Offshore wind's future could be 'just for heroes' with growth slashed: McKinsey

Offshore wind could be evolving into a renewable energy source that’s ‘just for the heroes’, with challenges to profitability persisting and lower growth rates than previously expected, claims McKinsey.

The scenario was tipped as most likely of three explored by McKinsey in new research into the industry’s prospects for the next decade after a turbulent period, a conclusion which the global business consultancy said was backed up by “numerous discussions” with clients in the sector.

After an initially rosy period of growth and declining costs, the McKinsey analysis, which covers the industry outside China, said offshore wind has been hit harder than onshore wind and solar by the macroeconomic shocks of the last few years, with supply chain bottlenecks, inflation and rising interest rates all bearing down on profitability.

It added: “The industry is experiencing severe consequences. For example, only about 40% of capacity that was expected to reach a final investment decision (FID) in February 2022 had taken FID by the end of 2023.”

The McKinsey analysts reckon that with “delayed or even canceled projects, penalisation in financial markets, and reduced internal rate of return guidance, the first signs of potential market exits and consolidation may be emerging”.

Based on its discussions with the sector, the management consultancy rated ‘just for the heroes’ the most likely direction of travel.

Under that scenario, “the industry will continue to grow despite its challenging cost position. Profitability will be structurally reset as the offshore wind margin premium evaporates compared to onshore renewables. In this scenario, industry leaders who are present in the ‘right’ markets will be able to realise value-accretive projects”.

That outcome would take a toll on capacity additions, “which will likely fall short of current industry growth expectations, with new projects representing approximately 10 to 15GW per year reaching FID over the next decade, 30% to 50% lower than many current industry scenarios”.

McKinsey added: "Large variability in performance between developers and markets could be observed with structural differences in profitability, resulting in less attractive markets gradually being deprioritised. Here, capacity additions will likely take place primarily in mature and self-sustained markets".

‘Just for the heroes’ was rated by McKinsey as most likely ahead of two other scenarios. One, called ‘structurally challenged’, sees developers and regulators unable to solve offshore wind’s current challenges and gradually prioritising alternative sources of renewable energy.

Another labelled ‘profitability restoration’ sees “market forces help restore industry predictability and profitability, allowing for healthier developer margins in line with announced profitability targets or beyond”.