Offshore wind in Asia - the star player of the energy transition ?

As the cost of offshore wind in Europe continues its downward trend, the evidence that the offshore wind industry is gaining momentum in the race for energy transition in Asia is now overwhelming. Success of the industry in Asia will be critical to the continent's efforts to decarbonise.

Europe leading the way – but for how long?

As the price of offshore wind power in the European market continues to fall to levels below that of fossil fuels, the industry is now also enjoying significant early success in Asia – a region where development has been historically slow. Asian countries that have been, and still are, over-reliant on coal and other fossil fuels are sitting up and taking serious note of the European success in driving down costs, examining how they can utilise and apply the knowledge and expertise from the developed European market to the unique challenges of Asia.

Offshore wind has in fact been identified as the technology that may attract the most new investment in Asia over the next 5 years, with over 30% of surveyed senior business leaders from across the Asia Pacific confirming that they are currently utilising or investing in, or have decided to invest in, offshore wind¹.

Of the 157 worldwide offshore wind farms currently in operation, 105 are located in Europe and as many as 50 are already in operation in Asia (with the USA making up the last two). The recent dramatic increase in Asia is mainly attributable to Mainland China, with 1.4GW of capacity installed during the first half of 2020, and a further 4.6GW currently under construction². With Taiwan already having now established the makings of its offshore wind industry in an impressively short period of time, and countries such as Japan, South Korea, and Vietnam expected to follow closely behind, the likelihood of Asia overtaking Europe this decade in terms of installed capacity seems high indeed, notwithstanding recently upgraded targets by market leading countries in Europe such as the United Kingdom.

Which new renewable power generation sources are senior business leaders in Asia considering investment in over the next 5 years?

Offshore wind at the front of the pack

The role of government

In a recent survey conducted by Ashurst , government pressure to invest in low-carbon power was identified as being the highest in Asia. The recent announcements by Japan and South Korea in respect of becoming carbon-neutral by 2050 are great recent examples of how this pressure is now manifesting into clear and ambitious government targets. On a more specific note, political backing for offshore wind is on a strong upwards trajectory in Asia, suggesting that offshore wind will play a key role in many government energy transition strategies across the continent. You only need to look at Taiwan, and the impressive momentum generated by recent regulatory changes in Japan, to see how quickly the offshore wind industry can react once the appropriate legislative framework is in place. The message that offshore wind can be less expensive than fossil fuels is evidently reaching the region. In the same Ashurst survey as mentioned above, 73% of respondent senior business leaders in Asia-Pacific stated their business strategies have changed in the last 12 months in response to the energy transition, with 32% stating that they are considering investing in offshore wind over the next 5 years. Offshore wind is evidently set to play a fundamental role in the energy transition in Asia, bringing with it substantial investment opportunities (beyond that previously seen in the European market) if ambitious government renewable energy targets are to be met.

Appropriate legislative framework

Once the political will is established, the next key factor is backing this up with effective policy. The development and passing into law of specific legislative frameworks for the development of offshore wind, and the adoption of installed capacity targets, evidence a real focus of particular countries to turn offshore wind into a key energy source for Asia, and these have been key factors in the recent success of offshore wind development in the region. As alluded to above, Japan is a great example of how quickly significant international investment can follow the implementation of a clear legislative framework.

However, in implementing and developing the applicable support regimes, governments need to closely consider on an ongoing basis the delicate balancing act between encouraging cost reduction while providing an adequate level of support for developers as new supply chains are developed. The struggle associated with this balancing act is expected to continue across the continent as the industry develops at differing pace in different countries. A stable regulatory regime which evolves at an appropriate pace with stakeholder support, coupled with long term government backed targets remain critical to the success of the offshore wind industry, regardless of geography.

International players and local partnerships

Attractive tariffs, improved design, increased knowledge of local conditions, and improving policy environments have all played their part in attracting major international developers, as well as key contractors, to the Asian offshore wind market, putting the sector at the forefront of energy transition in Asia. The presence now in the region of market leading international developers evidence the momentum that is currently in the industry in Asia, and with market leading floating wind technology providers also now present in Asia, it is clear that the industry will play a leading role in the energy transition. The numerous partnerships that have also been agreed between international developers and regional utilities and developers has resulted in a combination of serious financial power, knowhow, and local influence that will surely see the industry go from strength to strength over the next decade and beyond.

Floating wind

Floating foundation wind turbines have a crucial role to play in the energy transition of Asia. For countries where the continental shelf drops off into the open ocean quickly, and for countries which contend with major weather phenomena as well as earthquakes and typhoons, floating wind must surely form a key piece of the renewable energy strategy. The industry is developing at a quick pace, with multiple demonstrator projects now displaying the viability and increasing appetite of the offshore market for the commercialisation of floating wind. The entrance of major utilities and contractors into the market is taking the industry onto the next level in terms of investment. This, together with the increasing knowledge and experience being gained from demonstrator projects, is bringing the reality of large scale floating offshore wind ever closer.

