Offshore wind power could evolve into a "hero-only" technology, with persistent profitability problems and lower growth rates than previously anticipated
The future of offshore wind energy
Offshore wind power may have reached a critical point. After more than ten years of growth and increasing sales, today the sector is facing a wall. The current macroeconomic environment is testing its development and profitability, making the sector’s prospects more uncertain. Analysis company McKinsey & Company explains this by presenting a new study that elaborates three possible scenarios for the future. But before we look to tomorrow, we need to briefly track back past successes.
The successes of the world’s offshore wind power
The offshore wind industry has made giant strides in recent years. From 2010 to today, manufacturers have brought on the market ever larger and more powerful air generators, increasing their volumes gradually. The sector, supported by ambitious government targets and falling production costs, has made important milestones. And 2023 was the second-best year ever, thanks to adding 10.8 GW of new capacity. This figure has resulted in a total cumulative wind capacity of over 77.6 GW. At the same time, the weighted average cost of electricity (LCOE) for offshore wind power plants decreased to about 8 cents per kilowatt-hour in 2022.
Wind on the sea, today’s problems—all good or almost, until the macroeconomic turmoil of recent years—linked in part to the effects of the pandemic and in part to those of the Russian war—hit the sector. Rising commodity prices, coupled with increases in interest rates and nodes in the supply chain, have put pressure on project profitability.
“This vulnerability is largely due to the industry’s exposure to material prices, which has impacted funding costs and slowed growth, especially in Europe and the United States,” McKinsey explains. “As a result, our analysis shows that since the beginning of the decade, many developers have experienced inflated project costs, with the levelled cost of electricity increasing by about 40-60% compared to 2020. Moreover, many projects have differential contracts (CfDs) unsuitable for inflation, making them unprofitable.”
Thus began the first significant business difficulties and delays in investments, which in some cases also led to the cancellation of projects.
Offshore wind power, what will happen tomorrow?
The group’s analysts then identified five drivers that influence the future of offshore wind energy. That is: the position on the cost curve, the regulatory landscape, the market push, the supply chain capacity and the behavior of developers. And based on these, they developed three possible scenarios in collaboration with the same industry.
The “structurally challenging” scenario predicts that developers and regulators fail to solve current challenges, gradually giving priority to more cost-competitive renewable sources. In this scenario, the model of cancelled or postponed projects, with frequent companies leaving the market, will most likely continue.
The “hero-only” scenario predicts that the sector will continue to grow despite its difficult cost position. Profitability will be restored structurally as the offshore wind’s marginal premium evaporates compared to land-based renewable energy. In this scenario, industry leaders, present in “fair” markets, will be able to realize projects that add value.
The “recovery of profitability” scenario is one in which market forces help restore predictability and profitability to the sector, allowing for healthier margins for developers, in line with the announced profitability targets or even beyond.
Towards an offshore wind power “only for heroes”
The most likely? After comparing the wind industry with the wind industry, McKinsey believes we are moving towards the “hero-only” scenario.
In this future, “capacity additions will likely be lower than the sector’s current growth expectations. The new projects reaching the FID will represent about 10-15 GW per year in the next decade, or 30 to 50% less than in many current sector scenarios. One could observe a large variability in performance between developers and markets with structural differences in profitability, resulting in gradual de-prioritization of less attractive markets. Here, capacity additions are likely to occur mainly in mature, self-sufficient markets.”