The Bottlenecks Challenging Growth in the EU Offshore Wind Supply Chain

In the wake of Russia’s war in Ukraine, the EU has decided to end its dependence on Russian fossil fuel imports as rapidly as possible. To ensure the region’s energy security, self-sufficiency, and the long-term reduction of greenhouse gas (GHG) emissions, the EU has planned to speed up the deployment of renewable energy, including offshore wind energy, which is regarded as vital source to achieve the EU’s climate goals.

EU countries cumulatively aim to install 107 GW of offshore wind energy capacity by 2030. To reach this ambition, the EU must be able to install an average yearly capacity of 11.4 GW between 2023 and 2030. However, forecasts based on known projects in the pipeline project an average of 6.6 GW aggregate installations per year in the EU. If left unaddressed, this gap would result in about 36.5 GW of total missed installed capacity by 2030 compared to the 107 GW ambition.

The European wind industry has repeatedly flagged that slow permitting is one of the main bottlenecks hindering installation of both on- and offshore wind energy projects across Europe. According to WindEurope, projects representing 80 GW of European wind energy capacity are currently stuck in permitting processes. This has put many projects at risk of becoming outdated even before being built. The current complex rules and slow permitting processes have created a lot of market uncertainty that could somewhat deter investors from investing in wind energy projects. Delays due to slow permitting have been one of the main reasons for the drop in wind turbine orders cited by European turbine manufacturers in 2022. WindEurope reported a 47% drop in total European orders for new wind turbines (on- and offshore combined) in 2022 compared to 2021. Inflationary cost pressures and uncertainty around the EU’s electricity market emergency interventions also played roles in reducing the level of orders last year.

The good news is that EU policy makers recognize the need to fix permitting issues. Some emergency measures have been adopted while further actions are being worked out in more detail to speed up the permitting process at the EU level.

Last December, EU energy ministers agreed to accelerate the permitting of renewable projects by adopting the emergency measures[1], like qualifying them for faster permitting procedures. This is the first time in EU history that the expansion of renewable energy is defined as a matter of overriding public interest. Under the new emergency rules, member states will adopt a plan, or plans, to designate “renewables go-to areas”[2] within 30 months after the Renewable Energy Directive (RED III), which is currently under revision (see Box 1), comes into force. The renewables go-to areas would be chosen because they are particularly suitable for the installation of renewable energy production units and present lower risks for the environment. Member states will also need to adopt mitigation measures to compensate for the potential negative environmental consequences of the projects. In the renewables go-to areas, the permitting of offshore renewable projects should not take longer than two years, but the process could be extended by up to six months in justified extraordinary circumstances. In offshore repowering projects, the permitting process should not exceed one year. For areas outside go-to areas, the permitting process should not exceed three years for new offshore renewable projects. Although the required authorities have processed these changes rapidly, it will still take a few years to speed up the permitting process due to the 30-month period to designate the renewables go-to areas following the adoption of the revised RED III.

[1] REPowerEU: Council agrees on accelerated permitting rules for renewables - Consilium (europa.eu)

[2] RePowerEU: new mapping tool supports identification of go–to areas for renewables (europa.eu)

The world’s growing appetite to expand renewable energy, in combination with EU and US policy support to increase offshore wind energy, is not a silver bullet for offshore turbine manufacturers. Major European manufacturers – including Siemens Gamesa, Vestas, and Nordex – all operated at a loss in 2022, and expectations for 2023 don’t look promising. In addition to slow permitting reducing orders of wind turbines, cost inflation of raw materials, rising costs of logistics, dependency on imports of raw materials, growing demand for larger turbines, and competition from China have also added to the struggle of European wind manufacturers.

Wind turbine prices normally decrease over time as technologies develop. However, according to BloombergNEF, prices globally (excluding China) have increased by up to 19% on average between 1H 2020 and 2H 2022. This is mainly due to cost inflation of raw materials and other turbine components, which tightens manufacturers’ margins. Typically, there is a provision for inflation in contracts between wind turbine manufacturers and their clients. However, in the current situation such provisions do not fully compensate for the rise in raw input costs that turbine manufacturers incur. Turbine makers are increasing prices and renegotiating contracts to manage financial risks. For example, manufacturers are seeking to add new contract clauses to link the final wind turbine price to indexes tracking input costs. To manage their exposure to increasing costs, manufacturers could include cost-plus agreements in their contracts to cover all costs in addition to a guaranteed amount or level of profit. Cost inflation has not only impacted wind turbine manufacturers. It is also forcing project developers to renegotiate their contracts as well, as they too are struggling to adjust to higher prices. These renegotiations also pose a risk of delays in wind energy projects development.

