WindEurope’s annual statistics and seven-year outlook published today show the EU wind energy target for 2030 is within reach. This is mainly thanks to improvements in permitting and a rebound in investments. 2023 also saw a major political turnaround with the EU’s Wind Power Package which 26 Governments then endorsed in the European Wind Charter. But obstacles remain. The biggest threat to the accelerated expansion of wind is now the timely expansion of Europe’s onshore and offshore electricity grids.

 The European Union installed a record amount of 16.2 GW new wind energy capacity in 2023. 79% of that was onshore wind. And more than 1 GW came from the repowering of old turbines.

Germany installed the most new capacity followed by the Netherlands and Sweden.

The share of wind in total EU electricity consumption in 2023 was 19%. Another 8% came from solar. Renewables in total were 42% of the electricity mix.

Denmark had the biggest share of wind in its electricity mix with 56%. Seven other countries got more than a quarter of their electricity from wind – Germany got 31%. Total electricity generation from wind in the EU was 466 TWh, up from 412 TWh in 2022.

2030 target within reach 

Today’s report includes an outlook for new wind installations over the period 2024-30, based on the project pipeline, announced investments, permitting data and government auction volumes.

WindEurope forecasts that the EU will install on average 29 GW a year over 2024-30. This will bring the EU’s installed wind capacity to 393 GW in 2030, compared to the 425 GW required to deliver on Europe’s climate and energy targets.

Over 2024-2030 two third of new installations will continue to be onshore wind. But offshore wind installations will rapidly pick up towards the end of the decade. In 2030 new offshore installations will be almost the same as new onshore installations.

Improved conditions for wind energy

2023 saw significant improvements in areas critical to the expansion of wind energy.

Things are improving on permitting. Europe approved significantly more permits for new onshore wind farms in 2023 than in previous years. This is thanks mainly to the new EU rules on renewables permitting. Germany and Spain permitted 70% more onshore wind than in 2022 – Germany and impressive 7.5 GW. France, Greece, Belgium and the UK also saw higher permitting volumes.

Investments in new wind energy capacity were also up on 2022. An easing of inflationary pressures, better tariff indexation by governments and improved certainty around electricity markets created a more favourable investment climate. New investments in offshore wind alone amounted to €30bn – a stark contrast to the €0.4bn invested in 2022.

Crucially, the politics changed on wind energy in Europe in 2023. The EU and national Governments recognised that Europe’s wind industry was struggling and needed urgent support. The European Commission’s Wind Power Package in October set out 15 concrete and immediate actions to strengthen the industry. In December 26 EU Member States and 300 companies then signed the European Wind Charter endorsing the Wind Power Package and committing to take the actions in it that fall to them.

The Package and Charter commit national Governments to support the European wind industry by improving auction design: fully indexing prices so that revenues reflect costs; tightening pre-qualification criteria to raise the bar on what sort of turbines can be built in Europe; and giving clearer visibility on auction schedules to volumes so the industry can plan better. The Package also commits the EU Commission to support the wind industry through the Innovation Fund and the European Investment Bank to offer counter-guarantees to support equipment sales.

The recently-agreed EU Net-Zero Industry Act (NZIA) now enshrines in law the need to tighten pre-qualification criteria and sets an ambitious 36 GW a year target for the manufacturing of wind turbines in Europe.

“Things are looking up again for wind in Europe”, says WindEurope CEO Giles Dickson. “Permitting has improved thanks to new EU rules. Investments are up. Record volumes are being auctioned and built. And governments have committed with the Wind Power Package and Charter to strengthen Europe’s wind energy industry. The industry in turn is recovering. Europe’s wind supply chain is returning to profit and building the new factories needed to deliver the EU’s targets. We’re now confident that we can get close to the EU goal that wind is 35% of electricity by 2030, up from 19% today – provided Europe accelerates the build-out of grids to connect all the new wind farms.”

Grids are the new main bottleneck

To increase annual wind installations from 16 GW in the EU last year to an average 29 GW pa up to 2030 Europe needs to urgently accelerate the build-out of new and optimised electricity grids.

