TODAY’S STUDY: THE BUDDING OFFSHORE WIND SUPPLY CHAIN

U.S. Offshore Wind Manufacturing and Supply Chain Development

Bruce Hamilton, et. al., November 27, 2012 (Navigant Consulting)

Executive Summary

U.S. policymakers, market actors, and the general public need a reasonable idea of the potential size and value of the domestic offshore wind supply chain, as well as the unique challenges and opportunities facing the development of an offshore wind market in the U.S. This report seeks to provide an organized, analytical approach to identifying and bounding those uncertainties; projecting potential component-level supply chain needs under three demand scenarios; and identifying key supply chain challenges and opportunities facing the future U.S. market and current suppliers of the nation’s land-based wind market.

The total potential market value to the U.S. offshore wind supply chain is primarily a function of the market volume. In this study, market volume is fixed according to three scenarios. The value of the offshore wind industry to the supply chain is also impacted by changes in capital and operational costs. These costs are influenced by improvements in industry efficiency, fabrication technology, and wind turbine and foundation technology, as well as changes in material costs, market demand, commodity prices, and other factors.

The supply chain is evolving in a number of areas. Larger rotors allow for increased energy capture and production. Next-generation drivetrains will result in increasing turbine efficiency and reliability. Offshore wind towers in the future may employ concrete, composites, or other alternative materials to help combat corrosion and reduce steel content while simultaneously enabling taller hub heights. Shifting to High-Voltage Direct Current (HVDC) interconnection lines will reduce electrical losses, and higher voltage array cabling and larger turbines will allow for project layouts that minimize array cabling needs. Such advancements will help to reverse the recent trend of increasing offshore wind power prices, which are driven largely by a movement toward deeper-water sites located farther offshore; increased siting complexity; and higher contingency reserves that result from greater uncertainty when working in the offshore environment. As the industry matures and uncertainties are reduced, both capital costs and the levelized cost of electricity (LCOE) from offshore wind facilities are expected to plateau and trend downward.

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The potential exists for significant domestic supply of a future U.S. offshore wind market. A lack of current U.S. offshore demand means no domestic manufacturing facilities are currently serving the offshore wind market. However, strong domestic supply capacity for the U.S. land-based wind market suggests that potential also exists to supply significant portions of the future offshore market domestically.

The magnitude of U.S.-based offshore wind manufacturing capacity will depend on turbine suppliers perceiving stable, long-term policy support and subsequent demand for offshore wind in the U.S. market. Three major barriers combine to have a dampening effect on the development of the U.S. offshore wind supply chain: the high cost of offshore wind energy; infrastructure challenges such as transmission and purpose-built ports and vessels; and regulatory challenges such as new and uncertain leasing and permitting processes. The result is that European and Asian suppliers who are currently supplying offshore wind turbines and components have a competitive advantage over their U.S. counterparts. The U.S. offshore wind industry faces a “chicken-and-egg” problem where plants will not be built unless the cost is reduced, and local factories (which will help bring down the cost) will not be built until there is a proven domestic market.

In deciding whether to enter the U.S. offshore wind market, potential suppliers will assess the supply and demand dynamics. Suppliers will assess whether the market will be large enough to warrant dedicating manufacturing capacity to offshore wind-related products. European-based suppliers will use demand forecasts to determine whether it is financially attractive to build manufacturing plants in the U.S. On the supply side, potential suppliers will assess the competitive rivalry, the barriers to entry, and the risk for each component. Market entry will be more attractive with higher fragmentation, lower barriers to entry, and lower overall risk.

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Chapter 1. Offshore Wind Plant Costs and Anticipated Technology Advancements

Analysis of the capital costs and required labor inputs for offshore wind help illustrate the significant economic impact that a future U.S. offshore market could have. They also provide important context for evaluating the offshore wind industry supply chain and the opportunities that may arise for domestic suppliers of that market. This chapter describes the roles that various cost categories and equipment play in a project’s installed cost and potential future directions in turbine and installation technologies that could affect those costs. Notably, this background serves as the basis for many of the assumptions about near- and long-term technology trends and equipment costs made in subsequent chapters of this report.

