Wind – The lowest levellised cost of energy

Wind power will play a key role in the global energy transition. Henrik Andersen (HA), CEO of the world's biggest wind energy company, Vestas, talks to Nordea's Johan Trocmé (JT) about power generation investments as well as the company's efforts to address its own emission footprint. He also highlights the need to improve permitting for wind farms in order for the energy transition to succeed.

JT: In order to keep global warming to less than 1.5 degrees Celsius above pre-industrialised levels, there needs to be a massive transition from fossil fuel-based to renewable energy. What role will wind power play?

HA: Sustainability and ESG are much broader than just the environment. But while areas such as health and safety at work and diversity are also crucial, climate stands out in that it has become an existential issue for the entire planet. If we don't get it right, there may not be a habitable world for us to live in going forward. My daughters are 19 and 22, and through them I hear about young people having discussions about whether or not they want kids, based on concerns about what future we will be able to offer them. This underlines how serious it is.

We need to find a smart way of carrying out an energy transition for society over the next three decades, across all areas of energy usage. Carbon capture – storing CO2 in emptied North Sea oil and gas fields – is just a postponement of the problem, not a solution. Today, however, we do have most of the solutions, and we are seeing new technology developing that will help us get to net zero. Renewables are mature and keep improving, but something like green hydrogen, or Power-to-X, has also gained momentum, although it will take time before it is truly competitive.

For wind power, a common and serious misunderstanding is to assume that it is subsidised today like it was in 2010. Vestas and indeed the whole industry ended up in financial turmoil in the aftermath of the global financial crisis in 2009-10. At the time, probably over 95% of projects required subsidies to be financially viable, as the offtake was lower than the manufactured levellised cost of energy from the wind turbines. In the following decade, we reduced the levellised cost of energy by over 60%. This was driven by the size of the turbines, the efficiency of the technology, and arguably also improved connectivity and interaction with the grid, allowing better matching of wind energy production with current consumption in the grid.

Together with better operation and serviceability of the turbines, this has now given wind power the lowest levellised cost of energy. It beats nuclear power by a wide margin. Take the new Hinkley Point nuclear power station under construction in the UK. When it comes online, it will probably generate electricity at a cost of GBP 145 per MWh. The newest offshore wind farms in the UK run at some GBP 35 per MWh. And onshore wind farms in the UK run at perhaps GBP 15 per MWh. Offshore is still more expensive than onshore, because we have not yet solved the technology for floating platforms, but it will at some point in the coming decade converge to onshore cost levels. Construction at Hinkley Point has been ongoing for 20 years, and it is currently two and a half times over the original budget. This track record highlights that large-scale nuclear will be too slow and too costly for the energy transition we need to see in the next 30 years. At present, wind energy needs subsidies to be viable in less than 5% of the world markets. It is a far superior alternative.

For governments today, there is no economic or sustainability-related reason not to invest in or promote wind power. The only obstacle is permitting for wind farms. As much as central governments encourage and plan for a rollout of more wind power, municipalities and local governments often try to block developments. And this is driving more interest in offshore wind farms, which constitute some 10% of the market today but will probably grow to more like 30% in the next decade. There is ample space in the ocean, and governments can tap into an additional revenue source by leasing out the seabed on which the wind farms are placed.

JT: How cost competitive is wind power compared with other energy sources today? How do you think this will evolve in the coming ten years?

HA: We will, of course, strive to continue to bring down the levellised cost of energy for wind turbines going forward. But it is important to highlight that we have reached a critical point now that wind power is, in fact, the lowest-cost energy source. We no longer need to push the technology to be economically viable without subsidies. We are there. The focus is shifting towards making wind power available in those parts of the global energy market where these renewable solutions are needed. Ten years ago, we needed a game change for the cost of wind energy. Today, we need optimisation and refinement.

A potential future new game changer for wind energy would be to increase its utilisation from 30% to perhaps twice that level, from being able to use the wind turbine in the grid or off the grid. This should come from the ability to store generated energy.

JT: The strong interest in wind power project funding stands in sharp contrast to the difficulties in getting permits to develop wind farms. How do you think this could be resolved?

HA: This is indeed a critical issue. I see again and again that policymakers believe there is a mission accomplished status once capital has been earmarked for renewable energy development and investments. The capital being available is great news but of no help at all if permits are not forthcoming for building wind farms.

In the big and advanced economies, governments of course want to be re-elected. It is very convenient to present yourself as an energy transition champion by securing capital, but there is typically a fear of offending constituencies and losing voter support from overruling local objections to energy projects. Take Denmark as an example. In order to realise the government's objective for renewable energy, we need to install another 8 GW of wind power by 2030. The average of the past two years has been 87 MW. At that rate of development, the renewable energy goal of an additional 8 GW will be reached after 2100. That is a bit late if we are intent on saving the planet. It is a paradox that demand is not the problem. Getting permits is, and that is a matter of political will. The recent 1 GW offshore wind auction in Denmark had five consortia bidding for it. The winner had to be determined through a draw.