Grid connection queues are delaying the timely connection of new wind farms. Hundreds of GWs of new wind farms are currently waiting for their grid connection.

Details of the report here

This paper is about the gradual electrification of industry and its relation to the growing penetration of variable renewable electricity generation. The interaction between these developments can significantly reduce the challenges associated with either of them.

Decarbonizing the energy system is very challenging. However, it is essential to limit global warming to acceptable levels. The main pathway to decarbonization – replacing fossil fuels with renewable energy – is not straightforward. For the energy system, it involves installing large amounts of variable renewable electricity generation. However, a large installed capacity of renewable electricity sources leads to increasingly longer periods where generation exceeds demand (‘surplus’ electricity), while on the other hand, periods where renewable electricity generation is insufficient to meet demand remain. Because of the simultaneity of variable renewable generation, an increase of its installed capacity leads eventually to an increasing need to curtail during oversupply and thus to a reduced yield of added variable renewable capacity. This will threaten the business case for new variable renewables. The increase in renewable electricity generation capacity and the potential mismatch with electricity demand leads to issues for the market as well as for the infrastructure:

1 Market issues

An electricity price of zero for electricity when there is a surplus1 and high electricity prices during shortage.

2 Infrastructure issues

Constraints in the electricity grid that limit the transportation and distribution capacity.

Storage and demand response – such as shifting electricity demand to match variable generation – are seen as solutions. Especially lithium-ion batteries are very well-equipped to accommodate load swings of up to one day. The effect of storage and demand shift on electricity prices is twofold: it creates demand at very low electricity prices, and it increases electricity supply at high prices, mainly caused by a (relative) shortage of variable renewable generation. This leads to a significant reduction in the need to curtail variable renewable electricity in terms of MWh, but unfortunately not as much in terms of the duration of curtailment. This means that, with an increasing amount of storage, the price-boosting effect of storage during charging will increasingly be offset by the price-reduction effect of discharging. Hence, a large capacity of storage and demand shift will have a limited impact on the overall business case for variable renewables. Demand response that does not rely on shifting demand is another option that is especially suited to free up capacity in emergency situations. This may for instance involve shutdown of operations or industrial demand response capable of falling back on other energy carriers, such as biomass, natural gas, and eventually hydrogen. Such demand response is characterized by ‘opportunity costs’, i.e. the cost of curtailing production (generally expensive) or the cost of switching to the alternative energy carrier (generally relatively cheap). In this report, we call the latter ‘opportunity demand’.

Gradual decarbonization of industry For industry, the primary path towards decarbonization is electrification, preferably using renewable sources. In this report, we looked at using opportunity demand for industrial heating, i.e. heat supply that is capable of switching between gas boilers and electric boilers depending on the price difference between natural gas and electricity. Taking Germany as an example, our case-study calculations show that a structurally positive commercial business case is emerging for a hybrid electric-gas system for large-scale industrial heating, provided that the industry is exposed to ETS carbon prices and that synergies with the grid allow for low grid tariffs similar to industry with large continuous electricity load. Hence, opportunity demand can be an economically attractive way to decarbonize industrial heating.

Setting a price for renewable electricity Opportunity demand increases demand during renewable surplus, but not during shortage. Because it is triggered by opportunity cost (the fuel price, e.g. for gas or biomass) and not directly related to the current or future electricity price, it can set a price for electricity. In an energy system with plenty of renewables and with sufficient opportunity demand and storage, the price-setting effect is amplified by storage, because storage will take the opportunity cost based on (predominately) natural gas as the low-price reference for charging, instead of an electricity price of zero set by surplus renewables. From a societal point of view, renewable generation should preferably be stimulated indirectly. By stimulating the demand for variable renewable electricity rather than generation directly, a better fit is ensured between supply and demand, ultimately reducing curtailment of renewable generation. The main bottleneck for the electrification of industry through opportunity demand appears to be the increased need for transmission capacity in the electricity network. This is reflected in a significant increase of the grid fee covering transmission costs for the electric boiler (or electrolyser).