The Navigant Consortium’s bottom-up analysis estimates a total baseline installed capital cost of approximately $6,080/kW. This study sought to provide a clear and replicable approach to estimating the capital cost breakdown for a hypothetical 500 MW offshore wind plant with 3-5 MW turbines. As noted by Tegen et al (2012), however, the lack of any installed offshore projects in the U.S. subjects current estimates to a high level of uncertainty. Figure 1 shows the resulting breakdown of capital costs, with turbine equipment costs (including the nacelle, tower and blades) comprising the largest share (33 percent). Some offshore wind studies exclude construction financing costs from their capital cost analyses. To be able to compare costs across studies, the authors also performed a breakdown of capital costs prior to construction financing. Under this assumption, the turbine’s share of the overall capital cost (before installation) jumps to 38 percent, while the foundation and substructure increases to 25 percent.

To gain additional insights into the anticipated future cost trajectories of the capital costs of offshore wind, the Navigant Consortium conducted a subjective ranking and prioritization exercise involving a list of approximately 50 offshore wind technology innovations and trends. Specific innovations or trends were considered for overall turbine design, rotors, drivetrains, power electronics, substructure and foundations, electrical infrastructure, and across vessel, port, manufacturing, and operations and maintenance strategies. The team quantified potential impacts against three criteria: the impact on future LCOE; the probability for success within specific periods in the future (within 5 years, within 10 years, and in more than 10 years); and each trend’s ability to open new markets to development. A composite score from these three criteria also enabled the team to identify those innovations and trends with the anticipated greatest overall impact on the industry.

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The results of the exercise suggest the following key findings:

» Greatest Overall Impact: Moving to larger turbines, first 5 to 7 MW machines and then 7 to 10 MW machines, is likely to have the most significant overall impact on the industry (i.e., the highest composite score). The development of floating and transitional water-depth foundations is also expected to have a dramatic overall impact, with the probability of floating foundations increasing significantly over the next 10 years.

» Innovations with Near-term Impact: In addition to larger turbines and floating foundations, innovations and trends expected to have the greatest increase in probability over the next ten years (i.e., the increase in likelihood when moving from the <5 year timeframe to the 10 year timeframe) include superconducting generators and advanced tower materials. High-voltage circuitry and power converters, the development of active load-shedding rotor controls, movement to serial production volumes, and preemptive turbine response to changing wind conditions are also perceived to increase in likelihood in the five- to ten-year timeframe.

» Greatest Impact on Cost of Energy: When examining the different categories of innovation, cost of energy will most likely be impacted by innovations in turbines (e.g., turbine size and tolerance to adverse conditions), foundations, and substructures. Drivetrain (e.g., direct-drive generators) and manufacturing improvements are also expected to have substantial impacts on cost of energy. When examining individual innovations, floating foundations, direct-drive generators, advanced materials and dedicated, purpose-built vessels were ranked highly for cost impact, followed by larger turbines, increased production volumes, and HVDC trunk lines.

» Ability to Open New Markets: Innovations including floating substructures, hurricane tolerance, sea- and surface-ice tolerance, and transitional water-depth foundations are anticipated to have the greatest ability to open up new markets to offshore wind technology.

Given the breadth of ongoing research and innovation opportunities, there could be significant changes in the supply chain as the offshore wind industry grows and matures. For example, firms specializing in monopile foundation production may need to diversify into pipe production for jacket structures, and subsequently floating assemblies, should they desire to continue to serve the offshore wind sector. However, the technology ranking exercise demonstrates that progress in the industry will take time; many innovations see a notable increase into their potential impact as one moves five, ten, or even more than ten years into the future.

Moreover, many of the more promising innovations such as scaling to larger turbines, moving to serial production, and developing increasingly specialized installation vessels are likely to manifest as incremental changes to conventional industry approaches. These trends bode well for suppliers considering an entry to the market, as they suggest that dramatic changes in the makeup of the industry in the near term are unlikely. They also suggest that the competitive advantages will go to firms that can envision and implement process improvements or work within the existing technology spheres to advance the state of the art.

