Why partnerships are critical for cost reduction

Michael Tetteroo, Business Development Manager Seafox

The Dutch offshore wind sector has been on a strong cost reduction pathway of 55% over the past few years.  Technological innovation and industry partnerships are critical to maintaining this progress.

With HollandseKust (zuid) I and II  set to be the first wind farms in the world to be constructed and operated without subsidies in 2022 –the cost reduction, progress and market competitive potential of the Dutch offshore wind sector is being realised.  “Maintaining this rate of cost reduction requires further technological innovation and greater project cooperation…there are more lessons to be learnt.” says Michael Tetteroo, Business Devlopment Manager at Seafox.

Why are costs reduced?

As the capacity of offshore wind farms continues to grow, so does the capacity of the turbines themselves – up 102% over the past decade, with the average capacity of a newly installed turbine  up 23%, in just a year from 2016.

“We have gone through so many design cycles over the past decade in Europe – they are pushing it to the optimum point of efficiency. Today we are at between 9.5-9.6MGWt per turbine but with plans for even larger turbines surfacing (12MGWT) the levelised cost of energy will come down.” says Tetteroo.

This improvement in technology is a symptom of the offshore wind sector maturing. Products and processes are becoming more streamlined and fewer errors are being made. “The main players on the turbine side such as Siemens have become extremely efficient offshore with their installation process. The evolution of all operations and handlings has lead to such efficiency  reducing time (and costs) offshore,” says Tetteroo.

The instability of oil and gas prices shook investors confidence since peak pricing in 2014 – creating opportunity for offshore alternatives. “The downturn of the offshore oil and gas industry of the past five years has allowed a lot of installation vessel contractons to shift their focus to offshore wind. They are willing to work on projects for lower day rates or lower project costs than they used to in oil six or seven years ago.“

Why is there a growing risk of increasing costs?

The increasing size of wind turbines could provide adjustments, collaboration and innovation along the supply chain according to Tetteroo. As components increase in size – with a limited number of fit for purpose suppliers and vessels – vessel day rates, crane prices and ultimately their capacity will need to be in line with the investments needed for new or upgraded equipment.

There remains a growing threat of the resurgence in oil and gas investment with reports from Rystad Energy projecting global oil and gas offshore investment to bottom out at $155 billion in 2018, before investments grow steadily year by year going forward. “Now the price of oil has stabilised, the offshore activity is expected to increase – boosting prices for offshore installation, maintenance and crews. A real risk for subsidy free projects.” says Tetteroo.

Maintaining lower costs

Creating strong working relationships between supplier and client is key to lower costs according to Tetteroo.  The client tends to push as much risk across the table, while suppliers aren’t always in the best position to fully take on those risks, leading to price hikes and an overly competitive relationship.

“If there isn’t any transparency about risks people tend to quantify it and increase the price. Developers, often rationally and understandably, can become susceptible to over pricing the risk, inflating project costs. Similarly, risks that do not sit well with the supplier may boost costs as well,” he says.

The more dialogue in the tender process, the better the relationship is and ultimately a lower cost reached. “In partnerships you can understand what drives the fear of certain risk perceptions… those discussions are a lot easier when you sit at a round table rather than a square table,” says Tetteroo.

Sharing crew transfer vessels, helicopters, co-ordinating jack-up barges across assets and operators for major component replacements are just a few co-ordinated cost-saving measures through organized partnerships that could enhance economies of scale as cited in McKinsey.

Continued technological innovation is critical to keep costs down and avoid stagnating progress in the field. “[over the next five years] …expect wind turbines to hit the upper limit of capacity, potentially more sophisticated materials for the towers, alternative installation techniques to reduce time at sea..” says Tetteroo. “These are the innovations that are required to maintain this incredible progress Dutch offshore wind has made…which I fully expect it to continue.”