Figures 2 and 3 show changes in the prices of wind turbines’ key raw materials. Although prices have dropped since last year’s peaks, steel, copper, and epoxide resins in both Europe and the US are still significantly pricier than pre-pandemic.

Steel is the main material used in the tower, nacelle, and rotor hubs of wind turbines, equal to 90% of the materials used in offshore wind turbines. The price of Chinese steel last December almost leveled with the price in January 2019. In comparison, Europe’s steel prices were 69% higher over the same period of time. Copper is a key conductor in wind energy generation. It is mainly used in wind turbines’ wiring, cables, tubing, and generators. Copper prices have experienced less volatility than steel, with prices about 38% higher in the same period of time. Neodymium is a rare earth metal that is used in the permanent magnets of wind turbine generators. China, as the main supplier of neodymium, controls the supply of this metal. As of December, neodymium prices had dropped 40% since their peak in February 2022, but were nevertheless, 127% higher than in January 2019.

Epoxide resins (see Figure 3) are used in composition with fiber materials to make rotor blades as well as to coat wind turbines’ steel and concrete structures to increase their lifetime. Epoxide resin prices in China, Europe, and the US historically developed more or less in sync. However, since April 2021 China’s prices have declined drastically compared to the January 2019 level while prices in the US and Europe have remained elevated. In December 2022, Europe’s prices were 79% higher than in January 2019.

The developments in cost of materials are giving Chinese manufacturers a cost advantage, in particular in steel and epoxide resins. In addition, China has the advantage of largely controlling the neodymium market.

Shipping rates of containers of goods have been slumping due to decrease in demand, increases in inventories, and the easing of port congestions around the world. Figure 4 shows freight rates of the main shipping routes between Rotterdam, China, and the US. Prices on the shipping routes between Rotterdam and Shanghai have been more volatile than for the route between Rotterdam and New York. As of December 2022, the price of the Shanghai-Rotterdam route had fallen sharply by 80% since the peak in summer 2021 and was on par with pre-Pandemic levels.

The lower shipping rates and smoother logistics operations provide some relief for European wind turbine manufacturers and developers, however the supply chain disruptions and delays that have increased since the war in Ukraine still persist. The delays can incur extra costs for manufacturers as they could be held responsible for costs related to project delays. To manage related risks, manufacturers are signing longer-term shipping contracts.

Wind turbine prices have increased globally except in China (see Figure 5). According to BloombergNEF, Chinese wind turbine prices dropped 48% in the second half of 2022 compared to the first half of 2020, while for the rest of the world, prices increased 19% on average over the same period. The difference in price has become starker since early 2021, when Chinese prices began to decline consistently while prices in other regions continued to rise.

BloombergNEF expects that the prices of Chinese produced wind turbines will drop even further in 2023 by 15% to 20% per kilowatt of capacity. As a result of the increased production and price competitiveness, Chinese producers could threaten the top European turbine manufacturers’ market share outside of Europe. China’s wind turbine exports are already increasing, especially to Southeast Asia. A few contracts have even been won in Europe and Japan, markets that historically have not been open to Chinese wind turbines. Currently, almost all of Europe’s wind turbines are made in Europe, but China can beat the European producers on price.

European manufacturers’ main concern of is about losing a level playing field, which would mean lower price competitiveness. China’s manufacturers have received various support from national and regional resources, for example, the government’s intervention in commodity markets to mitigate the impact of rising prices and the notable amount of government support for research and innovation on wind turbine technologies. In addition to a strong local supply chain, this support is providing Chinese producers with a competitive cost advantage in the global wind market. European manufacturers are therefore calling for support from the EU and member states to provide a level playing field versus Chinese producers. Siemens Gamesa, the top European wind turbine manufacturer, has called on the EU policymakers to consider wind turbines as critical and strategic products that should be supported as such. The company suggested introducing a quota system to guarantee a set proportion of EU-built turbines to be installed across the EU trading bloc.