In the big democracies, everyone wants a transition to renewable energy. But local communities don't want it near them, and not right now. Permit processes are lengthy and often face stiff resistance from municipalities and local interests. We have even had situations such as when a Danish municipality protested fiercely against a wind farm development despite Vestas already employing 900 people at its factory there. Despite growing evidence of adverse climate change, such as the major flooding in Germany in the summer of 2021, national politicians are afraid of losing voter support from any serious attempts at forcing permitting from the national level. It is a fine balance, because political decision-makers need to act before climate change goes too far and it is too late. It would be a huge advantage to be one or more steps ahead of actual developments.

JT: What other challenges do you see for wind power as an energy source?

HA: In the coming five years, we will start to see Power-to-X schemes starting to be used, where we store energy from renewable sources such as wind power during periods of low demand, for example during the night. The power can be stored in batteries, or under these schemes converted into hydrogen, which can in turn be converted into methane or methanol. The key will be to bring up the volume of renewable energy participating in the scheme, as power-to-gas processes need substantial full-load hours to be economical. This will greatly improve the capacity factor of our wind turbines, as there will be clearly less stop-and-go in their operation. Going forward, devices such as electric cars will become more intelligent and active in when and how they charge their batteries. Wind power can benefit greatly from the whole system, becoming better and more sophisticated at matching supply and demand.

JT: Could you describe how you will make Vestas’s own footprint more sustainable? What are your ambitions and what will be the greatest difficulties?

HA: I think an interesting illustration is our own corporate car fleet. Our company has the world's most sustainable product, the wind turbine, which becomes carbon-neutral and even carbon-negative after six to eight months of use. Historically, this has led to little perceived need to address our own footprint. But when we approached it in a structured way when doing our Scope 1, 2 and 3 analysis, we could see that the big culprits in our own CO2 emissions profile were our own transports, our own energy consumption and our use of steel. When we reviewed our company car policy in September 2019, we felt it would send an important signal for Vestas's employees to drive electric company cars. At the time, there were only six electric car models available to buy in Denmark, and on average they were 15% more expensive than petrol or diesel cars. This made the economic and functional case questionable, but we argued that if we did nothing, there would not be any rollout of charging stations or increased adoption of electric vehicles. We decided to invest what was needed to get our locations in Denmark equipped with charging. And interestingly, over the next five months electric car prices dropped, and by December 2019 the number of available models had risen from six to 20. We made it clear that any of our top managers who drive a company car should have an electric vehicle. The energy transition will require an attitude change, across generations. And this is one, albeit simple, way to help demonstrate it.

Our model for serving the market will change logistically. We will move closer to where our solutions are implemented, to optimise the need for transportation, sourcing for manufacturing and serviceability of the turbines. We are focusing heavily on developing floating offshore wind turbines, which do not need to be built on concrete piles resting on the seabed and will hence have a more favourable CO2 profile. Our whole value chain from raw materials to installed megawatts of wind turbines will be reviewed from this perspective.

Another important topic is the circularity of our turbines. Recycling of turbine blades is a major challenge which we are looking into. Here, I think the consolidation of our industry will help, with bigger, better-resourced and more mature industry players co-operating to develop good solutions for reusing carbon and glass fibre from blades.

There may also be changes which we do not know of yet. We invest in a number of early-stage new technologies through Vestas Ventures to boost our own knowledge and to hedge our bets. We were an early investor in Northvolt of Sweden, with whom we have also partnered to develop a lithium-ion battery platform for storing energy from wind turbines.

We do not believe in carbon offset certificates. Everything we do has to be the real thing, actually reducing emissions ourselves from our own activities.

JT: How would you describe Vestas’s own investment needs in the coming years?

HA: A good illustration is probably when we bought back our offshore wind joint venture with Mitsubishi a few years ago and said that its capex over a five-year horizon would be split roughly 50/50 between investments in technology and investments in the location of manufacturing. Going forward, I think this will apply generally to us and our entire global supply chain. Even if it is not exactly a 50/50 split, technology investments will remain very important, while big efforts will go into revamping the traditional setup of materials or manufacturing being almost exclusively concentrated to highly cost-competitive sites in developing markets.

JT: How dependent is demand for wind power on economic growth and activity, versus substitution from fossil fuel-based to renewable energy?

HA: Renewable energy currently accounts for 2% of total global energy production and 7-8% of total electricity production. If you take the long-term perspective, the over 90% of energy which needs to transition to renewable represents a vast opportunity for wind power over time.

Our solutions by and large no longer rely on any subsidies. Demand for our products relies on public opinion in favour of a renewable energy transition, and funding being made available for it. I have a hard time seeing any negative outlook scenario for that at present. Back in 2010-11, we needed subsidies and faced a serious problem when the global financial crisis imposed a constraint on public spending on those subsidies. That is no longer a threat. Also, today you have at least four to five oil majors, including Total, Equinor, Shell and BP, who are essentially saying that all their cash generation is now being ploughed into their own transition to renewable energy. It has become an existential issue, and these companies understandably want to have a role to play in the energy supply of the future. And this in itself is giving additional impetus to demand for our solutions.