Offshore wind is stepping up as a contributor to decarbonization goals. China, with favorable funding, geography, demand, and improving technology, is primed to maintain a lead in bringing such global capacity online.

Why it matters:  Offshore wind is slated to play a larger role in achieving national and global decarbonization targets. However, this renewable technology is developing much more slowly than onshore wind and solar power. Still-high investment costs and fading subsidies in Asia-Pacific since an initial build-out stage have hindered progress.

In our view, the onus is shifting to industry incumbents along the value chain for offshore wind buildout. Such players will need to balance economic returns against meeting their governments' requirements for capacity expansion.

What we think and why:   State-owned enterprises (SOEs) will lead the rapid buildout in China. They have other, more profitable segments that can help them absorb heavy expenditure and narrowing investment returns for offshore wind. Over a longer timeframe, the returns could improve thanks to scale and technology changes. China's developers also have lower construction and financing costs than other markets.

Asia-Pacific Fueled Up In Global Offshore Wind Market

We think Asia-Pacific will continue to lead offshore wind development.  Asia-Pacific overtook Europe in 2021 during a rush to launch China offshore wind projects while generous subsidies were still available. While those subsidies are fading, China still has production and other advantages and will stay in the vanguard.

In contrast, offshore wind developers in Europe and the U.S. have been hit by the higher investment costs and supply chain disruptions since 2021. Growth from those markets has slowed, albeit as technology advancement continues (see "Power Sector Update: U.S. Offshore Wind Projects Have Not Harnessed Their Full Potential Yet," published on RatingsDirect on Aug. 2, 2024).

One driver will be falling unit costs as technology and scale strengthen.  We think average global unit costs have scope to drop by at least 30% to US$58/megawatt hour (MWh) by 2025, as per the forecasts by research group Bloomberg New Energy Finance. This compares with an average US$83/MWh in 2020--which in turn was 60% lower compared with US$255/MWh in 2012.Failure to make costs more competitive could, in our view, derail momentum for offshore wind.

Size matters for cost reductions and operating efficiency.  Wind turbines are getting bigger. Future pipelines will more often apply floating rather than bottom-fixed types. Floating pipelines are more cost efficient for projects located further out at sea, in deeper waters. Other factors, such as micrositing optimization and utilization of digital tools, may also enhance operating efficiency and reduce costs.

Development conditions for offshore wind are uneven across Asia-Pacific.  Mainland China dominates and will likely install 11 gigawatts (GW)-16GW per year of such capacity over the next two to three years. Its manufacturing edge helps; the country will also continue to supply 60%-70% of wind turbine nacelles and key components to the world in the foreseeable future.

For the rest of the region, three markets stand out in terms of commissioned offshore capacity in 2023: Japan (153.5MW), South Korea (150MW), and Taiwan (2.2GW at end-2023). Taiwan plans to add more than 10GW over 2024-2030. Vietnam and Australia have also announced ambitious national policy targets, but execution is yet to be tested.

Mainland China's Expansion Is Steady In A Post-Subsidy Era

Table 1

Offshore wind projects will take longer to reach grid-parity.

This is given more complex components and construction conditions:

• Construction and operational costs for offshore projects are 1.5x-2.0x higher than that for onshore projects; Feed-in-tariffs (FiTs) are just 30% higher than onshore ones.
• Without any subsidy, tariffs will fall 40%-51%. The remaining provincial government subsidies in coastal provinces of Guangdong, Zhejiang and Shandong will expire in 2025.
• Investment hurdles can hardly be reached at present, even if lifetime utilization hours set for offshore wind are relatively longer and some local governments provide subsidies.
• Policy risks include changes in sea usage approval or lower-than-expected utilization hours due to limited power consumption growth in that province.

Chart 1

Unit costs will continue to decline for China offshore wind.  Offshore wind farm construction costs vary depending on depth of water, distance from shore, size of turbines, and related factors. Most offshore wind projects under construction in China are in shallow water with construction costs ranging from RMB11,500/kilowatt (kW)-14,000/kW (equivalent to US$1,600/kW–US$2,000/kW) in 2022, a 50% decline from the first project developed in 2009.

Prevailing market prices for wind turbine are between RMB3,000/kW and RMB4,000/kW (equivalent to US$430/kW–US$570/kW) and trending toward the lower end. The cost trajectory of offshore turbines is likely to follow that of onshore ones, which declined by half and was RMB2,000/kW in early 2022. Still, wind turbines account for 40%-50% of costs for offshore wind farms, versus 70% onshore. This reflects the higher construction costs.

Developers are cutting their overall costs by using larger turbines for new projects.  Such turbines provide higher efficiency in power generation and lower development costs. Further cost declines depend on technology improvements and the application of new materials. The largest unit size of new project constructed in 2022 was 11MW, compared with about 3MW in 2010.

