TODAY’S STUDY: THE UK’S PLANS TO BUILD AN OFFSHORE WIND INDUSTRY

Building an Industry; Updated Scenarios for Industrial Development

June 2013 (RenewableUK and The Crown Estate)

Executive Summary

The UK is at the forefront of offshore wind development and the global leader in installed capacity. Despite this pedigree, and the fact that there is a significant pipeline of projects in planning, investment in manufacturing and installation infrastructure in this country has not yet followed at any significant scale.

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Defining a healthy industry

The UK has a once-in-a-generation opportunity to benefit from its world-leading position by stimulating investment in manufacturing and installation infrastructure that can serve its domestic market, overseas offshore wind farms and parallel sectors. If it delays, then investment will be made elsewhere to meet demand and then there will be little incentive to repeat that investment here.

To help the UK Government, industry and wider commentators, this report provides evidence on the potential scale of activity that will be generated by offshore wind projects in the UK and the rest of Europe, and the opportunity this presents for the UK supply chain. Two scenarios have been prepared that are in line with Government projections for UK offshore wind activity. These show that there are clear opportunities for securing UK investment in manufacturing facilities for wind turbines and foundations, as well as offshore substations, subsea cables and the wider supply chains that will coalesce around all these key components.

Importantly, the level of opportunity correlates to the level of deployment, and our two scenarios present contrasting pictures of the future UK offshore wind market. In our lower scenario, shown in Figure 1, significant industry growth does not begin until 2018, leading to 13GW installed by 2020 and 33GW by 2030. Our higher scenario, shown in Figure 2, shows an offshore wind industry that is a cost-effective part of the UK energy portfolio, with sustained investment in new capacity and a decreasing cost of energy, driven by confidence in a long-term future. This scenario sees a rapid growth in the installation of new capacity, with a UK installed capacity of 18GW by 2020 contributing to a European total of 36GW.

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Although both scenarios will generate significant levels of activity, the lower scenario runs a greater risk of not stimulating inward investment in the UK. This is because the commercial and logistic benefits of setting up in the UK may not be a sufficient incentive for Tier 1 suppliers, who will instead look to supply offshore components from existing Continental supply chains. This lower growth scenario will also limit the ability of the industry to deliver cost savings.

These scenarios are illustrative yet are important for demonstrating the sliding scale of opportunity available to the UK. The UK will be in competition with other European countries for the production facilities that will be required but it is important to note that even the lower scenario offers strong opportunities for the UK to secure activity. Another important difference between the two scenarios is the level of new UK capacity beyond 2020. Greater levels of activity in the long term will spur greater industry confidence and encourage more inward investment in the UK. It is clear, however, that for continued deployment beyond 2020, the offshore wind industry will need to have delivered on commitments to reduce its cost of energy and hence be able to compete with other low- carbon technologies for market share. In part, its ability to do this depends on a clear long-term Government vision for offshore wind. It is critical that industry and Government have confidence in each other and a shared long-term vision of the growth of offshore wind in the UK.

Finally, it is relevant to note that industry confidence in UK market plans is especially important as other markets, in particular that of Germany, may offer lower long-term levels of activity but an earlier ramp-up in demand, which means that investment may be committed elsewhere before the UK regains its market lead.

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Stimulating UK manufacturing investment

The supply chain for the offshore wind market is rapidly developing, and many companies have well-advanced investment plans. Figure 3 and Figure 4 show the progress being made in the building of coastal turbine and foundation production and installation facilities required to meet forecast European demand in 2020 under each scenario. This shows that 40% of the facilities required are already operational for scenario 1 and a third of the facilities required are already operational for scenario 2. Further announcements from leading offshore wind companies for new production facilities would, if delivered, account for a further third of the required supply chain capacity. Coastal production facilities also act as customers for lower-tier suppliers, thus offering further local supply opportunities.

Of these operational and announced facilities, fewer than a quarter are located, or are planned to be located, in the UK, and uncertainty in its market is currently inhibiting future infrastructure investment. The opportunity for industrial development in the UK is still considerable but the Government must give companies confidence about the size and stability of the long-term market to secure a significant proportion of the remaining investment in the face of strong international competition.

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Developing the UK supply chain

The size and scale of our market is the key lever for the Government to grow supply chain activity in the UK but other measures are also needed in some sub-sectors, such as ports, where structural issues mean that increased levels of national demand are not enough to secure the activity for the country. Such tools include a more proactive approach in shaping the development of industrial clusters, underwriting investment in infrastructure and strengthening requirements for UK content. These are needed because of the fierce competition for offshore wind jobs coming from elsewhere in Europe. Countries such as Germany and France are already financially incentivising infrastructure development and emphasising the importance of domestic content to attract inward investment and support indigenous growth. This means that the UK Government needs to take action to allow companies investing in UK facilities to compete on a level playing field with Continental facilities.

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Introduction

Over the next two decades, the UK faces the combined challenges of replacing a significant proportion of its electricity generation capacity, minimising increases in energy bills, reducing its carbon footprint and improving the security of energy supply in the face of increasing global competition for resources.