On the plus side, the EU seems to be moving faster in the direction of helping the European renewables industry. To respond to the Russian invasion of Ukraine and other global renewable energy legislative commitments like the US Inflation Reduction Act, the European Commission has just announced the Green Deal Industrial Plan, which aims to drive renewable energy and clean technology development and to place the European market at the forefront of the global energy transition. The four pillars of the plan are:

In addition to the inflation of raw materials and supply chain disruptions, the European wind industry is challenged by its dependence on imports of critical raw materials from non-European countries. Besides the risk of high price volatility, such dependence exposes the European wind industry to the risks of logistics disruptions and the risk of not having access to enough critical raw materials. To reach the EU’s wind energy targets, the European wind industry requires a stable, secure, and cost-competitive supply of raw materials like steel, copper, aluminum, and rare earth elements (e.g., neodymium, dysprosium, praseodymium). The consumption of these raw materials will increase hand in hand with the installation of new wind turbines in the coming decades. As demand increases, the raw materials supply could become more scarce and more expensive, and might be subject to geopolitical risks in line with gas from Russia.

To reduce Europe’s dependency on imported raw materials for renewable energy production, including offshore wind, the EU will present its Critical Raw Materials Act (CRMA) in March 2023. The new act will focus on identifying critical raw materials that can be considered particularly strategic for the EU’s green and digital transitions. The CRMA is expected to create a true European network of raw material agencies. The network would then develop monitoring and stress testing capabilities, enabling the industry to anticipate various risks, including price hikes or f disruptions, and to make suitable investment decisions. The CRMA also aims to build a more resilient supply chain by supporting and attracting more private investment in everything from mining to refining, processing, and recycling, with the highest social and environmental standards in mind. The CRMA is expected to ensure a strong and sustainable level playing field, drawing on the EU’s single market tools, such as standards. This can be done by, for instance, rationalizing and consolidating the existing numerous certification schemes on environmental and social performance of mining activities.

In addition to the need to secure more raw materials to reduce import dependency on these inputs, there is also a call for more circular business models in the industry. To date, wind turbine blades are not recycled but disposed of in landfills due to the lack of technology to recycle them. This is negatively affecting the industry’s image. Recently, positive news has come from European innovation projects on the recycling front. One example is from Vestas. In collaboration with research institutes Vestas has announced that it has developed a chemical solution to break up the polymers in wind turbine blades to enable recycling. With this new process, Vestas would be able to chemically break down epoxy resin into virgin-grade materials.

Wind turbine orders have dropped while wind turbine manufacturers in Europe have invested hundreds of millions of euros on new wind turbine models at a time when they are not making enough profit to cover the costs. These investments have been made as markets have been showing huge interest in bigger and more powerful turbines. The rationale is clear: The larger and the taller the turbine, the more wind it can capture, and the more energy is produced. The expectation is that larger wind turbines will result in a lower cost per unit of electricity. DNV, however, has observed no significant variation in the levelized cost of energy (LCoE) with respect to wind turbine power ratings in the range of 12-20 MW turbines. DNV indicates that currently the most cost-optimal offshore wind turbine size for high specific power densities (400-450 W/m2), is 12-15 MW capacity turbines. Figure 6 illustrates the evolution of wind turbine output over time.

In Europe, the average power rating of offshore wind turbines more than doubled between 2014 and 2020 (see Figure 7). In 2022, within Europe, the Netherlands had the highest average power rating of offshore wind turbines, at 10.9 MW, followed by Germany at 9 MW. In 2022, orders of offshore wind turbines to be installed in Europe reached an average power rating of 12.2 MW.

When a new wind turbine is designed and built, all components of the turbine need to be developed as well. A new wind turbine is usually released every five to eight years. During this period, manufacturers can collect feedback from the field to help them improve the platform. Also in this period, incremental increases in wind turbine size are achieved by increasing blade length and upgrading the drivetrain. The current market trend of seeking larger platforms could disrupt the normal cycle of turbine size growth. The drive to continuously increase platform sizes could push manufacturers to race to roll out larger turbine at the cost of technical optimization. This race could prevent the manufacturers from increasing the number of manufactured units of the same platform, which is key to unlocking economies of scale and lowering LCoE.

