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Offshore wind becoming a “whole Europe” success story as PPA demand surges

We recently sat down with Iván Pineda, Director of Public Affairs at WindEurope, to discuss the expanding offshore wind industry across Europe. WindEurope advocates for national and international policies and initiatives that strengthen the development of European and global wind energy markets, infrastructure, and technology on behalf of more than 400 member companies.

This interview was originally featured in our Q3 Renewables Market Report – a comprehensive assessment of current power purchase agreement (PPA) pricing developments, policy updates, insights on PPA evaluation, and trends shaping the global renewable energy market. Download a copy of the full report. To be one of the first to receive our upcoming Q4 Renewables Market Report, sign up for our distribution list.

Offshore wind growth in Europe continues to set records, with 1.3 GW of new offshore wind farms built between January and June of 2021. Another 2.5 GW of new turbines were ordered in the same period, nearly doubling the current build-out rate.

The EU now has 116 offshore wind farms across 12 countries, and together with the UK has reached 26 GW of offshore wind capacity. The EU Commission is now aiming higher, seeking to produce approximately 20 percent of its energy with offshore wind by 2050, according to WindEurope. Offshore wind power is considered a critical piece of the energy mix for EU countries to decarbonize, with EU governments already committing to 111 GW of offshore wind capacity by 2030.

While the North Sea is known as “the cradle” of the offshore wind industry, the EU wants offshore wind growth to become a “pan-European” story. And it’s happening.

In Italy, foundations recently arrived for the country’s first offshore wind farm, to be built in Taranto. Spain just published an offshore wind strategy, while Greece is preparing legislation for its first offshore wind auction next year. Meanwhile, the Polish Government has signed contracts with developers for its first 5.9 GW of offshore wind farms, slated for operation in 2026.

France has started building its first offshore wind farm, with construction already launched for the 480 MW Saint-Nazaire wind farm off the Guérande peninsula. The country is also planning four small floating offshore wind farms. Across the Mediterranean, the governments of Turkey, Romania and Bulgaria are jointly working on a regulatory framework for offshore wind, with the World Bank mapping out wind resources in the Black Sea and generating major interest from local governments, policymakers, investors, and industry. Lithuania, Latvia, and Estonia are also actively collaborating on offshore wind farms.

“It’s a very exciting time for offshore wind in Europe,” Said Iván Pineda, Director of Public affairs at WindEurope. “After many years of continuous growth, we’re approaching that inflection point where we’ll see capacity exponentially grow. Offshore wind has been mainly northern and western, but it’s becoming more of a whole Europe success story here. I think governments have realized that offshore wind is a very good option towards decarbonization of societies, and the cost reductions of the technology has had over the last five years have been impressive.”

Offshore wind could become the largest source of power generation in EU countries by the early 2040s, according to the International Energy Agency (IEA). This projection has been bolstered by offshore wind costs falling approximately 70 percent since 2012, making the sector ripe for more investments.

“It’s a high infrastructure, high capex industry but nonetheless, even the current low interest rates that we have in the EU have been an extremely good way for investors to secure long-term revenue with very reasonable risk revenue ratios,” Pineda said.

According to the latest WindEurope data, Europe raised €26.3bn to finance 7.1 GW of new offshore wind capacity in 2020, with the UK, Netherlands, Germany, and France all seeing final investment decisions for major new offshore wind farms.

Last year, six major offshore wind Power Purchase Agreements (PPAs) were signed, reflecting the rising demand from the corporate sector. New PPA deals came from different sectors of the industry, including large corporate off-takers Nestle, Amazon, Deutsche Bahn, Borealis and Ineos.

“We have seen an incremental interest in PPAs, which is coming from learning what’s happening in the U.S.,” Pineda said. “This is something that has been replicated for a few years in the EU. We now have big corporates looking into the potential of offshore wind PPAs, including large chemical companies as well as the IT sector. The EU has recognized the importance of these contracts for industry. In the new round of legislation towards meeting the EU climate and energy targets to 2030, they are reinforcing the need for governments to lower the barriers for PPAs.”

With the EU increasing its 2030 greenhouse gas (GHG) emissions reduction target to 55 percent, the Fit-for-55 proposal from the European Commission recently raised the EU’s renewable energy target to 40 percent by decade’s end. This means the EU will need 452 GW of wind power capacity by 2030, requiring 30 GW of new wind farms every year between now and then. The proposal still needs to be agreed by the European Parliament and EU countries.

“We’ve been increasing the amount of renewable PPAs, from about 0.5 GW per year between 2016 and 2019, and a jump of 1.5 GW between 2019 and 2020,” Pineda said. “The cost reduction of wind energy in general has made corporates interested in securing future electricity prices for their consumption. Offshore wind is becoming very attractive to provide that energy. It will provide 10-15 years of stable electricity prices that, despite the variations of generation, you can hedge with financial instruments that are available to the market and for corporates.”

There’s also been a major push from consumers, who are increasingly demanding that corporates decarbonize their entire value chains.

“The provision of energy accounts for three-quarters of GHG emissions across the world and is one of the very first areas where corporates will look into decarbonization,” Pineda said. “It’s the fastest, easiest and cheapest way to start on the road to decarbonization. The power sector has always been the very first option to reduce GHG emissions.”

But existing barriers to offshore wind growth continue to pose a threat to future deployment, says Pineda, specifically around the permitting of projects.

“It’s become extremely challenging to build the number of projects that we need if we want to mitigate climate change and achieve the decarbonization targets,” Pineda said. “This is something that is literally putting the brakes on the industry, affecting time to build projects and taking too long.”

The issue has been exacerbated by the Covid-19 pandemic, with many government agencies seeing a major downturn in staff and resources since last year. Another issue is lack of digitization at many government offices, which are often drowning in paperwork.

“There needs to be leadership from the high ranks of EU politicians that this is an issue that needs to be addressed by national governments.” Pineda said. “They need to increase staff in places where change is needed. Municipalities are completely drowned in applications. So, hire the right number of staff, modernize government infrastructure, and overall, it’s important to do a lot of work with local communities where we’re going to install these projects.”

The good news is that EU governments have been running successful vaccination campaigns, enabling factories to reopen and allowing for the free movement of people and goods across borders. This has afforded most companies the ability to continue normal business operations.

“I think we are now seeing the light at the end of the tunnel when it comes to the supply chain disruptions,” Pineda said. “When it comes to services and construction, we are on the right track and we think there will be an economic recovery fully seen by the end of the year. For wind energy, we’ve been able to keep up and keep the lights on when it comes to building projects and operating a lot of the current assets that we have.”