E.ON AG and Vattenfall Europe AG are among utilities leading a worldwide push to develop offshore wind power, overcoming a lack of work ships, stormy seas and higher costs to make almost twice the profit they would on land.
This week, they began running Germany’s first windmills in deep water, anchored more than 20 meters (66 feet) below the surface. Across the Atlantic, the U.S. approved plans two days ago for that nation’s first offshore turbines near Cape Cod.
“Offshore technology is the future, with excellent growth potential and tremendous opportunities,” said Werner Brinker, chief executive officer of EWE AG, the German utility partner of Duesseldorf-based E.ON and Vattenfall in the 250 million-euro ($331 million) project in the North Sea.
Investment in ocean-based windmills will rise about 30 percent this year to $3.9 billion, outpacing growth of less than 10 percent onshore, Bloomberg New Energy Finance estimated. Developers get more electricity output per turbine offshore, where winds blow 40 percent more often than on land, according to the European Wind Energy Association.
European countries including Germany and the U.K. have most of the world’s operating offshore wind farms. Together they plan a 50-fold increase in installed sea-based wind towers in the coming decades. Their lead over developers in the U.S. may be challenged should the 130-turbine project in Nantucket Sound, Massachusetts, open the way for more project approvals.
Harsh Conditions
“Offshore wind power is viable, even in the harsh natural conditions of Germany,” said Vattenfall Europe CEO Tuomo Hatakka.
In Britain, Prime Minister Gordon Brown has lured General Electric Co., Siemens AG and Clipper Windpower Plc to erect projects that would generate 47 gigawatts of power, enough to supply all of Britain’s households. One gigawatt lights about 653,000 homes, according to RenewableUK. Germany plans about half as much, and 6.3 gigawatts are on the drawing boards in the U.S. and Canada.
The return on investment for offshore developments are as high as 18 percent, said Martin Billhardt, chief executive officer of PNE Wind AG. That compares with returns of 9 percent to 12 percent for onshore projects.
“Offshore can be very attractive for investors,” said Billhardt, whose Cuxhaven, Germany-based company is building two deep-water wind farms off the German coast. “The wind availability is really there.”
Drawbacks Offshore
While turbines anchored to the seabed promise more clean energy as the world weans itself from oil and coal, the offshore plants aren’t without drawbacks. They can cost twice as much as onshore rivals and require special ships, cables and engineering to allow them to withstand high winds and corrosive salt water.
Floating cranes required to build and service wind farms are scarce, and most work ships now in use are “inappropriate” because they’ve been adapted from the oil industry, said Thomas Karst, a director at Make Consulting. The Danish company advising on investments in wind energy estimates that by 2015 there may be a 20 percent gap between the capacity of vessels and demand for their services.
“There are simply too few vessels, and the ports are inadequate to handle all the heavy equipment,” Karst said. “These are serious supply chain issues.”
Costs at Sea
Costs to install a turbine at sea are about 4 million euros per megawatt of capacity, said Mortimer Menzel, a partner at the Augusta & Co., a merchant bank. A turbine on land is about 1.5 million euros.
Design flaws on some U.K.-based turbines may cost operators including Royal Dutch Shell Plc,Centrica Plc and Dong Energy A/S as much as 50 million pounds ($77 million) to fix, RenewableUK said April 14.
“The barriers to entry are still very high,”Ditlev Engel, chief executive of Vestas Wind Systems A/S, the world’s largest maker of wind turbines. “Offshore definitely has a lot of potential, but it’s a small part of the overall market.”
Utilities, because of their “large balance sheets,” have so far developed the most wind parks, said Grzegorz Zielinski of the European Bank for Reconstruction and Development, which provides financing for wind projects in Eastern Europe.
With the new Alpha Ventus farm this week, Vattenfall increased its wind assets to 426 megawatts, closing in on Fredericia, Denmark-based Dong Energy, the world leader with 595 megawatts. RWE AG’s Innogy unit leads the world in wind parks under development, according to New Energy Finance.
Scarce Finance
Costs and risks particular to sea-borne structures have led to insufficient lending from banks as financing fails to keep pace with the offshore industry’s expansion, said Marc Schmitz, a vice president at Rabobank Nederland NV.
“There’s not enough bank debt in the market,” he said. “This is a real issue.”
Banks demand twice as much equity from developers for offshore wind projects, or 30 percent of the total investment, than they do for onshore, Schmitz said. Most wind farm projects cost from 600 million euros to 1.5 billion euros to build.
While the benefits of stronger, more frequent breezes offshore are evident to some investors, the risks imply the need for caution, said the EBRD’s Zielinski.
“Offshore wind is not for the faint-hearted,” he said. “And you need deep pockets.”