Wind turbine manufacturing is not the only part of the supply chain influenced by the market’s quest for larger turbines. If the growth in turbine size continues quickly without any standardization, vessels built now would be too small to carry out their required activities and may even be at risk of becoming obsolete before having reached economic payback. This uncertainty might hold back investments in new installation vessels. This would create yet another bottleneck, decelerating the installation rate of offshore wind turbines. To avoid such a scenario, owners of many vessels under construction have opted to include cranes capable of installing 15+ MW wind turbines.Currently, only two wind turbine installation vessels (WTIVs) able to install 15+ MW wind turbines are available for the European market, but the number of these vessels will increase to 14 by 2025. It is, however, unclear how long the new-built or upgraded vessels could serve the market if the turbine size continues to grow rapidly. It should be noted that building a new vessel capable of installing 15+ MW wind turbines would cost about USD 400m and take three to four years from order to delivery. For such a huge investment, vessel owners would expect a new vessel to operate for over 20 years. But with uncertainties around the growth trend of wind turbines, it is difficult for owners to strike the right balance between costs and vessel capacity optimization. The uncertainties increase the risks and make it more difficult to secure investment for new vessel construction.

Installation of huge offshore wind turbines requires vessels that are specially designed to handle the heavy installation in the harsh conditions of increasingly deeper seas where vessels face higher wave heights, stronger winds, and intense currents. Typically, three types of heavy construction vessels are needed to install an offshore wind turbine. WTIV are specially designed to install the tower, nacelle, and rotor. Most WTIVs are the jack-up type, as in the photograph below, which can provide stability in the sea environment. Foundation installation vessels (FIV) are usually floating types and are used to install fixed-bottom foundations. Cable installation vessels (CIV) are used to lay submarine cables.

Last June, H-BLIX assessed the availability of offshore wind vessels through 2030 on a global scale, excluding China. The results expect a shortage of WTIVs to first appear in 2025. This could lead to a missed installation capacity of 3.2 GW per year. A second shortage period of WTIVs is expected to appear between 2029 and 2030 and could result in an inability to install 14.9 GW of capacity per year. H-BLIX’s conclusions also indicate that demand for FIVs should peak between 2024 and 2025, potentially leading to an inability to install between 2.0 and 3.8 GW of offshore wind capacity per year. They expect a second shortage of FIVs between 2028 and 2030, which could lead to a missed installation capacity of 12 GW per year. As FIVs can also serve the oil and gas market, there are concerns about tighter FIV supply for wind turbine installation if the oil and gas industry’s demand increases. For CIVs, a first shortage is expected between 2024 and 2025, and could mean a 3.7 GW loss in installation capacity per year. The demand for CIVs would again peak between 2028 and 2030. The market could miss installation of 16.9 GW of offshore wind capacity per year. Based on these forecasts, the global market could face a bigger shortage for FIVs and CIVs compared to WTIVs in this decade. To make an offshore wind turbine operational and able to transfer electricity to the grid, all different types of vessels must be readily available.

To avoid installation delays, developers have started to establish longer-term contracts with vessel suppliers. For instance, Cadeler, a key global vessel supplier, has secured a backlog until 2026 for its two operational O-class WTIVs. One of its new WTIVs, currently under construction, has secured contracts until 2031, ensuring a full return on the investment.

The European offshore wind supply chain faces different challenges and bottlenecks that could hamper the EU and its member states’ efforts to reach their offshore wind targets. The European wind industry, particularly turbine manufacturers, are struggling due to slow permitting, increased cost inflation of raw materials and logistics, dependency on imports of raw materials, growing demand for larger turbines, and competition from China. Future challenges also include the expected global gap in vessel installation capacity for foundations, wind turbines, and cables, which could slow down the speed of offshore wind farm installation across Europe.

To deal with these challenges, the EU and its member states could play important roles to support the European wind industry. The EU acknowledges the challenges and has set the wheels in motion to facilitate a path to support its regional wind industry. The recently presented Green Deal Industrial Plan, the upcoming Critical Raw Materials Act, and the adoption of various emergency measures to speed up permit granting processes are among the positive initiatives launched to deal with the challenges in the supply chain. These could support the fast transition to net zero. In addition, the latest and proposed measures could help enhance the European wind industry’s competitiveness versus cheaper-priced Chinese players.