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Chapter 2. Potential Supply Chain Requirements and Opportunities

While the U.S. is not yet an established player in the offshore wind market, the U.S. land-based wind market has historically been a focal point for many wind turbine manufacturers and suppliers. China and the U.S. are the world’s two largest markets in terms of installed wind power capacity (BTM 2012). Following dramatic growth in installations, leading European turbines and key components suppliers shifted part of their manufacturing capacities to these two countries. In addition, many of the large European turbine suppliers are increasingly outsourcing components and materials to Asia, particularly to China, which has the world’s largest wind power equipment manufacturing base. Although some original equipment manufacturers (OEMs) hesitate to move away from established suppliers due to concerns over quality, economic pressures from declining turbine prices are driving manufacturers to accept higher risks to remain competitive (BTM 2011).

The potential exists for significant domestic supply of a future U.S. offshore wind market. A lack of current U.S. offshore demand means no domestic manufacturing facilities are currently serving the offshore wind market. However, recent estimates indicate that about 67% of land-based wind turbine content (as a fraction of total equipment-related turbine costs) installed in the U.S. was domestically sourced in 2011 (Wiser 2012b).1 This strong domestic supply capacity for the U.S. land-based wind market suggests that potential also exists to supply significant portions of the future offshore market domestically, particularly among global leaders in the offshore wind supply chain that have already established a presence in the U.S. to serve the country’s land-based demand.

A future U.S. offshore wind market would have to compete with the European offshore market as well as emerging land-based markets for manufacturers’ investment dollars. Recently, manufacturers have been facing important strategic decisions in diversifying their markets due to uncertainty in the U.S. market and the challenge of overcapacity in China. As a result, many suppliers are moving into new strategic markets such as India, Eastern Europe, Latin America, and the U.K., while focusing their offshore efforts in particular in the U.K. and Germany. Recently launched local-content requirements in Brazil, Canada, and India are also encouraging such a trend. Each of these global markets—whether for land-based or offshore wind—represent direct competition for manufacturers’ potential investments in a future U.S. offshore market.

A trend toward larger components intended solely for the offshore wind market may require a significant ramp up in new capacity. Recent studies suggest there is enough capacity in the supply chain to cater to expected growth in the land-based wind market, with some potential concerns over supplies of rare earth elements (for permanent magnet generators) and larger-sized bearings and forgings (BTM 2011). For the offshore market, however, the recent introduction of multi-MW turbines (mostly 5-6 MW) by turbine manufacturers in both Europe and China increases such supply concerns over the strategic components (e.g., bearings and forgings) for these larger turbines. This is partly because it takes time for the supply chain to prepare for mass production of such large parts that can meet OEMs’ increased quality requirements for offshore turbines.

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In some cases, U.S. manufacturing facilities operating at part load may have opportunities to shift or retool some capacity to serve the offshore market, particularly if those facilities are well-positioned near coasts where offshore projects are being developed. For facilities located further inland, logistical concerns associated with larger components (e.g., feasibility and cost of overland transportation) may preclude the plant from serving as a cost-effective option to OEMs. In the case of shifting or adding capacity for the offshore market, manufacturers will require additional investments and will need to verify that they can meet OEMs’ stringent quality requirements for offshore turbine components. The duration of such facility ramp-up and product qualification may be lessened for U.S.-based facilities that are directly linked to OEMs already serving the offshore wind market in Europe or Asia.

The development of U.S.-based offshore wind manufacturing capacity may also depend on turbine suppliers perceiving stable, long-term policy support and demand for offshore wind in the U.S. market. In addition, suppliers may require access to (or need to train) a sufficiently skilled workforce and appropriate logistical and installation capabilities. Manufacturers will likely weigh these factors in the context of the global offshore market. For example, under a moderate-growth scenario, the U.S. would add approximately 3.5 GW of offshore capacity by 2020. Some forecasts expect same-year offshore capacity additions in Europe to approach 10 GW (BVG 2012) while China has a goal to install 30 GW of cumulative offshore capacity by 2020 (Global Wind Energy Council (GWEC) 2012). While other forecasts show a somewhat slower increase in global offshore capacity additions, the European market’s head start and momentum is more likely to continue to attract near-term investments in offshore manufacturing. Even with its established track record and ability to share resources across several countries, the European market continues to face a short supply of skilled staff that are trained and capable of installing and maintaining offshore wind projects.

