Harnessing the Wind

Like the sun and blue skies, wind is one of nature’s wonders. Since man began walking on Earth, he’s marveled at wind’s variability and power, having seen its fury unleashed during storms. Harnessing wind’s energy has been a goal for centuries. It may be getting closer to reality. 

Easing the Load

Man envisioned harnessing wind to ease his work load, accomplishing more in less time and boosting living standards. As early as 5,000 BC, Egyptians were using wind to propel their dhows on the Nile River. Those dhows facilitated trade along the river, enabling the then-center of civilization to prosper.

By 200 BC, China was using simple wind-powered pumps, and people in Persia and the Middle East built windmills with woven-reed blades to grind grain. Each wind application enabled people to improve their lives. 

Merchants and the Crusaders brought wind technology to Europe where it was used by the Dutch to drain lakes and marshes in the Rhine Delta and eventually to pump water for irrigation. From Europe, wind technology migrated to the Americas. The colonists used windmills to grind grain, pump water and cut wood at sawmills. Small windmills spread across the U.S., following the settlers who needed help tapping into underground water supplies to live, farm and raise livestock. 

The U.S. windmill era peaked in the 1930s as rural electrification programs extended power lines to farms and ranches and reduced wind’s importance. Windmills often were kept to supply water for livestock, but people no longer depended on them for everyday needs. 

The first windmill revival came with the 1970s oil crisis. Fear of shortages and the use of oil as a political weapon prompted governments to re-emphasize wind as part of their energy policy response.  Wind energy eliminated the burning of petroleum to produce electricity, freeing that oil for higher value uses. With federal and California financial support, thousands of wind turbines were erected in the state’s mountain passes during the 1980s and 1990s. 

The Clean Energy Movement

Today, wind energy is promoted for its clean energy output in the global fight against climate change. The global wind power movement was revived in Europe when governments began fighting global warming. The onshore wind energy efforts of the 1970s regained steam by the late 1980s. Industry and governments promoted demonstration projects and established wind-generated electricity targets for 2000. 

The first European offshore wind farm was installed off Denmark in 1991, opening a new chapter for the industry. Today, although offshore wind continues to show significant growth, 89 percent of wind-generating capacity in the E.U. remains onshore. That mix will change as offshore wind farms are becoming key components of government energy plans. 

In 2019, 15 percent of electricity demand in the E.U. was generated by wind. Denmark led the way with 48 percent, followed by Ireland with a third of its power from wind and Portugal with 27 percent. Only three E.U. countries generated no wind energy at all – Slovakia, Slovenia and Switzerland. 

Growth in offshore wind is due to government policies as well as technology gains for wind turbines, making them more efficient. In 2019 the U.K. led the E.U. in new wind capacity installed, and 74 percent was offshore. Spain, number two in new wind capacity, put none off its coast. Third-place Germany installed 51 percent of its new capacity in its North Sea and Baltic Sea waters. 

The global offshore wind industry installed a record 6.1 gigawatts of new generating capacity in 2019, a 35.5 percent increase over 2018. Total offshore wind generating capacity reached 29 GWs or 4.4 percent of all installed wind energy capacity. Offshore installations were led by China with 2.3 GWs, followed by the U.K. and Germany with 1.8 and 1.1 GWs, respectively. Europe remained the largest offshore wind market, accounting for 59 percent of new installations, while the Asia-Pacific region accounted for the remaining 41 percent. 

The U.S. is an offshore wind neophyte although it’s a significant onshore wind player. As of 2019 the U.S. had the second largest onshore installed wind generating capacity, trailing only China.  U.S.-installed wind-generating capacity equals 58 percent of Europe’s capacity. 

Offshore, the U.S. has only one five-turbine wind farm with a 30-megawatt generating capacity.  That equates to one-tenth of one percent of global installed capacity. Given plans for new offshore wind farms off the coasts of Massachusetts, New York and Virginia, the U.S. offshore market will grow rapidly, assuming they’re constructed on schedule. 

