'Reality check' | Global offshore wind sector has shown resilience in 2023, key industry report suggests

Supply chain headwinds and price pressures may have dominated the headlines in 2023, but a leading industry report found that the global offshore wind sector still enjoyed a year of record activity, helped by growth in the mature projects pipeline and a surge in late-stage mergers & acquisitions, turbine orders and final investment decisions for projects.

“Negative headlines for offshore wind were rife across much of 2023, as inflation and rising component pricing reversed the industries trend of continual cost reductions. With (8GW) of secured offtake cancelled, and zero participation in AR5 (offtake tender) in the UK.... many would consider this a reality check for offshore wind,” said Finlay Clark, a senior analyst at Wood Mackenzie.

“Yet going towards the end of the year, the sector gained momentum as developers doubled down on more tangible near-term opportunities – FIDs and turbine orders reached record levels, and both tender volumes and acquisition of advanced pipelines also increased compared to 2022."

Clark added that the fact that governments across the globe offered the sector much needed tailwinds by announcing new and strengthened policy frameworks in the last quarter of the year was particularly important.

Appetites fade

Overall, the offshore sector suffered a year-on-year 61% decline in the the net rate of annual pipeline growth, due to what Wood Mackenzie described as a fall in project ambitions in emerging offshore wind markets.

Falling technology costs in a rapidly globalising market may have started off a capacity boom in 2021 and 2022, the report stated, adding that the strategy of developers has now become increasingly risk averse, "placing a renewed focus on immediate tangible opportunities on core markets".

This resulted in a drop in the number of alliances and M&A activity for early-stage projects, as fewer international developers and investors sought to establish links with new local players in higher risk markets, the report continued.

“The necessary action taken by developers to target what is in front of them has increased the execution of established opportunities at the expense of those further afield,” said Clark.

“Despite a turbulent 2023 with offtake cancellations, the sector finished the year with a healthy development pipeline of late-stage projects with an awarded support scheme and a record 14GW of FIDs."

This was an 11-fold increase from 2022 to 2023, according to the report. Nearly half of FID capacity in Europe was reached in the final quarter alone as a flurry of activity in the UK and Polish markets drove activity to an all-time high by the end of the year.

“This is important as it increases the momentum for the industry going into 2024 and places an emphasis on delivering on these projects through secured contracts with suppliers and adhering to project timelines,” Clark added.

Tender activity

The record for awarded tender capacity was also broken in 2023, with 31GW awarded, a 13% increase year-on-year. Despite offtake challenges, competition also remained high as the number of bidders in tenders increased by 33%.

Europe witnessed significant tender activity totalling 13.6GW, with Germany taking the lead through 8.8 GW awarded in 2023.

Europe’s total could have been higher if the UK had attracted bids in its AR5 auction, which yielded no participation due to caps on bid prices, which have subsequently been raised for allocation in 2024.

Clark continued: “In addition to securing additional capacity, the German centralised tenders offer players an opportunity to win capacity for a direct route to market, though at the expense of high upfront capital cost.

"In 2023, we saw BP and TotalEnergies capitalise on this to cement their future in offshore wind through leveraging capital for these high-value tenders. These now offer the majors’ a more streamlined development process which aligns with their ambitions for renewable energy growth. This success in German tenders has pushed them into the top five European offshore wind developers for awarded capacity.”

Mature projects

Wood Mackenzie found an overall decline in the amount of capacity exchanged under M&A deals, but noted that activity for advanced pipeline projects reached 10GW, a 43% increase year-on-year.

This brought new players to the offshore market, signalling continued competition and interest from institutional investors in the sector, the report observed.

“The active M&A market assists developers with cashflow and allows them to recycle capital into future projects to continue to grow the offshore wind development pipeline,” stated Sasha Bond-Smith, Research Associate at Wood Mackenzie.

Wood Mackenzie also described 2023 as a record year for turbine orders in Europe — including a first order, for 1.1GW for Poland — and also for Asia Pacific (excluding China), with significant uptake in the US too.

For grid-connected capacity, China added 6.7GW in 2023 and now holds 49% of the global operational fleet, where the major domestic asset owners were able to continue their ascent up the global rankings.

Outside of China, annual grid-connection capacity fell 23% year-on-year with 4.2GW of added capacity, with Europe connecting just 2.9 GW, followed by the Asia Pacific (excluding China) with 1.3 GW.

In Europe, an additional 3.7GW was initially targeted for grid-connection last year after a record 2022, yet project delays from transmission-related issues, combined with challenges in offshore construction and permitting, have pushed capacity into 2024, Clark noted.

Ambition versus reality

Sector headwinds combined with shifts in European energy demand forecasts and other power market fundamentals widened the gap between Wood Mackenzie’s offshore wind outlook and 2030 government targets by 46%, year-on-year.

"If the sector continues on this pathway, the offshore wind market will only reach 54% of 2030 global capacity targets (excluding China), according to Wood Mackenzie’s outlook.

Clark concluded: “2030 is only six years away – policymakers need to fast track processes and, in many markets, change their approach to reach their targets. This would include adjusting their targets. Higher targets do not mean more offshore wind capacity if not supported by a clear policy framework demonstrating a route to meeting these ambitions.

"It takes political courage to stomach this reality. However, it is a crucial step to allow the industry to believe that government ambitions are feasible and lowering targets will positively impact the offshore wind buildout in the 2020s.”