The Navigant Consortium evaluated domestic supply chain opportunities using three scenarios that estimate potential offshore market demand growth in each of four main regions (the Atlantic Coast, Great Lakes, Gulf Coast and Pacific Coast) with a total market size of 1 to 7 GW in 2020 and 10 to 54 GW in 2030. The primary goal of these scenarios is to provide a basis for comparing the effects on supply chain requirements of changes in either technological advancements or increasing demand for offshore wind. The team worked with the DOE and other teams working on DOE-funded offshore wind research to optimize the differences between scenarios in a way that would best illustrate the impact of those changes. Readers should note that none of the scenarios are intended as a forecast of future demand for offshore wind. Rather, the scenarios estimate realistic rates of regional capacity growth under varying sets of assumptions for cumulative demand in each region by 2020 and 2030. Table 1 lists these cumulative capacity targets for each region in each of three scenarios: high growth, moderate growth, and low growth.

The opportunity for suppliers to enter a U.S. offshore wind market is highest in foundations/substructures, towers, blade materials, and power converters and transformers. Navigant considered the relative opportunity for suppliers of each component based on three key factors: 1) the expected timing of sufficient demand to support domestic manufacturing under a moderate-growth scenario; 2) the probability of shortfall in global offshore supply through 2015; and 3) the ease of transferability of land-based supply to serving the offshore wind market. Table 2 presents the relative level of opportunity for domestic suppliers of each component by 2020 using a stoplight scheme (green = favorable; yellow = moderate/cautious; red = high-risk).

Based on the three growth scenarios, the estimated nationwide employment impacts for domestic manufacturing of major components (turbines, towers, blades and foundations) for the U.S. offshore wind market range from 2,000 FTE jobs (low growth of 10 GW cumulative capacity ) to almost 14,000 FTE jobs (high growth of 54 GW cumulative capacity) by 2030. These job estimates reflect the expected timing and share of demand met through imports versus domestic supply. They do not include jobs related to subcomponents and materials or project development and operations.

Estimates for the economic impacts of upgrades to a single port that wishes to serve the U.S. offshore wind market include incremental employment ranging from 600 to over 17,000 FTE jobs and incremental state GDP ranging from $48 million to $1,333 million. These estimates depend largely on the extent of upgrades the port makes and whether it also constructs co-located component manufacturing facilities. In a scenario where a port makes moderate upgrades and adds a single component manufacturing facility, it could generate up to an estimated 6,000 total FTE jobs, with $843 million circulating through the economy and $449 million in incremental state GDP. Most of these new positions (3,300 jobs) are directly related to the development of port facilities. Materials suppliers, subcontractors, consultants, and others in the supply chain provide an additional 900 jobs, while the remaining 1,600 jobs are in industries that capture local expenditures.

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Chapter 3. Strategy for Future Development

The LCOE of an offshore wind plant that is sourced domestically (i.e., excluding transportation costs) is estimated to be approximately $197/MWh in 2015 and approximately $167/MWh in 2030. LCOE estimates are used in this report to assess the potential value of the total offshore supply chain and key component groups under various industry growth scenarios. These baseline estimates may not reflect the long term targets of DOE, NREL, the Crown Estate (U.K.) and other organizations supporting initiatives intended to reduce offshore wind LCOE through technology innovation and market development. These LCOE estimates are based on the following inputs:

» Total current capital cost of approximately $6,080 per kW installed …» Initial operations cost of approximately $135,000 per kW per year …» Costs are likely to decrease by at least 25% by 2030 …» Average Net Capacity Factor (NCF) is initially 40% and will grow slowly over time…

Since there is very little offshore wind manufacturing in the U.S., most of the components will initially be sourced from Europe. Transportation costs for offshore wind turbine components sourced from Europe are expected to be 17% of the turbine costs. Therefore, the LCOE of a U.S. offshore wind plant that is sourced in Europe is expected to be 17% higher than the domestic cost, or approximately $205/MWh in 2015 and approximately $174/MWh in 2030.

Research shows that a demand of 100 to 150 turbines per year (or 500 to 800 MW per year) for a minimum of five years may be required to justify an investment in a full-scale turbine manufacturing plant. While a U.S.-based manufacturer will have a cost advantage over a European-based manufacturer due to savings in transportation costs, a manufacturer will not build a factory in the U.S. unless there is a stable and growing U.S. offshore wind market. The Navigant team estimates that a regional market demand of approximately 300 MW per year is required to support a factory that manufactures a single component such as towers or blades. However, these market-driven trigger points are only part of the decision criteria that affect a manufacturer’s decision to invest; other criteria include levels of competition, geography constraints, and the ability to serve additional markets such as land-based wind or other industries.

