OFFSHORE WIND INDUSTRY IN DENMARK

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1 OFFSHORE WIND INDUSTRY IN DENMARK ORGANIZATION AND DEVELOPMENT OF AN EMERGING BUSINESS SYSTEM Published in cooperation between

2 Danish Wind Industry Association

3 EXECUTIVE SUMMARY AND CONCLUSIONS Offshore wind energy is a business area which has progressed by leaps and bounds since the first offshore wind farm was built off Vindeby almost 25 years ago. In the past decade, offshore wind energy has been the focus of a great deal of attention in national energy plans in Europe. The installed offshore capacity has grown dramatically in the last five years. Offshore wind turbines accounted for 15% of wind energy capacity installed in Once a small area of wind energy, offshore wind energy has now become a focus area for a growing number of companies of which some are specialising in offshore. Meanwhile, there are indications that a wider circle of companies show an interest in offshore wind energy. Even though the offshore wind energy market has grown and is now at least in Europe a significant part of total wind energy installations, it is important to bear in mind that, in commercial terms, there are appreciable differences between offshore and onshore wind energy; differences which clearly affect how the offshore wind energy business system is configured and developing. Firstly, offshore wind energy activities are focused on relatively few projects, each of which has substantial volume. This means that decisions regarding the choice of solutions and suppliers are made by a very small number of decision-makers and the market is characterised by project supply and a great deal of uncertainty. In effect, this makes it difficult for companies to balance their presence in the offshore wind energy market with other market activities. A concentrated market relatively few projects Feasibility studies 1 3 years Authorisations 2 4 years Supplier agreements and supply chain 2 3 years Finance 1 3 years Installation and commissioning 1-2 years Operations 20+ years De-commissioning? 03

4 Many phases each is a market opportunity Secondly, an offshore wind energy farm has a long life cycle: the phases from project planning to de-commissioning may span over a period of 30 years. At the general level, the many different activities associated with the offshore wind energy business comprise two principal phases: construction and servicing. The servicing phase is also described as O&M operations and maintenance. The construction phase spans from project planning to commissioning. This phase typically takes 2 3 years but may often last longer. The construction phase involves a number of subcontracts, reflecting various types of specialisation within the industry. The operational and therefore also maintenance/servicing phase is expected to last years and includes de-commissioning, where the wind farm will be dismantled and the seabed restored (as yet, no offshore wind farm has been decommissioned.) Still, the activities in the servicing phase are to a large extent contractually tied to the wind turbine manufacturers. Consequently, this makes it more difficult for other actors to gain access to this market directly through service contracts with energy companies. At the present time, servicing is an important sphere of activity for the manufacturers, but their exclusive access to service contracts may be challenged by energy companies and providers in the coming years. Only a handful of companies in the Danish wind energy network are currently solely active in servicing. Pressure to reduce cost of energy It is widely recognised that the large gap between the cost of offshore and onshore wind energy is narrowing too slowly and that, in the longer term, offshore wind energy is losing ground to competing energy sources renewable as well as conventional. European governments, which were previously strongly committed to the development and expansion of offshore wind energy, are now more hesitant. There is insufficient available capital to realise very large wind energy farms planned e.g. in the UK, France, Germany and the Netherlands. The offshore wind energy sector is under considerable pressure to reduce costs. If the sector is to continue to enjoy the benefits of political and financial support and attract investors, cost reductions must be achieved through new initiatives. Faced with these developments and energy suppliers' renewed commitment to offshore wind, there is growing pressure on the suppliers of offshore wind energy farms to find new and cost-effective solutions, which can reduce the price per kilowatt-hour produced. 04

5 Our primary goal is to reduce the overall cost of offshore wind. It is clear to me that if we do nothing to help achieve this, and if the offshore wind energy sector does not succeed in reducing costs dramatically, then, in the long term, the sector will not survive. Other types of energy will then be more competitive. (Torgeir Ramstad, Universal Foundation Norway) 250 Average cost per MWh 200 UDD/MWh Coal Nuclear power Biomass Wind-onshore Wind-offshore Hydroelectric power Source: US Energy Information Service (2013) 05

6 The innovation paradox In recent years, many attempts have been made to rethink major and minor elements in the complex offshore wind energy business system. No single, definitive technological design has achieved the upper hand. A number of technologies compete to dominate all or part of the market. For this reason, the boundaries between the different elements in the business system are blurred, and the direction of technological development is still unclear. In contrast to more mature business systems, in which companies and activities within a certain area are defined through their position in the value chains, activities in a less mature industry are less clearly defined and more loosely coupled. Therefore the constellation of companies that are involved in and key to the development process is unsettled. As the industry matures, offshore wind energy can be expected to develop the same characteristics as other mature technologies, i.e. dominant designs and a relatively well-defined group of actors. Competition between the different technological designs is currently creating a wide array of technological options in the industry, but this is not necessarily leading to the development of broadly accepted solutions. The result is an innovation paradox. Despite extensive development activities and rivalry between providers, design and innovation do not seem to be in great demand. For their part, the actors on the demand side wish to see market uncertainty diminished through uniform, thoroughly tried-and-tested designs and solutions with predicable cost profiles. If efficient, well-documented technical designs are accepted and applied by the leading actors, de facto standards may evolve, to which other actors can be expected subsequently to adapt their own innovation activities. The supply side, on the other hand, is jockeying for position, by introducing new technologies and designs. Studies of the development of other business systems suggest that such industrial standards are neither created at random nor based on mutual agreements between rival enterprises. The individual actors have too much to lose, and the common interest in upgrading the business area is, as a rule, weaker than the well-established actors' pursuit of their own interests. The future occurrence of common standards therefore relies heavily on the market power of key actors. However, the companies which enforce such standards are not necessarily those who gain most from their introduction. Description of an emerging industry To a great extent, the companies which are active in offshore wind energy in Denmark are those which are well-established in the onshore wind energy industry. The study on which this report is based shows that companies which are active in offshore wind energy generate much of their turnover from wind energy generally. One in two offshore-active companies expects that wind energy will be more important for their total turnover in the future. 06