Infrastructure constraints 

The German business case for opportunity heating highlights the need for an integrated view on the energy transition that should optimally utilize the synergies between the various aspects of the energy system. There are still significant synergies possible between variable renewable generation, flexible demand with a theoretically infinite sustain time, and the electricity network. We briefly discuss three of them: non-firm capacity, interruptible capacity, and capacity pooling. Compared to congestion management, the latter two options offer the additional advantage of opportunity demand, potentially giving industry a more secure and sustained coverage for the required investments. In this paper, we define non-firm capacity as capacity for generation or demand that can be shed in advance to avoid congestion. We define interruptible capacity as capacity that can be instantaneously shed to free up capacity for higher-priority load. Because of this, it can make use of the reserve capacity in the transmission system needed to preserve the N-1 redundancy criterion. An alternative way of looking at it is that the load provides an ‘N-1 service’ to the network. With capacity pooling, several loads and generation units in a confined geographical area collectively contract capacity and are free to share it between themselves, as long as their total used capacity remains within the boundaries agreed upon with the grid operator. This allows the participants to exploit the synergies between their loads. We show that significant synergies can be achieved through smart electrification of industry by applying opportunity demand to reduce the impact on the network and even help to reduce the impact of variable renewable electricity generation.

Conclusions

In summary:

Opportunity demand, especially for industrial heating, is becoming an economically attractive way for industry to gradually electrify using renewable electricity and can become an important mechanism to support the energy transition.

Opportunity demand supports the business case for renewables and for electricity storage. It provides a floor price for electricity based on the cost of the alternative (e.g. natural gas instead of electricity for industrial heating), thus avoiding zero prices.

Opportunity demand is well-suited to optimize the use of the electricity transportation and distribution grid. It can be applied as non-firm capacity, as interruptible capacity, or for capacity pooling. All three mechanisms promote optimal use of the grid.

The offshore wind sector is navigating uncharted waters as it grapples with a fresh set of challenges in cost escalation and supply chain pressures. Much recent focus has homed in on a number of problematic projects in the US and UK. These projects won competitive tenders that locked in their remuneration schemes, but have recently found themselves facing low projected returns due to unanticipated cost increases. Developers, used to declining costs for offshore wind projects, had assumed that these would continue, or at least not increase. These unwelcome headwinds have even prompted a few of the projects to halt development and pay contract termination fees for early exit. 

This has left the offshore wind industry at a critical juncture. Dealing with such challenged projects is a real set-back for the industry and the energy transition. More importantly, however, they contribute to a larger issue lurking just around the corner ramping up the supply chain to meet developer and government objectives. These supply-chain challenges need to be addressed as a matter of urgency, as lead times on new manufacturing facilities are typically three to five years, with an additional one to two years until fully up and running. This edition of Horizons looks at these supply-chain constraints and the challenges and opportunities they present. 

Between 2015 and 2021, annual additions of offshore wind outside China averaged around 3 GW a year. By 2030, we project annual non-Chinese additions to increase tenfold. The technology is proven and cost declines have improved competitiveness. The need for carbon-free generation in land-constrained markets or regions with less attractive irradiance and onshore wind resources has resulted in strong public policy support. Since 2021, governments globally have announced 135 offshore wind targets. If all of these targets for offshore wind were to be achieved, annual additions, excluding China, would need to reach 77 GW by 2030, far exceeding what we expect to be built. 

Figure 1: Difference between Wood Mackenzie’s offshore wind outlook and 2030 government targets

Adding 77 GW of annual installations to meet all government targets is not realistic. Even achieving our forecast of 30 GW will prove unrealistic if more immediate investment in the offshore wind supply chain doesn’t happen soon. Government and developer ambitions got offshore wind off the ground. The early evidence from these initial efforts is that adjustments and new policies will be required to transform the supply chain to deliver offshore wind projects at industrial scale. 

Until very recently, China had developed its own supply chain, largely to meet its own demand. For the purpose of this analysis, therefore, we exclude projects and manufacturing facilities in China, unless otherwise specified. We will look at how China could potentially factor into the larger global supply chain in the future, though. 

