Birthplace of offshore wind farms struggles to cope with government subsidy cuts

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ESBJERG, Denmark -- The offshore wind industry has been concentrated in Europe, where North Sea winds provide excellent power generation conditions. Support from government subsidies in Denmark, Britain and Germany has helped create global leaders among turbine manufacturers and offshore wind farm builders and operators here.

But even as the industry embarks on an ambitious quest to significantly lower the cost of energy, wind power produced at sea still costs more than on land. And just as offshore wind is finally showing signs of life in other regions, like the United States and Japan, subsidies are being cut in Europe, raising worries about whether the industry will be able to grow and become self-sufficient.

Even Denmark, the birthplace of the offshore wind industry and homeland of the world's top two offshore wind turbine makers and the world's biggest offshore wind farm operator, is cutting down on state support for the technology.

Europe has pioneered large-scale offshore wind farms to switch power grids to clean energy, but governments are beginning to cut helpful subsidies.

The Danish government agreed with the opposition this week to delay the 600-megawatt Kriegers Flak offshore wind park by two years to 2022 and to cut the tender for near-shore wind turbines to 400 MW from 450 MW. It also cut the annual power system operator (PSO) energy tax paid by consumers to 4.6 billion Danish crowns ($840 million) from 6.5 billion crowns ($1.19 billion) currently, with total reductions of 13.2 billion crowns ($2.42 billion) by 2020.

Denmark's Vestas Wind Systems A/S, which produces the world's largest offshore wind turbine, found solace in the fact that the government maintained its commitment to the planned Horns Rev 3 and Kriegers Flak offshore farms, albeit delaying the latter by two years.

"The ambition level for the Danish energy policy is still high," said Morten Albaek, the company's chief marketing officer. "We hope that the deal will receive broad support in Parliament."

The wind industry employs 30,000 people in Denmark and exports products to the tune of 50 billion crowns ($9.15 billion) per year. Danish green technology exports grew 18 percent last year, while total exports grew 2 percent. Vestas has a quarter of its 16,000-strong workforce located in Denmark.

"It's good news for our 4,000 Danish employees and many sub-suppliers that the new conditions still keep Denmark as an interesting market for Vestas," said Klaus Steen Mortensen, Vestas chief for Northern Europe.

Pension funds grow leery

But other wind pioneers are more circumspect about the PSO cut. Danish pension funds were among the first to invest in offshore wind, seeing stable long-term returns for their members and providing financing for projects when some utilities maybe were not ready to take the risk. For example, PKA Pension invested 2.5 billion crowns ($459 million) in the Anholt offshore park. Now the fund says it may not invest in the 400 MW Horns Rev 3.

"At the end of the day, the PSO is what makes us able to invest in offshore wind," Peter Damgaard, chief executive of PKA Pension, was quoted as saying in the Danish media. "If the government makes a different arrangement, we're going to have to look at that. We have a climate-friendly strategy, so for us a wind investment in Africa is just as good as one in Denmark."

Denmark is an ideal place for the wind industry. Copenhagen, the capital, wants to be carbon-neutral by 2025. A report from the Danish Energy Agency says the country could achieve its ambition to create an energy system without fossil fuels by 2050. It was also the first country to roll out an initiative that allowed electric vehicle owners to sell power stored in their battery back to the grid.

Wind is projected to make up 58 percent of Danish power generation by 2020, up from 37 percent today and exceeding the government's own target of 50 percent. This has prompted calls from some politicians to cut down support for the industry and has led to the policy changes this week.

German conglomerate Siemens AG is a leader in offshore wind and has 5,000 employees in its Danish wind turbine manufacturing operations. A reduction in the Danish support for this industry may affect that.

"One of the reasons Siemens Wind Power chose to have so many factories in Denmark is the good political climate we've had here for years," said Michael Hannibal, head of the company's offshore wind division. "We need politicians not to create uncertainty in this area."

