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UK wind sector plays catch-up

Government incentives have breathed a new lease of life into the UK wind sector, but is it too little too late? Ian Lewis writes

THE UK hopes its latest initiatives to kick-start its offshore wind industry will not only enable the country to meet its emissions-reduction targets, but also provide a badly needed stimulus for domestic industry. That means developing a local turbine-manufacturing base – all but absent so far – which will not be easy given the head-start European rivals have.

The UK has been a laggard in terms of renewables incentives and investment compared with Europe's leaders in the sector, despite the country's copious wind resources – among the developed world's best. While Germany already had 23.9 gigawatts (GW) of wind power by end-2008 – second globally only to the US – and Spain had 16.7 GW, the UK had installed capacity of just 3.29 GW, according to the World Wind Energy Association (see Table 1).

The UK derives only around 7% of its power from renewables, putting it near the bottom of the EU league table and a long way shy of the amount needed if the country is to meet the government's target of producing 15% of all the country's energy from renewable sources by 2020. The British Wind Energy Association (BWEA) estimates that to meet that target, the UK would need around 20 GW of offshore wind capacity, compared with less than 600 megawatts (MW) at end-2008, and a further 12-14 GW of onshore capacity.

Government climate adviser Jim Skea, of the UK Energy Research Centre, says the UK will struggle to make the 15% target. But efforts to reach it should provide considerable scope to incorporate renewables into the country's economic regeneration plans. Already, by the end of 2008, almost 9 GW of further UK offshore wind developments were either in development or in the pipeline.

This potential contrasts with European green pioneers Germany and Spain, where returns on wind and solar investment are not what they were two years ago. Last year, overly generous government incentives for the Spanish solar market led to those incentives being heavily scaled back after much more, subsidised, capacity than the government had intended was built (PE 9/08 p30).

Feed-in tariffs for electricity generated by wind power are also becoming less generous in both countries, meaning manufacturing companies based in these more mature markets must focus more on faster-expanding markets abroad to bolster their bottom lines. "Germany and Spain are quite developed markets, so the situation is somewhat different to the UK. It is the high demand in the US and China that is keeping their companies going, not their home markets," says Eduardo Tabbush, senior wind-energy analyst New Energy Finance, a consultancy.

Offshore focus

Incentives for renewable energy in the UK government's April budget were focused on the offshore wind sector, which, while being expected to meet the bulk of the UK's renewable energy, had become increasingly starved of private-sector finance, following the collapse of international project-finance markets. But it is hoped some of the funding will help the UK to maintain the lead it has gained in the early stages of development of wave and tidal power.

The budget measures effectively guarantee that some £0.525bn ($0.839bn) of the government's Renewables Obligations funding pot will find its way to offshore wind over the next five-years by increasing the number of renewables obligation certificates (ROCs) – tradable green credits – for which companies will be eligible (PE 6/09 p16). Electricity-supply companies receive 1.5 ROCs for every megawatt hour of energy they buy from offshore wind farms. Under the government's proposal, this will rise to 2 ROCs for the financial year 2009-10, falling back to 1.75 ROCs in 2010-11.

The government also agreed a deal with the European Investment Bank to provide a package of up to £4bn for investment in infrastructure projects and has improved the tax framework for renewable investment by increasing capital allowances from 20% to 40%. While ROCs offer the element of risk present in all tradable paper-based schemes, the returns now available are regarded by investors as higher than those available through the feed-in tariffs for wind in Spain and Germany (PE 6/09 p17).

The wind industry has welcomed these decisions, saying they provide a springboard for the UK to meet its EU renewables target and that they would go a long way to unlocking the £10bn of "shovel ready" offshore projects, which the BWEA says are being held up as a result of the effects of the economic downturn. "These measures affirmed the government's commitment to the development of the offshore wind industry," says Gordon Edge, the BWEA's economics and markets director.

Already, the new policy seems to have produced results, apparently having tipped the scales in favour of construction of London Array, which is set to be the world's largest offshore wind farm (PE 6/09 p17). The consortium of Denmark's Dong Energy, Germany's E.On and the UAE's Masdar specifically linked their decision to proceed with the project to the improved state support.

"The partners are satisfied that the project is now financially viable and are keen to push ahead with construction and to produce the first renewable power in 2012," they said in a statement. The consortium says it will invest €2.2bn in the first phase of the 630 MW project, with the rest of the 1 GW-plus project to follow after 2012.

This is substantial money, but what sort of boost will this and other projects give to the UK economy? Partly because of the UK's limited involvement in the early development of the wind industry, domestic companies have a limited presence in the sector, other than at the micro-turbine level – a relatively small niche in which the UK is a global leader. Companies from Germany, Spain and Denmark are now the main operators in the global offshore wind market, both in terms of manufacturing and project development, having built internationally on the foundations provided by years of generous subsidies at home.

Putting up wind farms will require the involvement of local workers and UK-based – if mainly foreign-owned – businesses, so the economy will benefit in that way. But a big prize would be the establishment of a UK-based offshore wind-turbine manufacturing industry, covering the supply chain from massive blades down to the smallest electronic components, which could then also be exported.

The success of Denmark's Vestas illustrates what has been possible. Originally an agricultural machinery maker, wind turbine production has turned the company into a global leader in the sector (PE 2/09 p10). It made net profits of €56m in first-quarter 2009, a rise of 70% over the same period in 2008, on sales of €1.1bn.

