offshore wind market. The Offshore Wind Outlook 2019 represents the most comprehensive global study on the subject to date and in it the IEA estimates that installed capacity may increase 15-fold by 2040, driven by falling costs, supportive government policies and technological innovation.

They also forecast that offshore wind technology has the potential to grow far more strongly, to the extent that it could satisfy the entire demand of a number of key electricity markets several times over, including Europe, the US, and Japan.

These estimates come from a very low base, with offshore wind providing just 0.3% of global power generation currently, but it is a technology that continues to be well-backed by a number of countries around the world, including here in the UK, which is arguably the global leader.

The cost of producing energy through offshore wind has fallen significantly in recent years, and the IEA thinks that technological advancements could see costs move below that of conventional generation methods within the next ten years. Larger turbine sizes and the development of floating foundations, which would be cheaper to install and also open up deeper parts of the ocean to offshore wind, are two potential drivers.

Also this month, the world’s largest offshore wind company, Orsted, provided an update to its long-term financial targets, which included details of a report that suggested that it had been overestimating its production figures, due to the underestimation of two factors, the blockage effect, and the wake effect.

In short, the blockage effect is where the wind slows down as it approaches turbines, similar to the way in which the water in a stream slows down as it approaches a rock. The wake effect is where wind slows down as it passes through the turbines, therefore impacting wind speeds at subsequent turbines.

Orsted believes that this is an industry-wide miscalculation, and they now estimate that their projects will have a load factor of 48% versus a previous range of 49% to 50%. The load factor is a measure of the utilisation rate of an electricity source. For example, a wind farm with a capacity of 1,000MW could be expected to produce 480MWh of output per day based on a 48% load factor.

What does this mean for the market?

Clearly these are two contrasting developments in the offshore wind market. On the one hand you have the IEA forecasting astounding growth in the technology, while on the other, the global market leader has suggested that the entire industry has been overestimating production levels.

Orsted’s report is a reminder that offshore wind is a relatively nascent technology, with the first farm commissioned in Denmark in 1991, and also that wind dynamics is a highly complex topic. However, the relatively small load factor downgrade by Orsted, seems unlikely to change the bigger picture of a world that is increasingly moving towards renewable technologies for its power generation, and of a particular technology in offshore wind that is seeing steep cost reductions and capacity additions.

Should you have any questions or would like further information on the offshore wind market then please contact your Investment Manager.