In this briefing, we take a closer look at the momentum gathering behind floating offshore wind and the different advantages and challenges it faces when compared to fixed bottom offshore wind.
The offshore wind sector has enjoyed a high degree of success over the last decade. It has experienced strong and continued growth in Europe and is now emerging at pace in Asia. With fixed bottom offshore wind ("FBOW") having led the way in the development of the industry to-date, increasing attention is now being given by key industry players and investors to the future of floating offshore wind ("FOW").
Not too long ago, predictions of FOW becoming feasible on a commercial scale were typically made for some point in the 2030s. We are now looking at this commercialisation taking place much sooner, noting that France is about to launch a tender for a 250MW floating offshore project off the coast of South Brittany (which would be the first non-pilot project in France).
Drivers behind the momentum
What has driven this change in view?
Improving track record of success
While earlier FOW demonstration projects had mixed success, more recent and successful demonstration projects, coupled with the success of larger projects such as the world's first floating offshore wind farm (Hywind Scotland), as well as the commencement of construction on the world's largest floating offshore wind farm (Hywind Tampen), have given the industry and financiers active in the offshore wind market an increasing degree of confidence of what can be achieved with FOW.
Such projects are showing that the use of large wind turbine generators, a key feature behind the exponential growth of FBOW, is possible, currently up to 10 MW from 2 MW in earlier projects, with circa. 15 MW turbines potentially being used for the Emerald project in the Celtic Sea. The WindFloat Atlantic project has now also connected its 8.4MW MHI Vestas turbine, and three of the four 30MW French floating wind farm pilot projects are expected to use MHI Vestas's V164 10 MW turbines and the fourth project is expected to use the 8.4 MW turbines from Siemens Gamesa.
The cost efficiencies resulting from the increased size of floating turbines is showing how costs can be driven down, speeding up the rate of deployment and going someway in addressing the concerns reported to have affected earlier demonstration projects such as Japan's Fukushima FORWARD project (which related in the main to high costs and disappointing energy yield). For example, Equinor's Hywind Scotland 30 MW FOW farm has delivered a 60-70% cost reduction when compared to its earlier Hywind Demo project in Norway.
With regard to the levelized cost of energy ("LCOE"), some estimates now project an LCOE for the sector of EUR40 MWh (in line with current fixed bottom average prices) by 2050. This would represent a cost reduction of approximately 70%. The LCOE trend appears to be heading south at an impressive rate.
In addition, energy yield concerns are beginning to be addressed by the success of projects such as Hywind Scotland, which after one year of operation, reported a higher capacity factor (measuring at 65%) compared to other wind farms in the UK, which can average between 45 – 60% during the winter season.
Fixed bottom site availability
The availability of the best "high wind" FBOW sites continues to decrease across Europe and Asia as such sites are being developed at an ever increasing pace. Attention is therefore naturally turning to sites in deeper waters, some of which are further offshore and which can take the benefit of winds that are higher than that of the sites which have to-date been developed for FBOW. Such sites will be in deep water beyond the reach of FBOW and the emergence of FOW makes the development of such sites realistic for the first time.
Improving regulatory environment
Countries where FOW resource is considered abundant (such as Scotland, France, Japan and South Korea) are now committing to making commercial sized leases available for development and have introduced specific legislation around offshore wind development. Japan's recent and significant recent progress in respect of its offshore wind regulatory framework is a case in point. DNV estimates that FOW will deliver 2% of the world's power by 2050 and 20% of offshore wind capacity overall, and governments around the world are planning accordingly.
The energy transition
We are seeing a raft of new and ambitious renewable energy and net-zero targets being announced by various countries across the globe. These targets are driving innovation and development of nascent renewable energy technologies. Such countries include Japan, where the if the country is to reach its wider renewable energy targets. This is acknowledged by Japan's 2030 offshore wind (unofficial) target of 10 GW, of which 4 GW is expected to be derived from FOW, with 424 GW of FOW having been identified in Japan's waters overall. Equally France is expected to launch three 250MW tenders for FOW in the next two years, one in South Brittany this year and two in the Mediterranean next year.
Oil & gas skill set
Finally, the development of FOW is attracting key oil and gas developers, who have a ready-made and transferable offshore skill set that can be adapted and applied to floating offshore wind. The capital that such developers bring with them has and will continue to drive research, development and innovation at increasing speed. Majors such as Shell, BP and Total (which will be shortly renamed TotalEnergies) are all looking at this space.
In the above context, it is not surprising to see FOW gather such encouraging momentum in recent years and the pioneers in this industry seem well placed to benefit as we go deeper into this decisive decade for investment in the energy transition.
The different perspective of Floating Offshore Wind
Well documented key advantages to FOW generally fall into one of the following broad categories:
- the ability to locate wind farms in previously inaccessible, high wind-speed locations. Nearly 80% of the world's offshore wind resource potential is in water in excess of 60 metres deep;
- time and cost savings associated with avoiding the need to construct foundations;
- the installation of the turbines onto the floater is done in or close to the port which is much easier, more cost effective and reduces the impact of adverse weather;
- reduced environmental impacts; and
- floating wind projects are better suited to turbulent weather conditions when compared to fixed-base projects.