Opportunity

While the energy transition in Asia will continue to depend on the legislative frameworks and support regimes the relevant governments put in place and develop, the potential of approximately 100 GW of offshore wind capacity by 2030⁴ places the industry at the forefront of the energy transition in Asia, and will clearly bring with it ample opportunities for industry participants who are willing to be flexible and innovative in the context of overcoming the challenges that can go hand in hand with investing in nascent markets.

Drivers of offshore wind growth in Asia

With offshore wind making its way to the front of the pack in terms of leading the energy transition in Asia, the early success of the industry can be attributed to a mix of domestic and global factors.

• Renewable energy targets
  
  The wide adoption of national renewable energy targets by Asian countries evidence to key international players and financiers the region's ambition to transition to renewable energy, and provides a clear signal that the region is open for renewable business. Conversely, it is important to acknowledge that the absence of such government backed targets can have a materially detrimental effect on the establishment and development of the industry, a point with which long-term followers of certain Asian countries may concur.
• Government support
  
  An increasing number of governments have now backed up these renewable energy targets with regulatory frameworks and balanced support mechanisms which has resulted in early success in driving up investment and the growth of the offshore wind industry in Asia at an appropriate level of cost. Some countries have however run the risk of jeopardising early success by not communicating to the industry their plans for what follows the expiry of the initial support mechanism that initially attracted the key industry participants. Whether or not this involves a reduced tariff, or a switch to an auction based system for example, early clear communication in this regard is critical to the long-term success of the industry in the region.
• Increased understanding and technology development
  
  Increased understanding of previously unknown seabed conditions, and resultant improvements and development of technology and design (including in relation to turbine size and natural disaster resistance) have opened up areas for development that were previously considered to be unreachable, impracticable, or not cost efficient to bring to pass. Key industry participants in Asia have invested in offshore wind projects in Europe over the past few years, enabling them to bring vital knowhow back to their respective countries. These factors, together with an increasing trend of international players partnering local developers and technology providers, have led to effective problem solving and efficient project development in Asia, particularly in respect of the development of the supply chain. The potential afforded by floating wind development is also considered to be a key attraction for offshore wind investment in Asia.
• Domestic factors
  
  Specific domestic factors have also contributed to the focus on the offshore wind industry in Asia, with perhaps the best example being that of Japan, where the shift away from nuclear for well documented reasons has resulted in a renewed focus on how it can become more energy dependent. Renewable energy (particularly offshore wind and solar) has been a clear benefactor of this shift in domestic energy policy.

Challenges to offshore wind growth in Asia

The offshore wind industry will need to embrace and overcome a number of challenges if it is to play a long term leading role in the energy transition in Asia. While each country will have its own particular pressure points and unique challenges to overcome, there are common themes that can be drawn out when looking at the challenges that industry participants and government authorities must overcome in order to build upon the early success in the region, including:

• Government reviews
  
  Periodic reviews of government schemes have been crucial in ensuring that tariff rates or auction caps (if any) are set at appropriate levels to promote development of the industry while keeping the cost of the development at a balanced level for all stakeholders. Cut the tariff too soon and development of the emerging industry could be curtailed, but cut the tariff too late and the government may end up paying over the odds for the development of the industry and its supply chain. Taiwan has previously almost been caught on the wrong side of this delicate balancing act before arriving at a price point that was ultimately acceptable to all stakeholders.
• Supply chain development
  
  A key part of the ongoing success of the offshore wind industry in Europe is the collaboration and framework of cooperation that has developed between various governments and the supply chain over the past decade or so. This has facilitated a material reduction in costs as, for example, the supply chain has been able to consolidate resources and take advantage of relatively relaxed local content requirements.
  
  Repeating this European framework of cooperation model in Asia may not however be straightforward, firstly from a practical perspective given the materially wider geography involved, and secondly from a political perspective, as sensitive political issues can arise between some of the key early market participants, potentially prohibiting collaboration, particularly so in relation to the South China Sea and Taiwan Strait. Relevant governments will need to carefully consider political issues such as local content requirements, and whether or not the development of their own supply chain in their own country really represents the most cost efficient way of developing an offshore wind generation capacity and industry. Allowing the supply chain to develop in a way that services the whole region in the most cost effective way would surely be of benefit to all of the early leaders in offshore wind development in Asia. Increased collaboration between the key players in Asia will also be a key factor in the attempts of the industry to bring supply chain costs down to a level which allows the industry to compete effectively with fossil fuel.
• Grid capacity and transmission
  
  Particular countries may have to address the issue of their most abundant offshore wind resources being sometimes in regions that are underpopulated. Grid capacity, integration, and/or distribution challenges are common in Asia, particularly in the context of renewable energy generation, and any government faced with such challenges must ensure that its policy agenda expressly addresses its grid infrastructure investment strategy. While this comes at its own expense, heightening commonly held public concerns around the cost of renewable energy in Asia, the economic benefits that can be derived from developing an offshore wind industry in coastal regions that can be in serious need of investment needs to be effectively communicated to the public in order to alleviate such concerns.
• Topography and major weather phenomena
  
