Offshore Wind – Next Wave Supply Chain Challenges and Evolution

The second of our series on offshore wind looks at the challenges and evolution facing the supply chain as the offshore wind market continues to expand globally

19 March 2021

In the first article of this series looking at the challenges and opportunities facing the offshore wind sector over the coming years, we highlighted that supply chain issues will continue to be a major focus for both developers and contractors and as the market grows worldwide and the pressure to engage local supply chain grows there will be big challenges ahead. In particular, we see three distinct issues facing the sector (i) securing and demonstrating a localised supply chain; (ii) technological hurdles; and (iii) decarbonisation of the wider supply chain.

Other than, perhaps, decarbonisation, these issues are not new and industry participants will be well aware of the need for a project to ensure its supply chain is sufficiently protected. However, increasing global uptake and technological advances will place new pressures on the supply chain on a scale not currently experienced.

In this article, we will consider the issues and challenges facing supply chain relationships and consider ways that sector participants could address the impact that these may have on future projects.

1. Securing a localised supply chain

The UK Government has been actively encouraging a localised supply chain and the development of offshore construction expertise in the UK for years now. Scotland in particular has been keen to ensure that any new offshore project has a localised supply chain. Regulators have looked to enshrine this by ensuring that any successful subsidy price support or contract for difference awarded project is able to demonstrate local routes. It is not just offshore wind either: the same principles are being looked at for carbon capture, hydrogen and other projects. We expect a similar local supply chain focus to arise in Wales, with the focus on new developments to the west coast of the UK for floating projects. The Green Recovery policy from Westminster adds further pressure and the industry itself in offshore wind has signed up to deliver significant UK supply chain benefits as part of the Offshore Wind Sector Deal.

The upcoming Contracts for Difference auction has the potential to secure nearly £20bn of investment in new offshore wind projects, which will support jobs and local economies across the UK. As part of a package of initiatives, including the Offshore Wind Sector Deal and £160mllion in funding to upgrade ports and infrastructure, the government proposes new measures to strengthen the UK supply chain whilst investing in low carbon technologies (including offshore wind) in line with the 2050 Net Zero emissions target.

The Offshore Wind Investment Programme aims to provide grant funding for major investment projects including the manufacture of components for wind farms, such as blades, towers, export and array cables and monopile foundations. Whilst supporting the 2050 Net Zero goal, this ensures that offshore wind becomes more cost competitive in the UK and that domestic targets are met, including the delivery of 40GW of offshore wind capacity by 2030.

In support of localised supply chains, the 2021 budget also announced significant opportunities for offshore wind and renewable hydrogen technologies (both of which are key to achieving the UK's net-zero target) with funding for new port infrastructure to build offshore wind farms in Humberside and Teesside and a new UK Infrastructure bank. The Infrastructure bank has £12 billion in funds and is to be established in Leeds to promote the net-zero transition process.

The government also announced a £20million programme to support the development of floating offshore wind tech in the UK and a £68 million fund to develop a UK wide offshore wind demonstrators competition.

2. Technological hurdles

The surge in uptake of offshore wind in the UK and globally will lead to increased demand for specialised vessels and factory manufacturing slots for key components which, unless actively managed, will likely cause bottleneck delays for offshore wind installations.

Ensuring that there is early engagement with procurement is vital to avoiding delay arising from wider availability issues. It is therefore important for developers and/or contractors to book any relevant factory slots for manufacturing key components and to consider the impact that any construction delay may have on the wider package and project programme. We have identified a number of key considerations which participants may need to consider when formulating their wider procurement strategy.

A) Global expansion

Offshore wind is rapidly expanding globally, with predictions that 18 nations will have offshore turbines by 2027 in comparison to seven nations in 2007. Projects are also anticipated to continue to increase in size with South Korea announcing recently that it intends to construct a project off the coast to the south-western town of Sinan with an expected capacity of 8GW; almost seven times larger than Hornsea One.