Offshore wind turbine manufacturers are concentrated in the biggest four players, namely Shanghai Electric, Mingyang Wind Power, CSSC Haizhuang Windpower, and Envision Energy(all unrated). Direct-drive technology used to be the dominant technology, but offshore projects are transitioning into hybrid and medium-speed geared powertrains to better manage the weight and dimensions of the large unit size wind turbines.

Chinese wind turbine manufacturers are benefiting from strong domestic demand and vertical integration. Margins should therefore be stable, relative to those of peers in Europe and North America, which face more challenges. However, China margins will decline after subsidies are removed from downstream operations.

Chart 2

Bank financing remains the major funding source for China offshore wind projects  China's relatively low interest rate environment provides favorable funding, mainly through policy or state-owned bank loans. There is a lack of alternative funding structures that other mature markets often use for renewable financing. There's also no need, given the low funding costs.

Some China projects have been piloted funding through REITs, but wider application is untested. For example, in March 2023, the first publicly funded REIT on a 500MW offshore wind project owned by State Power Investment Corp. Ltd. (SPIC, A-/Stable/--) was listed. The proceeds amounted to about RMB4.4 billion (US$630 million), or about 20% of the project's total investment.

China has ample renewable reserves (e.g., shoreline, wind speed, etc.) to expand, which could provide opportunities for innovative financing structures. Nonetheless, a few prevailing risks throughout the lifecycle of a typical offshore wind project may create obstacles to alternative financing:

• Project selection and preparation: Wind speed and resource can vary from feasibility study.
• Construction: Changes or misinformation in geographical conditions at the seabed and surrounding environment can affect construction for foundations and lead to construction cost overruns.
• Operation: Transparency may be lacking in the length and terms for power-purchase agreements (PPAs) compared with other mature markets; for projects without a long-term FiT, operating cash flow may be volatile due to fluctuations in market-based tariffs; as the turbine warranty period expires, maintenance and other operating expenses may increase unexpectedly and are not covered in insurance terms.
• Transparency of information: Disclosure of information at project level may not be transparent enough, making it difficult to follow up on execution of a certain project.

SOE participation underpins credit stability for this buildout.  Most offshore wind-farm operators in China are central SOEs, with the top six accounting for approximately 70% of national capacity. This niche only accounts for a small portion of the total power assets for these incumbents.

These integrated power SOEs are more willing to exchange near-term profitability with strategic positioning and project development experience in the expanding offshore wind market. Funding ability is also a key competitive advantage for these operators to absorb the capital deployment.

Chart 3

Taiwan--Ambitious Targets, Emerging Execution Risks

Table 2

Offshore wind power is the key pillar for Taiwan's goal to become carbon neutral in 2050.   This is given the island's favorable geolocation for this type of renewable. However, its aggressive targets (see table 2) are hindered by high costs and a less-established supply chain. The government is already running behind on its 2025 interim goal.

The removal of government subsidies could slow investments.   At first, the government has offered favorable FiTs to offshore wind farms with capacity totaling 5.5GW to attract overseas developers and to build a local supply chain by 2025. However, new projects will need to rely on direct sales to end issuers, mainly large corporates through corporate-renewal PPAs (CPPAs). This together with lengthy environmental reviews and rising construction costs has hindered investment appetite and could delay the goal of commissioning those new offshore wind farms by 2029.

Nonetheless, the CPPA deals will include discounted distribution services from Taiwan Power Co. (Taipower), the state-owned monopoly that runs the grid. This will trim a bit off the rising investment costs.

Rising cost burden for developers.   Construction costs for offshore wind farms in Taiwan are higher than those for regional peers mostly because of a 60% local-content requirement. Moreover, mainland China-made equipment is excluded, limiting key equipment suppliers to Western ones, including Vestas and Siemens Gamesa, adding to the cost burden. Bucking the global trend, Taiwan's construction costs will likely rise in 2024 and be a considerable 3x more expensive than in mainland China. We estimate unit generation costs at US$106/MWh, also higher versus the global average of US$83/MWh.

Without guaranteed tariffs, financing will become harder.  Banks, mainly offshore ones, have extended more than New Taiwan dollar (NT$) 350 billion up until 2023, making them the key financiers. However, we believe that banks will be more cautious in extending new loans given that new projects won't have fixed FiTs. It might be more complicated to assess the credit risk associated with CPPAs, deterring interest from local banks.

The large borrowing needs--at least NT$250 billion before 2030--will also test banks' capacity for more lending exposure to offshore wind. In addition, overseas developers could face significant barriers to tap direct financing, given a less-established regulatory framework and local investors' appetite for new types of debt instruments such as project finance.