  The knowledge of seabed conditions surrounding particular areas of Asia is not as extensive as in other regions such as northern Europe, which has benefited from decades of geological studies driven by oil and gas exploration. Knowledge is gradually improving with each project, but nonetheless it will take time before such knowledge reaches a threshold which can translate into material cost savings in the development of the applicable wind farm in a chosen area. In relation to major weather phenomena, while the risks associated with (for example) soil liquefaction, sand waves, typhoons, and earthquakes can be mitigated by appropriate construction methods, this inevitably brings with it additional cost and time implications due to the complexity of the required design and engineering solutions. As the industry in Asia matures, one would however hope to see a reduction in cost as demand grows and proven methods become established.
• Vessel availability and cabotage
  
  Asia is no exception to the challenges presented by a lack of vessel availability. In fact, the issue is arguably more acute in Asia as the limited number of installation vessels are almost exclusively from Europe, and cabotage type regulations in Asia are common. While new vessels are being built by owners including Deme Group and Jan De Nul Group, there is a perceived reluctance among vessel owners to overcommit to the construction of new vessels at this point in time given that manufacturers are designing blades of ever increasing size which will require bigger installation vessels. Locking in the relevant vessels at the earliest feasible point in the development of a project is now more crucial than ever, with vessel owners delaying strategy decisions on the deployment of existing vessels and the construction of new vessels in order to take into account both the ever-increasing size of turbines being designed and also the geographical location of the emerging markets that are developing at fast rates across the globe.
• Port capacity and location
  
  Port capacity and location is a common challenge that must be overcome in the development of offshore wind in Asia. Relevant port facilities will need to be upgraded in many countries in order to ensure that the ports which will be used for the development and maintenance of wind farms are capable of handling the vessels and heavy loads that accompany the construction of an offshore wind farm (on top of its existing obligations).
• Co-ordination with local stakeholders
  
  Ranging from the powerful fishery lobbying groups who need to be comfortable with the location and effect of the wind farm, to local landowners whose consent is required for grid connection related development, to local shipowners who object to developers contracting foreign flagged vessels, the need to promote collaboration and harmony between the developer, contractors, and local stakeholders is a critical challenge to overcome. Early engagement and open dialogue is fundamental to the successful resolution of the issues at hand for the respective parties.

The early success of Taiwan, and the current impressive build-out stats of Mainland China, present tangible evidence that these challenges can be overcome. Such momentum can however be easily undone by poor policy decisions, and the industry and policy makers will need to continue to collaborate, listen to each other's concerns, and communicate effectively with each other in order to turn the initial success in the region of the last 2 – 3 years into a long-standing thriving industry which can lead the energy transition in Asia.

2020 and beyond

It has been estimated that the Asian offshore wind market will install approximately 100 out of the 190 GW of offshore wind capacity that is estimated to be installed globally by 2030⁵  which demonstrates the fundamental role that Asia will play in the offshore wind market over the next decade and beyond. Offshore wind will surely therefore be one of the renewable technologies that will attract the most new investment in Asia over the next decade, and increasing government pressure to invest in low carbon power generation will likely turn Asia into a global leader in offshore wind.

The trend of more experienced European developers partnering with local institutions and utilities is expected to continue, and how this European expertise is applied to the unique challenges of the domestic market will be crucial to the long-term success of the offshore wind industry in Asia.

Mainland China is expected to remain dominant in terms of installed capacity, and it will be interesting to see if this domestic market shows any further signs of opening up to international investment following the recent moves by EDF and GE in the country – although a more substantial opening up of the Mainland Chinese market to international contractors would seem to be unlikely at this stage. Taiwan is expected to remain a market leader in terms of attracting international investment, with Japan set to follow hot on its heels following the imminent fixed bottom offshore wind auctions. South Korea and Vietnam will also likely become key players in the region as the policy environment matures.

Governments, one would assume, will continue to push hard for a reduction in cost at early stages of the development of the industry, as evidenced by Taiwan's move in 2018 to reduce its feed-in-tariff by as much as 12.7% (although the reduction was later reduced to 6% following feedback from key industry participants in the region). Taiwan has continued to reduce its feed-in-tariff on an annual basis, and the trend of a reduction in government support will surely be reflected across the region as the industry develops and governments look to strike an appropriate balance between encouraging cost reductions while still providing a sensible level of support for new developments.

The floating offshore wind industry will also play a crucial role in the energy transition in Asia, and it is anticipated that floating offshore wind farms will be possible on a commercial scale over the coming years.

In conclusion, it is clear to see that the energy transition is beginning to gather an encouraging level of momentum in Asia. The offshore wind industry has a crucial role to play in this transition, and the early success enjoyed by the industry in countries such as Taiwan demonstrate how quickly and efficiently the industry can contribute to decarbonisation efforts once the political support and relevant policy frameworks are in place.

The offshore wind industry cannot on its own facilitate the energy transition in Asia, but it undoubtedly has a star role to play.

1. Ashurst's report: "Powering Change: Energy transition", May 2020
2. WFO_Global Offshore Wind Report HY1-2020
3. Ashurst's report: "Powering Change: Energy transition", May 2020
4. "Global Wind Energy Council's Global Wind Report 2019"
5. "Global Wind Energy Council's Global Wind Report 2019"