Winds of Change? Why offshore Wind Might Be the Next Big Thing

MGT 7173

Advance Practices in Strategic Marketing Management

(Sustainable Marketing)

Winds of Change? Why offshore wind might be the next big thing

McKinsey & Company –

Arnout de Pee, Florian Kuster, and Andreas Schlosser

MOSHAH Group Members:

Shahriar Anvarizadeh (Shah)

Ahmed Ahsan Saeed (Ahsan)

Then Voon Mok (Mok)

October 2017

Table of Contents

1.0 Synopsis        3

2.0 Critical Issues        3

3.0 Background – Offshore Windfarms        4

4.0 Prices and Costs        4

5.0 Room for Improvement        6

5.1 Engineering, Procurement and Construction        6

5.2 Operations and Maintenance        6

5.3 Financing        6

6.0 Reasons for Optimism        7

7.0 Recommendations        7

8.0 References        8

1.0 Synopsis

This case discusses about the future of offshore wind farms and analyses critical issues such as prices and costs, room for improvement in engineering, procurement, and construction of offshore wind farms, gives an insight of the operational and maintenance requirements, the financial requirements, and the reasons why offshore wind might be the NEXT BIG THING.

The case concludes as “failing costs and rising acceptance are promising signs of offshore wind, but the industry needs to keep improving”

2.0 Critical Issues

The critical issues identified and discussed on this case are as follows:

• Prices and costs of offshore wind parks: Starting from the beginning of the case till the end of the case, the authors kept their focus on prices and costs of wind parks as this variable would play an important role in the success of industry.
• Room for improvement: The case discussed ways to reduce the prices and costs and concentrates on three main areas to reduce the costs and make the industry a success:

• Engineering, Procurement, and construction.
• Operations and Maintenance.
• Financing

• Reasons for optimism: The case ends with a summary of reasons why the offshore wind park industry could boom in the next decade and discusses briefly the improvements and research that is currently conducted to make the industry more efficient and increase value for all the stakeholders including but not limited to suppliers, manufactures, investors, end-users, etc
• Understanding the relationship between sustainable business practices, societal welfare and ecological systems: When this case is thoroughly analysed, one could identify the importance and relationship between sustainable business practices and ecological systems.
• The new value-focused design model: The case emphases on understanding the current beliefs and importance of marketing and business practices that are sustainable and work in line with nature.
• The sustainable consumption society of the future: The case shows the importance and the need for change in marketing and business strategies due to advancements in technology, the influence of the current knowledge community (scholars and graduates), social media, etc

3.0 Background – Offshore Windfarms

Europe has already been implementing regulatory requirements for renewable energy. As a result a high level of expertise and strong competition, it is possible that offshore wind could be competitive with other energy sources just within a decade (Pee, Kuster & Schlosser, 2017).

In April 2017, German auction for offshore wind energy won the bid at the wholesale electricity price, meaning no subsidy is required and is starting to compete with conventional and other renewable energy sources (Pee, Kuster & Schlosser, 2017).

4.0 Prices and Costs

Offshore wind industry still has a way to go in terms of costs, in order to compete with other renewable energy sources as well as conventional energy sources like coal and gas (Pee, Kuster & Schlosser, 2017).. The levelized cost of electricity (LCOE) for offshore park installed in 2016 is expected to be EUR 120 to EUR 130 per megawatt-hour, which is 40% more than onshore wind and 20% more than solar photovoltaics (PVs) and conventional sources are way more cheaper (Pee, Kuster & Schlosser, 2017).

The cost of building at sea are higher because it requires more materials for foundations and piles, also rough weather conditions make installation and maintenance expensive (Pee, Kuster & Schlosser, 2017). Offshore wind farms also require expensive connectors to the inland transmission network (Pee, Kuster & Schlosser, 2017).

Offshore wind is at an earlier stage of development, so it is expected that prices will fall further and faster, thus improving its competitive position. Offshore wind has numerous advantages that can help to compensate its higher costs (Pee, Kuster & Schlosser, 2017).:

• It can be sited near densely populated coastal areas, where land can be costly (example: Singapore and Maldives)
• It can be used with solar PV in Northern Hemisphere and during less sunshine climates like winter.
• Not-in-my-backyard (NIMNY) effect can be minimized when turbines are placed miles away at sea.

External Environmental Factors play a major role in cutting costs. Like low interest rates, low steel prices, advancements in technology (Pee, Kuster & Schlosser, 2017).

[pic 1]

According to McKinsey research, offshore wind farms have already started showing signs of competitive pricing, when different farms are made comparable by normalizing for water depth, site preparation, subsidies, and other factors (Pee, Kuster & Schlosser, 2017). (refer Exhibit I below)

[pic 2]

Exibit 1 (source: McKinsey)

When investors get more comfortable with offshore wind, financing risk premiums will come down as well (Pee, Kuster & Schlosser, 2017).