The authors developed three scenarios to estimate the timing of factories being built in the U.S. that are dedicated to offshore wind. Under a low-growth scenario, a single component plant could be started up in the Atlantic region by 2021, when that market reaches 300 MW per year. A full wind turbine generator (WTG) manufacturing facility could be started up by2027, when the Atlantic market reaches 800 MW per year. Recognizing that investment decisions will not be made purely based on these market trigger points, percentages of domestic sourcing were estimated to slowly ramp up from 40% in 2015 to 53% in 2030. The LCOE based on a blended average of U.S. and European sourcing is expected to decrease from $202/MWh in 2015 to $170/MWh in 2030. Although certain factors may cause LCOE to decrease more rapidly, particularly in the high-growth scenario, this analysis is based on a common LCOE forecast for all scenarios.

Under a moderate-growth scenario, a single component plant could be started up in the Atlantic region by 2018, the Pacific region by 2021, and the Great Lakes and Gulf Coast regions by 2023, when those markets reach 300 MW per year. A full WTG manufacturing facility could be started up in the Atlantic region by 2023 and in the Pacific region by 2026, when those markets reach 800 MW per year. The resulting percentages of domestic sourcing for the moderate-growth scenario, after adjustments for smoothing the timing of investment decisions, range from 40% in 2015 to 70% in 2030.

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Under a high-growth scenario, a single component plant could be started up in the Atlantic region by 2015, the Great Lakes and Pacific regions by 2020, and the Gulf Coast region by 2023, when those markets reach 300 MW per year. A full WTG manufacturing facility could be started up in the Atlantic region by 2019 and in the Pacific region by 2022, when those markets reach 800 MW per year. The resulting percentages of domestic sourcing for the high-growth scenario, after adjustments for smoothing the timing of investment decisions, range from 40% in 2015 to 79% in 2030.

A survey of industry participants, combined with the authors’ other research, indicates that there are three major categories of barriers to development of the U.S. offshore wind market.

1) High cost of offshore wind energy. Offshore wind energy currently has a higher LCOE than conventional and other renewable technologies. ..2) Infrastructure challenges. The specialized infrastructure required to install and operate offshore wind farms most cost-effectively, such as expanded transmission and purpose-built ports and vessels, does not currently exist in the U.S. ..3) Regulatory challenges. Offshore wind projects in the U.S. are facing new and uncertain leasing and permitting processes.

In order to promote offshore wind manufacturing and supply chain growth, efficient and effective state and federal policies are needed to overcome barriers in all of these areas.

The authors identified seven policies to improve the competitiveness of offshore wind vs. other technologies, but only to the extent that offshore wind is given special consideration due to its early stage of development in the U.S. These policies are proven to be effective in addressing high initial cost. While the policies do not reduce the cost of offshore wind per se, they will help level the playing field so that its LCOE will be closer to long-established and previously subsidized competing technologies:

1) Mandatory long-term power contracts …2) Offshore Renewable Energy Credits (ORECs) …3) Investment Tax Credit (ITC) for developers …4) Production Tax Credit (PTC) …5) Low-interest loans and loan guarantees to developers …6) Accelerated depreciation for developers …7) State Feed-in Tariffs (FiTs)…

To promote domestic manufacturing, a policy must have a long enough term to give manufacturers and their investors’ confidence that the market is here to stay. A stop-start policy may be useful in stimulating year-to-year demand, but there is too much uncertainty for a manufacturer to invest potentially hundreds of millions of dollars.

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The authors identified five policies to deal primarily with transmission infrastructure. They are based on some existing state and federal programs and policies plus recommendations made in recent policy studies such as the Great Lakes Wind Collaborative’s 2011 study Transmission-Related Policy Options to Facilitate Offshore Wind in the Great Lakes (Balachander et al, 2011).