The Danish Wind Energy Association expressed relief that the big offshore projects were not canceled altogether.

"We're happy that now the framework seems to be set in place," said Jan Hylleberg, head of the Danish wind lobby group. "The industry can hopefully continue to expand in a more certain investment environment. It's important for the industry that there is a market in Denmark and that the time frames are clear. This is a prerequisite for the sector to be able to make wind turbines less expensive.

"If we didn't have any new big offshore wind projects, Denmark's unique position in the industry would have been threatened," Hylleberg added.
Utility wants to see cost cuts

Denmark's Dong Energy A/S is the world's largest operator of offshore wind farms. It's also an oil and gas exploration and production company, and a utility that provides power and district heating to Danish consumers and businesses.

It is one of four companies prequalified to bid to build Horns Rev 3 and will have to decide whether it will put in a formal bid by February 2015.

Dong wants to cut the cost of offshore wind energy by 40 percent by 2020, to €100 per megawatt-hour from €160 in 2012. It is cooperating with Vestas on the manufacturer's new 8 MW turbine, the largest in the world, and has a long-term relationship with Siemens.

"If we don't cut costs, offshore wind will disappear or will never become the major industry it aspires to be," said Henrik Poulsen, Dong's chief executive.

The industry is still learning how to streamline the building of large-scale projects and reduce costs. Bigger turbines are part of the solution. Vestas competitors are also going in that direction, with Samsung Electronics Co. testing a 7 MW model in Scotland, Siemens already having signed contracts for its new 6 MW model and Alstom SA targeting the local French market with a 5 MW machine.

But Dong wants more than just bigger turbines -- future projects should also share certain designs to save costs. For example, the company is buying electric substations for three different offshore wind projects at a standard design to get economies of scale.

The cost of capital will have to drop too if offshore wind is ever going to become competitive. Luckily, more and more investors are willing to get in. Apart from the pension funds, Marubeni Corp., the Green Investment Bank and even the Kirkbi fund, which manages money for the family that owns the Lego Group toy company, have invested in offshore wind.

"Rising project finance volumes and an increasing number of investors entering the offshore segment to share the equity burden of project developers and utilities gives confidence that the funding gap can be met," said Charanjit Singh, renewable energy analyst at HSBC Bank.

Big grid investments needed

Siemens thinks Europe's offshore wind market will grow from 6.5 gigawatts of operational capacity last year to 28.3 GW in 2020. "The industry needs to reduce cost of energy, that has to be our goal as an industry," said Clark MacFarlane, managing director for offshore wind in the United Kingdom at Siemens.

Offshore wind is on track to become a mainstream power source, but the market needs to be large enough to drive down costs, said Huub den Rooijen, head of the offshore wind portfolio at the Crown Estate, which manages the seabed for the United Kingdom.

"The jury is still out whether the market is large enough for all the innovators that are out there to come in and use their ability to drive cost down," he said.

Then there is the problem of the wind's intermittence. Although offshore wind is not as affected by this as onshore, it is still costly for utilities to need to have baseload capacity on standby for when the wind is not blowing. Massive grid investments are needed as well, experts say.

"We expect a new business model to emerge with upstream focus on renewables and decentralized energy with conventional generation only as a backup, midstream focus towards the creation of local distribution networks feeding into a smart and Pan-European transmission grid, and downstream focus on services and facilities maintenance instead of supply," said Sofia Savvantidou, utilities analyst at Citigroup.

"The pace of change will vary by country and plenty of stumbling blocks exist, the biggest of which is the lack of innovation track record in the utilities sector," she added.

Denmark is still learning how to juggle various cost-cutting options. In April, the government launched a smart grid strategy that includes the use of smart meters, real-time monitoring of energy use, variable tariffs and the use of data hubs across Denmark.

This will allow greater flexibility so that demand and supply for energy can be matched and drive energy efficiency. So far, 1.6 million homes and 50,000 businesses have already installed smart meters. It is expected that all consumers will do so by 2020.