Chart 4a

Chart 4b

Australia – Offshore Wind Strategy is Fledging

Table 3

Australia's offshore wind strategy is in its infancy.  There are no operating offshore wind farms in Australia, and even by 2035 such energy is likely to be a low 3% of total market capacity. Still, both the federal and state governments plan to incorporate offshore wind into their energy-transition plans.

The state of Victoria is the first mover in awarding feasibility licenses and legislating its energy-generation targets (see table 3 above). New South Wales is also close to setting its target for the Hunter and Illawara region--the second declared area. The northern tip of Tasmania is also shaping up to be a preferred site. Studies estimate that the declared and identified areas present good wind resources in the range of 8-10 meters per second.

Early stages in determining project development costs.  Given this is an emerging industry in Australia, levelized cost of energy and average completion time are also uncertain. Nonetheless, the industry and government estimate an average of 10 years for development, of which about five years could be taken up in feasibility, development, and approvals.

Chart 5

Vietnam Has Big Ambitions Relative To Closest Peers

Table 4

Among South and Southeast Asian countries, Vietnam has set the most ambitious target for offshore wind given its ample resources along its coastline.  According to the country's latest power development plan, Vietnam's offshore capacity target is set at 6GW by 2030 and 70GW-91GW by 2050, from zero now.

Domestic and international players will be involved. According to S&P Global Commodity Insights, about two-thirds of the project pipelines are jointly owned by local and international companies, most being European companies such as Orsted A/S (BBB/Stable/A-2) and Copenhagen Infrastructure Partners.

Unlike Taiwan, Vietnam's construction and unit costs do not have localization requirements.  Wind equipment will be mostly imported given a lack of local manufacturing capability. For onshore and intertidal wind projects (offshore wind projects in shallow waters), Chinese wind turbine manufacturers have the largest market share in Vietnam due to the low cost and proximity. According to S&P Global Commodity Insights, about 42% of the wind turbines installed in Vietnam in 2021 were supplied by Chinese makers such as Goldwind Science and Technology Co. Ltd. and Mingyang Wind Power Co. Ltd.

Policy could hold back development.  Tariff mechanisms, grid development and other policies are still being worked out. Vietnam's renewable projects are initially entitled to a 20-year fixed FiT set by the Ministry of Industry and Trade. In particular, the FiT for intertidal wind projects was set at US$98/MWh, though this was subsequently cut to US$79/MWh for projects commissioned after November 2021. Furthermore, projects approved after 2022 may be subject to variable electricity tariffs adjusted every year and across regions in Vietnam, and are still being discussed among authorities.

Also, the World Bank estimates that Vietnam will require five to 10 years of grid construction to absorb the additional electricity generated by the offshore wind projects. So, any delays in grid construction might restrain offshore wind development in Vietnam, in our view. Indeed, some solar power plants in Vietnam are already suffering from 20%-40% power curtailment due to grid constraints, and this has affected the project economics and discouraged new investments in the country.

Chart 6

Given the high project capital needs, government support in policy reforms, robust PPA framework, and strong grid construction remain crucial for investments.  Inadequate cost-passthrough from tariffs and massive capex needs including grid development may further strain the financials of main power entity Vietnam Power Group (EVN). This highlights that government support would be essential for Vietnam to meet its renewable ambitions.

As such, the ambitious national capacity target may fall short to about 5GW by 2030, according to S&P Global Commodity Insights.

Offshore Wind: A Late Starter But Likely Big Finish?

Worldwide offshore wind capacity could roughly double to 130GW over the next five years (2022: 64.3GW). That's according to forecasts by the Global Wind Energy Council (GWEC).

By 2050, more than 2,000GW of offshore wind capacity is needed in order to achieve the "1.5C" scenario, according to GWEC's estimates.

We anticipate Asia-Pacific will contribute at least half of the capacity and 40% will be from China alone to meet these targets.

Elsewhere in the Asia-Pacific region, Japan and South Korea also started to commission new offshore wind capacity in 2023. The two countries are eyeing 10GW and 18GW of operational capacity by 2030, respectively. They are slowly catching up with Taiwan and will contribute 4%-5% each to Asia's offshore wind capacity by then.

The above targets are based on the assumption that technology will continue to advance and reduce costs, grid infrastructure to catch up, and that policy settings keep a wind at the back of these efforts.

Editor: Cathy Holcombe

Digital Designer: Evy Cheung

Related Research

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• Asia-Pacific Energy Transition: Adapting To Looming Execution Risks, April 15, 2024
• China's Energy Transition Will Be Powered By Debt, April 15, 2024
• China's IPPs Can Speed Energy Transition As Power Demand Tapers, Nov. 6, 2023
• China's Renewable Developers Can Tackle Spiraling Debt And Capex, April 7 2023