US$27 billion investment needed to build out the offshore wind supply chain

To reach governments’ 2030 targets, more than US$100 billion of investment in new supply-chain capacity would be required. Even to reach our base-case 30 GW of annual installations by 2030, however, will require approximately US$27 billion of investment by 2026, with the bulk of that secured in the next two years to account for facility ramp-up. This US$27 billion does not include full supply-chain buildout; it is what is required for installation, foundations, towers, blades and nacelles. The investment need for each area, along with the gap in investment, is summarised in the figure below.

Figure 2: Investments required to meet 2030 government targets vs investments required in Wood Mackenzie’s base case outlook

Each of these components is supplied solely to the offshore wind industry and not the onshore industry due to the unique size of offshore equipment. Other components of which transmission is the most important are supplied to other industries in addition to offshore wind. 

Installation: the largest investment gap 

Installation refers to the installation of turbines and foundations. Here, installation vessels are the critical equipment. Half of the existing fleet is set to be retired from service due to its inability to cope with increasing turbine and foundation weights and dimensions, meaning that more than 20 new installation vessels need to be commissioned. Of the US$13 billion in investment needed overall, installers have committed to slightly less than half.

Foundations: expansion faces numerous challenges 

Foundations are the support structures for offshore wind turbines. Monopiles are the primary technology  steel tubes that are driven into the seabed. While established companies have committed to projects that will almost double existing capacity, a similar-sized capacity increase will be required to support 30 GW of annual additions by 2030. Also, scaling the manufacturing capacity of foundations is more challenging than other aspects of the supply chain, because of their large weight and size, complicated logistics and the customisation required for individual sites. 

Blades: manufacturers feel the financial strain 

Blades interact with the wind to produce an aerodynamic force, which spins the rotor of the turbine. Blade manufacturing typically requires ongoing investment, not just to meet demand growth, but as blade sizes grow, new moulds must be made and the output per mould diminishes. Some facilities have even had to close because they cannot accommodate larger blade sizes. Turbine original equipment manufacturers (OEMs) are suffering low to negative EBITDA margins and have committed to just a third of the US$4 billion investment required in new factories, which is alarming given the three- to five-year lead time for a new facility. 

Towers: larger turbine sizes will fuel increases in tower demand

Towers support the mass of the nacelle and blades. Turbine towers are made up of multiple sections, with three-section towers long the mainstay of the industry. But the need to support larger turbine sizes is leading to four- and five-section towers, resulting in a 3.5-fold increase in demand for tower sections by 2029. Increasing section sizes are also making the towers more complex to manufacture and extending the physical dimensions required of factories, sometimes even making existing factories obsolete. While there have been numerous announcements of new potential tower manufacturing capacity, only 35% of the requisite new or expanded facilities have reached final investment decision (FID). 

Nacelles: least likely to become a supply-chain bottleneck 

The nacelles in a wind turbine house the components that help convert mechanical energy from the blades into electrical energy. Compared with all the other aspects of the offshore wind supply chain, nacelles are least likely to become a supply-chain bottleneck. To meet peak demand this decade, capacity must increase by around 50% from 2023 levels. OEMs have already made FIDs, committing to most of this increase. However, the nacelles are made up of multiple components that are sourced externally. Coordinating the ramp-up of the required sub-suppliers will be challenging.

Why is it so hard to drum up US$27 billion?

Against the backdrop of a multi-trillion-dollar climate crisis, US$27 billion to build out the offshore wind supply chain through 2030 does not seem like a lot of money. So why is it proving so hard to mobilise investment? 

Low offshore margins make the investment case more challenging

Companies in the offshore wind supply chain have seen declining EBITDA margins since 2015, when the industry had built out its capacity to supply around 800 turbines. Since 2015, turbine installations have averaged around 500 a year. Even in 2022, only 678 turbines were installed outside China.

The oversupply that resulted from the 2015 buildout is one of the factors depressing profitability.

The oversupply that resulted from the 2015 buildout is one of the factors depressing profitability. Suppliers are now also having to cope with the inflation of the past two years and higher commodity input costs. An exception to the fall in EBITDA margins lies with the installation companies, which have higher and increasing EBITDA margins. This is misleading, however, as installation is more capital intensive than other sectors and high depreciation has taken a toll on profit. 