1) Establish clear permitting criteria and guidelines for transmission planning and siting …2) Establish clear and consistent cost allocation and cost recovery mechanisms for transmission development …3) Promote utilization of existing transmission capacity reservations to integrate offshore wind…4) Designate offshore wind energy resources zones for targeted grid investments…5) Offshore transmission planning should take into account public policy mandates, such as Renewable Portfolio Standards (RPSs)

The authors identified the most effective state and federal offshore wind regulatory policies in the following subcategories: site leasing, permitting, and operations.

1) Site Leasing: the Smart from the Start/U.K. process in which regulators identify suitable lease areas based on an initial environmental review process, conduct early environmental reviews, and coordinate federal and state permitting of specific wind farm and cables …2) Permitting: develop a programmatic environmental impact statement (EIS) for a broad geographic area followed by more limited, detailed EISs or Environmental Assessments (EAs) for specific individual projects …3) Operations: self-monitoring of environmental and safety compliance by developers/operators

The most critical near-term policies are those designed to stimulate demand (i.e., policies that address high cost). A portfolio approach that incorporates multiple policy elements could be effective, similar to the U.S. land-based wind market, which has been stimulated through a mix of Power Purchase Agreements (PPAs) with PTCs, ITCs, and RPSs. However, other examples such as the Feed-in Tariff, which many European countries have used to stimulate offshore wind demand, could also be effective. Secondary to creating demand are policies that ensure the demand can be filled. These policies will help to streamline siting and permitting processes and put in place critical infrastructure components such as transmission and ports.

In the medium to long term, policies are needed to instill confidence in the U.S. market. Manufacturers are unlikely to build new U.S.-based manufacturing capacity without confidence in U.S. long-term, stable demand. Only after the U.K. and Germany signaled that long-term demand would exist did manufacturers begin to build port-side manufacturing capacity in those countries. After the U.S. offshore market takes off, manufacturing incentives such as tax credits are appropriate.

State and federal governments should provide R&D investment support as a long-term policy. R&D support will help to drive down the total installed system cost and the LCOE, which is critical to the longer-term success of offshore wind market development.

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Chapter 4. Analysis of Market Entry Pathways

In deciding whether to enter the U.S. offshore wind market, potential suppliers will assess the supply and demand dynamics before establishing dedicating manufacturing. Suppliers will assess whether the market will be large enough to warrant dedicating manufacturing capacity to offshore wind-related products. European-based suppliers will use demand forecasts to determine whether it is financially attractive to build manufacturing plants in the U.S. On the supply side, potential suppliers will assess the competitive rivalry, the barriers to entry, and the risk for each component. Market entry will be more attractive with higher fragmentation, lower barriers to entry, and lower overall risk.

The greatest driver for the development of a U.S.-based offshore wind supply chain is credible evidence of a strong and sustainable U.S. offshore wind market. Until there is greater certainty around future demand in the U.S. offshore market, major turbine components will likely come from Europe or Asia. OEMs and major suppliers will likely be unwilling to invest in new, offshore-specific manufacturing capacity without market certainty.

If the U.S. offshore wind market were expected to show steady long-term growth, major turbine components would likely be built in the U.S. When the U.S. land-based wind market began to show strong growth, OEMs and major suppliers invested in U.S. manufacturing facilities. Given the size and relative lack of intellectual property in towers, they are often the first components manufactured locally. Growing blade sizes will also necessitate local manufacturing in a growing U.S. market.

While the majority of land-based wind manufacturing facilities are located in the wind-heavy Midwest, offshore facilities will be located near ports, as they have been in Europe. While the domestic content in wind turbines deployed in the U.S. has risen, some components will continue to be imported. High-value, complex nacelle internals would likely be the last components to be sourced locally.

To meet Jones Act requirements, a thriving U.S. market could spark construction of U.S.-built vessels.

Specialized U.S.-built and -flagged vessels would greatly facilitate efficiency of the offshore construction process in U.S. waters. As converted oil and gas barges will be insufficient for offshore wind over the long run, U.S. shipbuilders will construct wind-specific vessels. These vessels will be similar to those currently being produced in China, South Korea, and the UAE.

