Offshore Wind Revenue/MWh to Drop 66 Per Cent Between 2014 and 2025 – WoodMac

Offshore wind projects coming online in 2021 are getting revenues that are on a EUR per MWh basis on average 55 per cent lower than in 2014, according to Wood Mackenzie.

And the most recent bids and WoodMac’s projection show that revenues in 2025 will be 25 per cent lower than in 2021, the energy and research consultancy said, representing a 66 per cent decline compared to 2014.

Earlier this month, Denmark announced the winner of the 1 GW Thor offshore wind tender. This was a historical event as five out of the six bidding consortiums submitted a bid where the subsidies were effectively negative – the developers will pay the government and not the other way around. This announcement comes at the end of a six-year string of ‘record bids’ in offshore wind tenders, WoodMac said.

As projects are weaned off subsidies the structure of revenue is also fundamentally changing as projects become more exposed to power prices, according to Woodmac’s recent Global Offshore Wind Revenue Dynamics report and dataset.

For the mature top six markets, capture prices’ share of revenues doubled from a weighted average of 30 per cent in 2014 to 50 per cent in 2021, WoodMac has found. By 2026, WoodMac forecasts that more than 80 per cent of revenues will be driven by wholesale power prices.

The lower revenue is putting pressure on investor returns, as the 55 per cent drop in revenue between 2014 and 2021 has been matched by only a 45 per cent reduction in the levelised cost of energy (LCOE), WoodMac said.

Similar to the historic trend, WoodMac is forecasting through 2025 revenues will decline by 25 per cent while costs will only fall by 15 per cent, challenging project returns. Accordingly, some of the major offshore wind players have reduced their guided IRR.

On the other hand, the reductions in subsidies are likely to help drive accelerated growth in the offshore wind industry, the consultancy said.

70 offshore wind targets have been announced since 2016 by governments across the world.

There are many examples like the Dunkerque offshore wind tender in 2019 where record-low costs released additional tenders.

More recently, the competitive bids of Thor led the Danish government to release an additional 2-3 GW of offshore wind, as they learned that instead of utilizing government funding, the projects would improve government finances.

Similarly, the Netherlands and Germany are also proposing significant upgrades to their offshore wind targets.

There are, however, two caveats to keep in mind. In regions with low power prices, or particularly expensive offshore wind projects, subsidies will likely remain for some time, WoodMac said.

Plus, as projects take on more market price risk, periods of low power market prices could be followed by reduced investment into the sector in the longer term, like other typical commodity markets.

The revenue/MWh reductions are fuelled by both LCOE reductions and intensifying competition in tenders. WoodMac expects both LCOE reductions to continue and for competition to be intense across the globe in the first half of the 2020s.

However, for the projects connected from 2023, Woodmac is starting to see the year-on-year revenue/MWh reductions subdue. The reason is that as subsidy levels are reduced, there is no longer subsidy revenues to take away and revenues will be driven by market prices.

Hence, future revenues will instead be determined by the capture prices as opposed to the subsidies, which will subdue revenue reductions.

This makes the revenue side of the equation increasingly important to the project developers. It also increases the value of alternative routes to market, such as corporate power purchase agreements (CPPA) and innovative business models like storage and power-to-X which can create new sources of value.

Similarly, WoodMac does not expect Thor to be the last negative subsidy as the price of acreage goes up in lease auctions and other policy-makers, especially in other continental European markets, will be looking at Thor and searching for ways to eventually see similar results.