Burned once, current suppliers are cautious in their investment plans. Moreover, their lack of profitability is hampering their ability to fund manufacturing capacity expansion and has stalled innovation in the sector. What’s more, macroeconomic inflationary pressures are driving up the cost of capex needed for new investments. 

Figure 3: EBITDA margins low for all segments except installations*

Casualties of the turbine-size arms race 

The innovation that resulted in increasing turbine size has been key to bringing down the cost of offshore wind. But these larger sizes have also rendered obsolete some elements of the supply chain, such as installation vessels. Elsewhere, costly investments have been required to change manufacturing facilities. Consequently, supply-chain investments and spending on research and development have to be recovered over shorter timeframes, and those investing are unsure what turbine sizes to plan for. Larger-size components have also increased the cost of repairing mistakes when something goes wrong in the manufacturing process. Lastly, increasing turbine sizes have made developers reluctant to sign equipment orders until the last possible moment, hoping costs will continue to fall for their projects with larger turbines. This is probably one of the factors making some projects unprofitable. 

Uncertainty of project timing could result in very different supply-chain needs 

Some 24 GW of projects scheduled to come online between 2025 and 2027 have secured a route to market  either some form of subsidy or power purchase agreement (PPA)  but not yet made an FID. Some of these projects signed their PPAs or subsidy agreements before costs started to rise and are now faced with potentially uneconomic projects that they want to renegotiate or exit and bid at a later date.

The following charts show our buildout projections based on current schedules compared with a delay of two years in all projects that have not reached an FID. While it is unlikely all of the projects would be delayed, it would shift expected equipment demand from 2025-27 to 2028-30. The result would be less need for manufacturing expansion in the shorter term, but an even greater need for expansion to meet 2028-30 demand. In reality, if this occurs, certain projects might not get built at all in 2028-30, meaning governments will fall even further behind their targets. The uncertainty surrounding project timing is one reason supply-chain participants hesitate to expand further. 

The uncertainty surrounding project timing is one reason supply-chain participants hesitate to expand further.

Figure 4: Wood Mackenzie base-case annual additions outlook vs. outlook assuming a two-year delay to the secured pipeline without an FID

The focus of many governments around the globe has been to set an offshore wind target for 2030, resulting in a projection of 77 GW of installations in 2030 compared with 6 GW in 2023. Many investors are concerned that if the supply chain were built out to satisfy peak installation demand in 2030, somewhere close to government targets, there would be insufficient demand for equipment to support it after 2030. To the industry, this seems eerily similar to the post-2015 collapse in margin. This is an important consideration for suppliers, in particular, as they need 10-plus years to earn a return on their investment. 

Figure 5: Wood Mackenzie outlook for annual offshore wind additions vs. 2030 government targets (excl. China)

The offshore wind supply chain has become increasingly consolidated 

The offshore wind supply chain has become highly concentrated over the past decade. The top three producers of blades, nacelles and foundations account for 93%, 96% and 67% of their respective markets. Not securing capacity with one of the dominant companies could mean having to deal with a considerably less experienced player. Given the weak financial condition of many supply-chain companies now, an exit by any of the companies could have a detrimental impact on the industry’s ability to meet expected demand.

In addition to the consolidation, an increasingly tight market for supply-chain components also means that, unlike the past decade, equipment sellers should, in theory, have more pricing power and an ability to influence project timelines  something developers seeking the lowest cost will have to navigate. 

Figure 6: 2020-30 market share of announced orders by supplier 

How to scale up the offshore wind supply chain

Government policy plays an outsized role in offshore wind. The opportunity to invest is often driven by government offtake remuneration schemes, legislation enabling utilities to recover their purchase power costs, the sale of leasing rights and plans to build out the transmission system. Governments also have a direct impact on the supply chain through local content policies dictating that some portion of a project’s equipment be manufactured locally. How government policy is structured and enacted will play a critical role in shaping the growth of the supply chain. 

Against this backdrop, important considerations for market participants and policymakers in helping to build out an industry that can meet policy goals include: 

Targets for the post-2030 period. Target setting and plans for power-market infrastructure to support offshore wind integration need to extend beyond 2030 in places where they do not already do so. Ideally, targets could be established for 2035, 2040 and beyond. It is also important to recognise that a 2030 target can be too high, as it cannibalises demand in the coming decades. Lastly, targets need to be accompanied by a clear roadmap for leasing opportunities, transmission buildout and a route to market. 