The Economics of Wind

The pace of global wind capacity installations has slowed in recent years. Climate change proponents are concerned. The slowdown relates to concerns over the economics of offshore wind energy, problems wind energy is causing electricity grid operators, and the durability of ongoing government subsidies. 

Wind variability is becoming a more pronounced problem. National Grid, the U.K.’s grid operator, has issued several warnings this year of low power supply margins and increased risk of blackouts. Projected drops in wind speed combined with untimely fossil fuel plant outages are the cause. 

In August 2019, one million homes and businesses in London and Southeast England were blacked out, shutting down commuter trains and traffic lights. The blackout was caused by a gas-fired power plant going offline, only to be followed two minutes later by the North Sea’s Hornsea Wind Farm. 

That blackout and the recent warnings highlight grid operators’ challenges managing wind’s intermittency. Overbuilding capacity is the answer, but it often necessitates large payments to generator owners to shut off their output when a surplus develops. Conversely, grid operators often pay standby fees to fossil fuel plant operators to have them available when wind disappears. These payments boost customer bills and pollution, as the plants idle inefficiently awaiting use. 

Wind energy is promoted based on estimates of its levelized cost of electricity (LCOE). This analysis shows costs trending lower and wind soon becoming competitive with natural gas power plants. 

Although wind turbines have 20 to 25-year useful lives, some have been replaced within five to ten years. In addition, wind turbine performance deteriorates over time, further impacting their economics. During the 40 to 50-year life of a fossil fuel plant, wind farms must be replaced once or twice, adding to power costs. Wind farm lives seem to be tied to the duration of their government subsidies. 

A key component of wind’s LCOE is the expectation of declining construction costs. A study by Professor Gordon Hughes of the University of Edinburgh, a former energy and environmental advisor to the World Bank, refutes that assumption. He showed capital costs per megawatt rising sharply from 2002 to 2015 but remaining flat or declining slightly since. The study examined actual wind farm financial reports. 

Projections for cheaper offshore wind farms rely on bids in recent power auctions. Dr. Hughes suggests these developers are speculators as they are betting on capital costs falling or power prices rising. If neither occurs, developers can end their projects with little recourse. If power prices rise, developers can pay a nominal fine to end their existing contracts and negotiate more profitable ones.  Relying on speculators as a measure of future market conditions is a dangerous move.

Government Subsidies to the Rescue

A more telling analysis of the offshore wind market’s health was a study of the profitability of the U.K.’s most efficient offshore wind farm, Kentish Flats. Its 2017 financial results showed a profit of $14.5 million, but they also showed it receiving $15.1 million in subsidies and benefiting from $0.7 of government grants written off each year. Without government support, the wind farm would have lost $1.3 million. 

The last wind energy data point is BP plc’s agreement to purchase 50 percent of two U.S. offshore wind farms planned by Norwegian operator Equinor for $1.1 billion. Equinor has indicated it will likely book a $1 billion profit on the sale.

Our analysis of Equinor’s investments suggests it has spent about $250 million. Half of this investment is to be reimbursed by BP, basically confirming Equinor’s profit projection. Are we looking at green energy virtue spending by BP? 

While the economics of offshore wind are not yet compelling, contrary to opponents, the projects make operational sense. They’re located away from populations, thereby eliminating the eyesores and potential health issues associated with onshore wind turbines. Offshore wind is also stronger and steadier, yielding a higher output than onshore. However, they cost significantly more than onshore turbines, especially as they move into deeper waters, and they require more expensive maintenance. 

If energy policy in the U.S. follows Europe’s trajectory and adopts a carbon tax, offshore wind’s economics should benefit, depending on the level of taxation. However, that’s a government subsidy in another form.

Boosting Maritime

For the U.S. maritime market, offshore wind offers a new business opportunity, certainly welcomed during the oil industry’s ongoing travails. While timing of the profitability of the offshore wind business remains uncertain, building new offshore wind farms will generate jobs and improve the maritime industry’s health. The public will foot the bill.

As the saying goes, the industry has “the wind at its back.”