At present, the UK's offshore wind farms import virtually all the major components of turbines – the blades, towers and the nacelles that connect the two together, and contain the drive shaft. The 175 3.6 MW turbines needed for the first phase of the London Array, for example, will be sourced from Siemens' plant in Denmark.

Market observers say the chances of creating a UK-based manufacturing base to compete with the existing output of European plants owned by the likes of Siemens, RE Power, Vestas and Spanish firms Acciona and Gamesa are remote in the short term. "It was possible for the wind sector to grow organically in Denmark. Now we are in a $30bn a year industry, there is an existing supply chain," says Edge.

There is also the problem of over-capacity during the economic slowdown. European manufacturers that were running their assembly lines flat out to service bulging order books a couple of years ago now have more than enough manufacturing capacity to cater for much weaker European demand. That has led to a sharp price decline. RWE Innogy's chief operating officer, Kevin McCullough, told a London conference recently that the German developer was now paying 15-20% less for onshore wind turbines than it was before the economic downturn kicked in during 2008 – good for RWE, but not great for the manufacturers.

Indeed, shortly after the UK's wind-incentive package was unveiled, Vestas said it was considering closing the country's main blade-manufacturing plant, on the Isle of Wight, which employs over 600 people, and that it planned to lay off nearly 1,900 people across northern Europe. Vestas' main complaint is that there is not enough UK demand for the sub-3 MW onshore turbines it builds on the Isle of Wight – because of the country's drawn-out planning regulations – and that it can make more money building them in countries with more buoyant markets.

Window of opportunity

So, on the face of it, this is a tough time to attempt to kick start UK turbine manufacturing. But market observers say all is not quite as gloomy as it might first appear, as the future lies in producing larger, more cost-effective turbines for the offshore industry, which no company is doing on a commercial scale anywhere in the world.

While the UK cannot compete on production of the present wave of 3.0-3.6 MW offshore turbines, which build on pre-existing onshore technology and are already being churned out elsewhere in Europe, a slice of the manufacturing market for the next generation of 5 MW-plus turbines is up for grabs.

Improved state support and potentially high domestic demand could persuade manufacturers to set up shop in the UK. Proximity to the market is also an important consideration: the turbine blade on a 5 MW prototype is over 60 metres long, the tower is some 120 metres high and the whole turbine weighs around 900 tonnes. These bigger turbines offer the prospect of financial savings overall because they are more efficient and cheaper to operate per unit of power output than smaller turbines. But shipping their constituent parts from manufacturing plant to wind farm is expensive, so the nearer they are made to their final resting place and the easier it is to tow them, the better.

That makes building a plant somewhere on the east coast of the UK, where the highest density of UK offshore wind farms is likely to be built, look very attractive to manufacturers and developers alike. But handling and transporting turbines requires specialised port facilities, which are not widely available.

The BWEA – whose members include Vestas, Siemens, E.On, Centrica, Dong, Mitsubishi, Scottish Power and most of the other big players in the UK wind industry – is in favour of creating a single big manufacturing and port complex to serve the offshore industry. "We need a single large wind manufacturing hub," says the BWEA's Edge. "Efforts need to focus on that one place, otherwise the industry could be too diffuse [to be viable]". Areas such as Humberside, the northeast coast of England, around Newcastle, or further north near Dundee, in Scotland, have been floated as potential sites for a hub.

Edge favours establishing a manufacturing centre for the largest sections of turbines and initially relying on imports for the smaller components, until a local supply chain can develop. "That's what Nissan did when they set up their vehicle plant in Sunderland [northeast England]. They started by importing a lot of automotive components, but used that as a base to increase local content," he says.

However, if wind companies do want to collaborate on a hub, it will not be up and running until the UK market has expanded enough to convince them of its viability. So the economic benefits are liable to be felt in the medium rather than short term.

"You can't set up a manufacturing unit if your demand is three hundred turbines one year and zero the next," says NEF's Tabbush. "There will be demand over the next couple of years, but it will be on a project-by-project basis. In four or five years, the offshore sector should start to display a stronger growth rate."

But the UK may not have it all its own way, even then. Germany has plans to create its own wind-manufacturing hub at Wilhelmshaven, on the country's North Sea coast, which is the long-standing home of the German Wind Energy Institute. Such an offshore turbine-manufacturing base would provide a serious challenge to UK-produced turbines.

At present, wind companies are still evaluating the UK incentives, weighing up their options and waiting for the release of the country's Renewable Energy Strategy, which is expected to emerge in the coming weeks. But the case for the development of a UK manufacturing base remains strong, despite Germany's lead.

"It will happen, it's just a matter of when," says Tabbush, who notes that UK project developers are likely to be happier sourcing components from local manufacturers, which should provide better guarantees of component availability. It would also help reduce currency risk – when sterling lost a quarter of its value against the euro between October 2008 and January 2009, UK wind projects found themselves facing a jump in the cost of their supplies from continental Europe.

Onshore turbine manufacturing may also benefit from the development of an offshore industry. The limited amount of UK onshore wind development has made domestic manufacturing an activity of marginal profitability at best – as illustrated by Vestas' experience – and even the possible addition of several gigawatts more over the next few years would do little to change that on its own, analysts say. However, the economics may become more attractive if a plant built for the offshore industry could also be harnessed for onshore turbine production.?

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