While the opportunities created by such advantages are encouraging, challenges remain. Technical, design and LCOE challenges, as well as the establishment of local supply chains and lack of operational experience, are of course not unique to FOW and are common issues that must be overcome by any nascent technology in advance of commercialisation.
As alluded to above, these challenges are being addressed in a positive and proactive manner as can be evidenced by the success of recent demonstrator and larger sized projects, the investment by global energy players into the industry and also through increasingly widespread government support for the technology.
The fact that FOW can tailor and build upon the industry expertise and supply chains of FBOW provides additional assurance to investors and lenders that the significant potential of FOW can be delivered efficiently and ultimately at economically viable and investable prices.
However, while the skill set and experience of the FBOW industry is clearly relevant and provides a ready-made baseline from which FOW can evolve, what different challenges might FOW encounter as it continues its journey to full commercialisation?
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Design interface |
There is an increased design interface risk in FOW when compared to that of FBOW. There is an acknowledgement within the FOW industry that the turbine supplier and floating foundation unit provider need to engage at a much earlier point in time in the design process in order to ensure that these two key packages are compatible. It would not be surprising to see contracts evolve on this point, requiring more prescribed interface obligations and warranties in this regard. In this context, the number of potential floating foundation solutions available at this point (while not unusual in the context of a nascent industry), does raise optimisation challenges for WTG suppliers. This places increased importance on design interface discussions taking place at a much earlier stage in FOW than what might be typically expected in the FBOW industry. |
| Cabling considerations |
FOW requires dynamic cabling, which will be exposed to additional loads when compared to FBOW (e.g. wave loads, impact loads from drifting objects and additional fatigue due to substructure motion). This inevitably increases the risk factor in terms of cable failure when compared to FBOW. Operational experience on this point will improve as more projects come online, but it as a point of difference to the FBOW that will be closely monitored by industry participants over the coming years as the industry continues its journey to full commercialisation. Contracts may well evolve as a result to cater for a distinct and separate risk allocation with regard to the cabling-related defects. |
| Grid considerations | With FOW going further offshore and/or into deeper waters, and the lengths of export cables having to increase, the construction and operation and maintenance costs associated with grid connection may be higher than FBOW. Response times for defect rectification works and programme buffer in FOW may therefore require a different approach to that of FBOW. |
| Port considerations |
With an element of major maintenance likely to require the floating WTGs to be towed back to shore for onshore maintenance, port availability and capacity will need to be considered in a different context. Developers will need to be comfortable that they have available to them the port capacity to handle the different O&M risk profile from that of a FBOW farm. The ability to perform major repairs at port is dependent on the ability of the operator to perform multiple connections and disconnections of the mooring and power transmission systems. Mooring system connection and disconnections are well understood from the oil and gas industry, but the electrical connections used for dynamic cables are often bespoke to each floating wind project. This may have knock-on effects for the availability guarantee and contractual carve outs in respect of the same when compared to the FBOW market standard. |
| Turbine performance and O&M |
As alluded to above, major maintenance may be more time consuming and complex in FOW given the requirement that elements of WTG maintenance may need to be performed onshore. The performance of the turbine when operating outside of its design parameters due to the floating foundation and the subsequent impact on energy production will also be a different consideration to that of FBOW. FOW turbines are exposed to larger motions when compared to FBOW turbines. The long-term effect of this on FOW turbines is not currently established, which may have an effect on the availability guarantee that the WTG supplier is willing to provide. The number of situations within which the WTG supplier warranty will be invalidated is subsequently likely to be higher in FOW, which in turn may raise contingency and insurance costs making the overall viability of the project more challenging from an economic perspective. Reduced efficiency of O&M may also be a factor given the increased difficulty of performing on-site inspections and repairs when compared to FBOW due to the inherent dynamics of FOW turbines, although developers with oil and gas experience will have helpful experience on which it can rely and tailor in this context. On a related point, access to and from FOW turbines requires a different approach to FBOW due to the inherent dynamics of FOW. Contracts may need to be developed in order to cater for these different health and safety requirements. Accommodation requirements during construction and the O&M period may also be different to that of FBOW depending on how far off shore the FOW sites may be. Additional carveouts in applicable contracts (in particular, in respect of the WTG availability guarantee) may therefore be required in order to accommodate this different risk profile of FOW in respect of availability guarantees and operation and maintenance. |
| Ground condition | Ground condition risk represents a different risk profile in FOW, as while unforeseen ground condition risk is clearly reduced when compared to FBOW, FOW has other ground condition considerations such as anchor reliability (which will be a new key risk to be assessed and managed by the developer). Additionally spread mooring systems may well attract increased resistance from the fishing industry when compared to FBOW. |
| Programme |
A more complex construction programme may be required for FOW, given the increased onshore pre-assembly nature of FOW turbines and then the subsequent offshore commissioning. The extension of time mechanisms in the contract may well need to be developed in order to ensure a detailed and equitable risk allocation on this point. |