7 Expected development in companies' wind energy-related turnover compared to total turnover in the next three years. Expected to increase Expected to decline Expected to remain the same Don't know Not active in offshore wind energy 24 % 21 % 47 % 8 % Active in offshore wind energy 45 % 6 % 49 % 0 % Differences are statistically significant at 1%-level (chi2 test) However, companies in Denmark which are active in offshore wind energy do not only supply to the Danish market. A significant proportion (about one third of all offshore-active companies in the study) has been actively involved in the construction of offshore wind energy farms abroad. Many companies are also active in other industries. They can therefore benefit from technological insights and competences derived from other types of industrial activity which may present new technological options to the offshore industry. Examples of such new technologies include those related to maritime tasks which are part and parcel of setting up an offshore wind energy farm during the installation and servicing phases, and other activities, such as cabling, logistics and analysing the seabed and the potential impact of the installation on the maritime environment. These areas are often knowledge-intensive and they are characterised by a business logic which differs from the business logics traditionally seen in wind energy. 07

8 Up-and-coming offshore companies Isolated companies, i.e. not identified as sharing knowledge with other companies Offshore pioneers Occasional offshore companies The pioneers, the up-and-coming and the occasional wind energy companies The survey identifies three different groups of companies, distinguished by their commitment, trading patterns and knowledge-based relations with other companies, as well as how activities are configured in this business area. The smallest group are the companies which are most active in offshore wind energy. A relatively large proportion of their turnover is generated from wind energy (onshore and offshore). All of these companies are active in both construction and servicing of offshore wind farms. Because wind is already an important part of these companies' turnover, they do not expect an increase in the relative importance of wind energy turnover. We label this group of companies the offshore wind energy pioneers. It is apparently the most recently established companies that are most dedicated to offshore wind energy: compared with other companies which are active offshore, the pioneers are relatively young companies with an average age of 13 years. Companies in this group are also those most centrally positioned in the network of companies that is active in offshore wind energy. Their central position, manifested through more ties than the other companies and especially more ties to other key actors, is particularly distinct in connection with knowledge relations, less so in connection with trade-based relations. Because of their central position, the pioneer companies can potentially play a key role in defining the direction, in which the offshore wind energy industry will develop in the future. 08

9 The largest group of companies generates a relatively small proportion of their turnover from wind energy. However, they are on a development path, in which wind energy is set to become an increasingly important part of their total activities. That offshore wind energy is apparently important to their development is indicated by the fact that these companies expect to invest more resources on winning contracts in this area in the future. Most of these companies have participated in constructing offshore wind energy farms, either as a sole activity or in combination with servicing. We describe this group as the up-and-coming offshore wind energy companies. Where relations are concerned, these companies are slightly less centrally positioned in the trading and knowledge network of companies associated with offshore wind energy than the pioneer companies. However, they are more centrally positioned than the companies in the third and final group. We label this last group the occasional offshore wind energy companies. They generate a relatively small and stable turnover from wind energy. They do not expect to invest more in cultivating offshore wind energy as a business area and they are active either in the construction or servicing of offshore wind energy farms but do not combine these two main types of activities. Where the future development of offshore wind energy as a business system is concerned, the pioneers and the up-and-coming companies are expected to play the most important roles. If the up-and-coming offshore companies realise their plans and acquire more activities in offshore wind energy, they can achieve the same level of commitment to the industry as the current pioneers. Such a relatively large group of companies, which is strongly committed to offshore wind energy, has a well-founded knowledge-sharing network, and a relatively broad base of experience, could be a strong foundation for building critical mass. In cooperation with key and influential actors, they have the potential to develop and create the generally accepted standards and new solutions, which the sector needs in order to improve competitiveness compared with other energy sources. 09

10 A developing industry The overall conclusion of the study is that the offshore wind energy business system is still developing. The development is currently driven by a small group of pioneering companies. However, an increasing number of firms are gradually establishing themselves as incumbents. The networks between companies in the industry are relatively accessible as there is no manifest tendency for companies to form exclusive cliques. This means that there is significant potential for companies to engage in innovation through joint activities and knowledge-sharing focused on the challenges the sector faces relation to reducing the cost of energy. Among other things, these challenges are about operational stability, grid integration, process optimisation and efficient design. In the Danish offshore wind energy industry, there is a complete network, the activities of which are driven by experienced actors, who represent a creative resource for Danish competitiveness. Danish actors, especially providers, are on a very steep learning curve and have successfully developed their knowledge by cooperating with each other. At the same time, the Danish offshore wind industry is increasingly focusing on diversification rather than market development. This means in effect that the offshore wind industry is in the throes of developing a distinctive business logic, rather than being an appendage to the conventional onshore wind industry. However, there is no doubt that in the future many companies will continue to be active in both onshore and offshore wind energy. Precisely how the wind industry will develop and to what extent offshore wind energy will develop into an independent business area will largely depend on the degree to which the actors succeed in controlling the cost of constructing and operating offshore wind systems. This is the key challenge and it will require comprehensive readjustments as well as the realignment of the collaboration between the actors. 10

11 011 A2SEA

12 Rosenørns Allé 9, 5. DK-1970 Frederiksberg C P Photos front cover: A2SEA, Siemens Wind Power, Siemens Wind Power, Danish Wind Industry Association Photos back cover: A2SEA, Esbjerg Havn, Danish Wind Industry Association, Siemens Wind Power.