Opinion

Revenue/MWh for offshore wind projects will decline 66% between 2014 and 2025

What does the decline mean for the sector, and how long will it continue?

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The winds of change are certainly blowing for offshore wind projects. Just this month we’ve seen a seismic change taking place in the sector and with revenues/MWh in decline, we discuss what the implications are and how long the decline is likely to last.

Read the article below, and then dig deeper into what it all means by clicking on the links at the end of this article to discover more about our Lens Valuation tool.

Tables turning as developers pay the government to build offshore wind projects

On December 1, the winners of Thor – the 1 GW offshore wind tender in Denmark – were announced. 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. On average, offshore wind projects coming online in 2021 are getting revenues that are on a Eur per MWh basis 55% lower than in 2014. Based on the most recent bids and our projection of power prices, in 2025 revenues will be 25% lower than 2021*.

As projects are weaned off subsidies the structure of revenue is also fundamentally changing as projects become more exposed to power prices, according to our recent Global Offshore Wind Revenue Dynamics report and dataset. For the mature top six markets, we found that capture prices’ share of revenues doubled from a weighted average of 30% in 2014 to 50% in 2021. By 2026, we forecast more than 80% of revenues will be driven by wholesale power prices.

What does Lower revenue/MWh mean for the offshore wind sector?

First, the lower revenue is putting pressure on investor returns. The 55% drop in revenue between 2014 and 2021 has been matched by only a 45% reduction in the levelised cost of energy (LCOE). Similar to the historic trend, we are forecasting through 2025 revenues will decline by 25% while costs only fall by 15%, challenging project returns. Accordingly, we have seen some of the major offshore wind players reduce their guided IRR.

Second, the reductions in subsidies are likely to help drive accelerated growth in the offshore wind industry. 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, 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. 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.

Will revenue/MWh continue to drop?

The revenue/MWh reductions are fuelled by both LCOE reductions and intensifying competition in tenders. Wood Mackenzie 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, we are 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, we do not expect Thor to be the last negative subsidy as we see the price of acreage go 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.

How to evaluate the effects

To discover more about what these effects add up to and to see project IRRs and other key financial metrics of offshore wind projects please learn more about Wood Mackenzie’s offshore wind service and our Lens Valuation tool.

Wood Mackenzie’s Lens Valuation tool offers unique insights and in-depth analysis of offshore wind projects. Discover more about project IRRs and other key financial metrics. Here we discuss the economics of offshore wind projects. This film is an analysis of the sensitivity of offshore wind valuations projects. And in this film we take a closer look at Eni’s interest in the UK Dogger Bank offshore wind project.

*Please note that this article is based on Wood Mackenzie’s power price assumptions and that the final revenue may change depending on final power prices.