Competition for equipment. Policymakers should bear in mind that there will be a fight for scarce manufacturing capacity at the end of the decade. The earlier tenders can be held for the 2028:30 timeframe, and the more robust the tendering framework, the more countries are likely to achieve their targets. We expect these dynamics to be particularly detrimental to the buildout in markets new to offshore wind. 

Confidence in the growth drivers. The sector needs to restore supply-chain companies’ confidence in the certainty that awarded projects will materialise. Almost half of our forecast 2023-30 capacity outside China has already secured an offtake agreement. This level of project visibility is unprecedented. Still, the industry is uncertain as to when and whether projects will reach FID and translate into firm orders. The best way of doing that is to shorten the time between awarding the bid and the project reaching FID, and to enforce strong bid requirements on project deliverability.

The impact of supply-chain considerations in deciding whether or not to renegotiate at-risk contracts. Countries being asked to renegotiate the terms of previously awarded tenders should consider the supply-chain implications of not doing so: it would likely imperil their ability, and that of other governments, to make 2030 targets. Risk can best be mitigated throughout the supply chain if future contracts include some form of commodity price-risk indexation between contract award and the end of construction.

Local content requirements. The jobs and economic benefits of local content requirement mandates need to be carefully considered against the goals of developing an efficient and scaled-up supply chain. It will be challenging enough to scale the supply chain without having to ensure that some components are sourced locally. The more local and profuse the requirements become, the more challenging it will be to scale efficiently and the greater the impact on costs.

Pausing the turbine arms race with a size cap. Turbine OEMs are already developing next-generation turbine models, while some new vessels and facilities being built are capable of accommodating 25 MW turbines  double the size of current installations outside China. The Dutch government recently proposed a cap on turbine tip heights, which would effectively cap turbine size at 25 MW. Ultimately, the most important factor is not the size of the cap, but that a cap is imposed. Getting all nations on board would be challenging. However, if the core markets – Europe and the US – enforced the cap, suppliers would be less likely to introduce technologies that exceeded it, even if it were possible. As increasing turbine size is key to bringing down costs, the cap should be temporary, but at least 10 years in duration, as this would give suppliers and investors confidence in their new investment.

The China wildcard. With competitive costs, improved quality, healthier financials and an imperative to diversify their portfolios due to fluctuating domestic demand, Chinese companies stand poised to capture market share outside China. Governments, developers and even suppliers now need to make strategic decisions on what role they want Chinese suppliers to play in the global offshore wind supply chain. These decisions will influence jobs, capacity buildout, margins and emissions. Amid western governments’ push for local content and efforts to reduce dependence on China in the solar and storage industry, developers will need to carefully consider whether to develop deep relationships with Chinese companies to plug some of the gaps left unfilled by non-Chinese firms or to rely instead on Chinese suppliers to deal with any contingencies as a backup plan. 

Innovation in partnerships between developers and suppliers. Developers need to consider innovative partnerships with suppliers to provide the demand stability that suppliers need to increase capacity. For instance, in the solar industry, Invenergy recently formed a joint venture with LONGi, one of the world’s largest solar module producers, to build a new manufacturing facility in the US. Invenergy provided a US$600 million investment in the facility and will serve as the anchor customer. In another example, Iberdrola signed a framework agreement with a monopile manufacturer, providing the latter with future sales certainty while Iberdrola receives preferential access to meet its future monopile needs. Other examples include upfront payments and slot agreements by developers to help fund investment in new manufacturing capacity. Developers could also look to invest resources to help scale some of the smaller companies in the concentrated part of the supply chain. These initiatives are needed now to fund new supply-chain investments, but they also create new risk for developers – mainly that they may find themselves committed to equipment orders but not have a project to use that order. We expect tenders to remain competitive, meaning that future ownership for 2028-30 projects remains uncertain. Consequently, innovative types of risk sharing, such as a shared buyback or a secondary market for unused capacity, could prove valuable.