| Stakeholder engagement | As mentioned above in the context of ground conditions, FOW might encounter additional opposition from the fishing industry if spread mooring systems are used, and the aviation industry (as well as the defence department of the country) may require more detailed involvement in the planning of the project given the inherent dynamic nature of a FOW when compared to the FBOW. It would not be surprising to see contracts expressly deal with these risks in more detail as the FOW industry evolves. This being said, Leucate French FOW pilot project in the Mediterranean did not raise a single objection from fishing and environmental groups. |
| Insurance | The new technology and engineering solutions may require different insurance solutions for the FOW industry. While insurers involved in the oil & gas industry will no doubt be comfortable with the FOW risk allocation generally given the synergies between the dynamic nature of the mooring systems, etc. the availability and cost of an owner controlled insurance program in a nascent industry with new technology is a factor to be taken into consideration. |
| Performance security | The corporate strength of particular technology providers in FOW may result in an increased focus on the performance security required by lenders, as well as the contractual remedies that may be triggered in the event that such credit requirements are not maintained. |
| Project finance | Project finance for FOW is in its infancy. Higher margins, lower leverage and tighter covenants when compared to FBOW can be expected although initial indications are that the pricing of debt appears to be similar to FBOW financings. A not unsurprising comment is that FOW developers and contractors should also anticipate a more involved Lender due diligence process while the market establishes itself with possible new issues raised by the lenders (e.g., security package). |
| Bargaining power | The number of specialist FOW contractors is not large at this point. As a general comment, these contractors may therefore, depending on the circumstances, have a stronger bargaining position than the equivalent contractors in the FBOW industry. |
Contracting structure
Multi-contracting construction strategies are common for FBOW and lenders are generally comfortable in principle with such a strategy. While technical due diligence and project contingencies (in terms of time buffers and cost) play a key role in the bankability of a multi-contracting strategy, various interface, co-operation and delay related contractual provisions (with varying sophistication and complexity) also form a key part of the analysis and have been evolved and developed by the FBOW industry to mitigate the construction risk associated with a multi-contract procurement model.
FOW will of course take the benefit of the experience and evolution of the FBOW procurement models and contractual risk allocations, but will we see a different approach to the procurement structure in FOW?
The potential additional number of contracts in FOW, coupled with the technical challenges of FOW, may well place additional pressure on contractual interface regimes – the sort of pressure that could, from the developer's perspective, be mitigated with an EPC solution. For example, the closer design interaction that is required between the floating foundation, mooring and installation will attract significant attention of the lenders, and a wrapping of these packages would certainly go some way to streamlining the lender due diligence process on that particular interface risk. However, whether or not a robust fully wrapped EPC solution will be forthcoming from what is at this point a small supply chain, is another question.
FOW projects to-date have tended to follow the multi-contracting approach on the whole, but wrapped procurement models have also been adopted to an extent. Different contracting strategies will surely come to the fore as partnerships between key technology providers develop, the number of floating foundation solutions reduces for the purposes of commercialisation and confidence develops from financiers with regard to the technology being deployed in FOW. Contractors willing to provide a fully wrapped and robust EPC solution may also become a distinct possibility, particularly in these early stages of commercialisation as increasing access to project finance is sought.
Therefore, while an industry norm has not yet been established with regard to the procurement model, a not surprising position would be for some form of hybrid solution to become common for the foreseeable future, pursuant to which the nascent technology is included within a partial wrap, with the more settled and established scope being delivered via a multi-contracting strategy.
Concluding remarks
The success of demonstration projects and more recently that of larger projects now shows that the floating offshore wind industry has the technical and engineering solutions to make commercialisation a reality. With LCOE potentially being in line with, or close to, FBOW by 2030, and with FOW being able to build upon and tailor the experience of FBOW with regard to risk allocation and procurement models, FOW is well placed to deliver material growth this decade. How quickly this recent success and momentum generates access to the significant capital and favourable financing conditions enjoyed by FBOW remains however to be seen.
In any event, at this early stage of the industry, ongoing and dedicated policy support will be one of the key crucial determining factors in determining whether or not FOW will develop at the pace that certain commentators and industry participants have estimated is possible this decade. Long term government policy and support for this developing technology must be introduced as a matter of priority (where it is not already in place) if FOW is to fulfil its potential this decade. Where it is in place, governments must provide long-term certainty with regard to policy and subsidy regimes so that the industry can develop with confidence – the announcement of specific government backed FOW targets would be a very welcome development indeed in this regard.
In conclusion, the increasing pace of development of FOW technology opens up significant opportunities for offshore wind industry participants. With 7,000GW of FOW potential having been identified, the FOW industry clearly has a fundamental role to play in the energy transition alongside more mature fixed bottom technology. This additional renewable energy capacity made possible by FOW technology will be key to the achievement of many ambitious renewable energy targets now being set by governments around the world.
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