The most practical means of resolving these challenges will be through a portfolio approach using a range of different renewable and low-carbon energy production technologies. A vigorous debate continues to run about what balance should be used but, subject to achieving the anticipated improvements in the cost of energy, offshore wind is certain to be a key technology.

Beyond these headline considerations, however, a further factor that affects the choices made by the Government is the economic impact of the large-scale deployment of different forms of generation. This includes both the savings that could be achieved by avoiding the cost of imported fossil fuels and the economic benefits of creating facilities and jobs to build components and provide development, installation and maintenance services.

This report has been prepared to deepen and extend the analysis in RenewableUK’s 2010 report UK Offshore Wind: Building an Industry. It is focused on providing detailed evidence on the potential scale of activity that could be generated by a strong UK offshore wind market and the opportunities that this presents for UK economic activity. It also considers this level of activity within the wider European context, both in terms of the relative importance of UK-generated demand and the existing and future levels of the domestic supply chain. The report has two audiences: Government and wider business. It seeks to support continuing positive Government action by providing accurate market information setting out what a confident market – at a scale sufficient to attract inward investment and develop UK manufacturing – looks like. For the supply chain, the report highlights market bottlenecks that offer key opportunities for proactive players.

The report starts out with a consideration of two scenarios for UK demand up to 2030 and explores some of the headline drivers and consequences of different levels of demand. This is then used to assess the potential demand for key components under the different scenarios and examines what facilities are required to meet this demand and the timescales for their development. This is compared to the level of industrial development that has already taken place across Europe, to estimate the additional supply capacity needed to meet the rapid increase in growth that is expected over the next decade…

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Conclusions

A battle for offshore wind jobs

The UK is in fierce competition with the rest of Europe for the jobs that will be created by the offshore wind industry. It is anticipated that there will be a significant increase in installation activity from 2017, with project developers needing to give commitment to suppliers in 2014 and 2015. To meet this demand, many companies will decide where to invest in new facilities and port infrastructure in the next two to three years. These decisions will determine the long-term shape of the supply chain for the next 20 years.

Different countries have particular advantages in this struggle for jobs. The UK has developed a world-leading track record in offshore wind delivery and built up a pipeline of projects that could potentially account for more than 50% of the total long-term European offshore wind market. Germany and Denmark benefit from existing supply chains (though often not in the right locations), while France has designed its licensing process to encourage indigenous supply chain growth by placing an emphasis on domestic socioeconomic impact when awarding projects. The UK market dominance so far has been during a period when the industry has not needed to invest in new coastal manufacturing facilities, due to the level of demand and manageable logistic constraints. Now, when the step-ups in market demand and technology scale require new facilities and infrastructure, it is even more important that the UK preserves its lead to incentivise the establishment of a strong local supply chain.

The competitive advantage for the UK of being seen as the dominant market by the industry should not be underestimated, but the domestic market has lost momentum. The annual installation rate for the next four years is anticipated to be relatively stable before a rapid increase in 2017. Market uncertainty and reduced ambitions risk a situation in which the UK is just one market amongst many. In this case, the argument for investing in the UK is less compelling, with the advantage going to those countries that have an existing supply chain, where short-term demand can be met from operating facilities and investment can be made incrementally.

The consultation and analysis for this report suggest that if the UK is to succeed in building a dynamic domestic supply chain, two things must happen. First, Government must demonstrate that it will support sufficiently strong market demand to ensure that the UK market remains ahead of other markets. It also needs to consider the market beyond 2020, as the relatively low margins available in the offshore wind sector generally require major investment decisions to be taken with a business plan of 10 years or more. Second, project developers need to underline the importance of UK content, such that the supply chain sees the business advantages in being UK based.

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Differentiating the UK market

The scenario of 13GW of installed capacity by 2020 may still result in the UK being the largest market in Europe, but the industry advises that it will not generate the scale of logistic and commercial benefit to tip the balance of investment decisions towards investing here: indeed, much of the manufacturing and installation capacity that is required to meet future European demand under this scenario is either operational or being planned elsewhere.

Industry feedback is that a market of 18GW by 2020 achieves the level of demand that will attract investment, as long as reasonable incentives are provided to allow UK-based companies to compete fairly with their Continental rivals. It is also essential that the plans for this market scale be confirmed early enough to avoid investment decisions being taken to establish infrastructure elsewhere first.

The investment that will be secured through this market size is also critical to delivering the cost-of-energy reductions that the industry says are achievable and that the UK Government sees as essential for its continuing support. There is a win–win here, combining the benefits of scale and the cost-of-energy reduction.

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A longer-term vision

The UK Government has so far expressed its ambition for offshore wind mainly in terms of its ability to provide sufficient generating capacity to meet its renewable energy targets in 2020. This is a relatively short-term horizon for companies planning to invest significant resources in infrastructure, tooling and new products. Other governments, such as that of Germany, have stated 2030 targets to give investors an indication of the extent of their ambitions.

To overcome these concerns, the UK Government and industry need to agree on a long term vision for offshore wind that will give industry confidence to invest in the technology and facilities that will be critical to bringing down the cost of offshore wind.

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