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Domestic suppliers of offshore wind turbine and balance of plant components will be more likely to enter the U.S. offshore market in areas where the competitive rivalry is less fierce and where barriers to entry and risk are relatively lower. The entry of new suppliers into a U.S. offshore wind supply chain will be very difficult for the majority of key component areas. In 10 of 14 areas, including blades, gearboxes, bearings, and foundations, market concentration is high as are entry barriers. High market concentration refers to an environment in which a relatively small number of suppliers supply a relatively large proportion of market demand. The areas providing the most promise for potential new entrants are towers (low market concentration and market entry barriers) and generators (low market concentration and medium market entry barriers). While the market entry barriers for castings and forgings are high, market concentration in both areas is medium.

Wind turbine OEMs will take into account numerous criteria when evaluating potential suppliers for a U.S. offshore wind industry. The Navigant Consortium have categorized these criteria into primary and secondary. Among the primary criteria are:

1) Track record in wind or similar sector…2) High quality and reliability…3) Available capacity…4) Solid financial footing …5) Competitive pricing…6) On-time delivery

The secondary criteria include:

1) Flexibility in production schedules and ability to meet short lead times …2) Robust service organization …3) Willingness to engage in joint development with OEM…4) Technology development …5) Localization/geographic footprint …

Suppliers looking to sell components into a future U.S. offshore wind market will need to follow a similar qualification process found in other manufacturing sectors. While different turbine manufacturers will likely use slightly varied processes, the following steps articulate a typical supplier qualification process:

1) Supplier and manufacturer make initial contact…2) Pre-qualification…3) Confidentiality agreement …4) OEM sends turbine specifications to supplier …5) Auditing…6) Prototyping… 7) Field testing …8) Serial production …9) Monitoring…

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Market barriers faced by new suppliers in the offshore wind industry fall into two primary categories: production planning and production facilities. In terms of production planning, the offshore wind sector has three major barriers to entry: low production volumes, batch production requirements, and widely fluctuating demand. The wind sector and the offshore segment in particular require lower volumes than many other manufacturing sectors. This makes achieving economies of scale challenging. Suppliers may be reluctant to enter the market as shifting production capacity away from larger volume products may prove financially unattractive. The wind sector also requires a relatively small batch production process with more ordering and receiving cycles, leading to high inventory turnover. The nimbleness required for this type of production can be challenging for many suppliers. Lastly, the incentive-driven nature of the wind sector has often created boom and bust cycles. These large swings in demand for wind turbines make production planning difficult. Suppliers do not want to be left with extra inventory. OEMs do not want to lack the necessary components to fill their orders.

In terms of production facilities, the offshore wind sector also has three major barriers to entry: equipment size, capital requirements, and logistics challenges. Offshore turbines are typically larger than land-based turbines and are growing even larger. Suppliers must have manufacturing equipment large enough to produce these large components. This can often prove difficult as some castings and forgings can weigh over 10 tons. Many potential suppliers could also find it difficult to secure the capital necessary to retool a manufacturing plant for the production of offshore wind components. Lending institutions may be reluctant to make a loan for capital improvements without firm orders. Lastly, in the offshore wind sector, a supplier’s location is even more critical than in the land-based sector as components are typically larger. Nacelle assembly and pre-assembly of the rotor typically occur in coastal areas at or near ports to reduce transportation costs. Suppliers not near ports, like many found in the U.S. Midwest, will need to conduct transportation studies to determine whether it is technically and financially feasible to deliver the components to port locations.

As mentioned in other parts of this report, strong and consistent demand for offshore wind projects is the best antidote for most of the supply chain barriers. The previous chapter, Strategy for Future Development, discusses approaches for driving demand. These approaches deal with lowering the cost of offshore wind, lowering or removing technical and infrastructure-related challenges, and removing regulatory challenges involved with siting and permitting of projects.

Thriving U.S. and global markets will create sufficient demand for new suppliers to enter the market. Consistent policy will reduce the market fluctuation and supply chain disruptions seen with the on-again, off-again application of the PTC. Strong and consistent demand will also make it more attractive for banks to lend to suppliers who want to invest in new equipment to build the larger components required by the offshore market. With a strong backlog of orders, suppliers will find it attractive to build port-side manufacturing facilities to reduce transportation costs and improve delivery times. Finally, strong demand for offshore components will allow some suppliers to capture economies of scale, reducing costs and thus their delivered prices…

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