Global wind annual installations are expected to grow 40 per cent in the next 10 years. Europe is currently leading the offshore wind market, and as noted in our previous article, there are now 38 operational windfarms off the coast of the UK alone with a further four under construction, five in development and a further six have recently been successful in the Crown Estate Round 4 lease auction, subject to the outcome of a Habitats Regulation Assessment. However, it is expected that the US, Japan and Korea are to become new leaders for offshore wind in the medium term, with up to 50 per cent of offshore wind capacity expected to be coming from Asia – Pacific countries by 2050.

This upswing in development is likely to put some pressure on the initial supply chain and developers should consider ensuring factory slots of their chosen manufacturers are available during the required build window.

Equally, contractors should consider investing into any necessary infrastructure upgrades early to ensure that they remain competitive. The new investment funds mentioned in section 1 above should assist developers with this goal, although there is much to be done.

B) Turbine development

As offshore wind expands, significant innovations in technology amid attempts to make wind farms more economically viable have seen the size of turbines rapidly increase. The average offshore turbine in 2005 had a capacity of 3MW, but projects commencing in 2022 now have an average turbine size of 6.1MW. It is envisaged by 2030 that the average turbine size will be about 15MW. For offshore wind projects, fewer, larger turbines are more cost effective and capable of projecting green energy targets. Regulatory policy pressure, such as the UK’s Net Zero target, alongside the cost efficiencies of larger turbines will continue to increase demand for larger turbines over smaller. 

Whilst this demand is being currently met, with the development of technology and turbine size exceeding the manufacturing pace of turbine vessels, an undersupply of vessels is predicted in the near future.

The UK Government is actively investing into ensuring that local infrastructure is capable of supporting the growth of offshore wind as demonstrated by a recent announcement of a £160m wind manufacturing investment support scheme to develop port infrastructure. This will need to be expanded to ensure a continued and targeted inward investment into the sector and the development of specialist capabilities in line with the government’s 'levelling up' ambitions. It is possible that, together with the creation of industrial hubs, the recent Freeport announcement in the budget could provide an avenue to ensuring a wider port infrastructure capable of handling the manufacture and shipping of blades, foundations and other plant to facilitate the size of future projects.

C) Undersupply of vessels

There are currently 32 active turbine installation vessels and 14 dedicated foundation installation vessels worldwide, with 15 turbine vendors. Only four of these vessels are capable of handling the next generation of turbines. WindEurope predicts that at least 10 new vessels will be needed to deal with the fleet of next generation turbines. Whilst vessels are not currently large enough to cope with the new turbines, there are also not enough vessels or ship yards to meet the number of turbines forecast. Without rapid development, this challenge will only increase given forecasts that installation vessel demand will increase five times between the present day and 2030.

Wind vessels will not have the capacity to cope with an influx of larger turbines and it is predicted that there will be an undersupply of vessels by the mid-2020s, expected to lead to a bottleneck in the offshore wind supply chain within the next five years. The delays caused by this bottleneck could be significant for offshore projects. With increased pressure surrounding vessel chartering, delays will impact the future availability of vessels and cause a ripple effect across offshore projects. 

The government is looking to provide some support with its port upgrade fund but we are also seeing market participants considering future supply chain bottlenecks and placing shipbuild orders to ensure there is no gap in coverage. For example, Jan De Nul announced in 2020 that it had ordered two new jack-up vessels designed to handle 'supersized turbines' with the first being contracted to install GE’s 12-MW Haliade-X turbines at Doggerbank.

Contractual Considerations

Whilst some of the challenges above are matters for government, there are some protections that developers and contractors may look to include contractually. Beyond the usual provisions for liquidated damages for delay (which will only be triggered where the contractor is causing the delay), parties may look to provide for specific provisions mandating what may happen to a key vessel should there be wider construction delay.

A provision looking a vessel risk has potential benefits for both a contractor and developer. Such provisions may entitle a contractor to redeploy a vessel to another project in its pipeline whilst there is sustained delay on the initial project and at the same time, provide comfort to a developer that key vessels are held on retainer pending resolution of the delay event.

Early stage engagement and sign up of ports and localised infrastructure is increasingly likely to be a key focus to ensure that there is a contractual framework in existence early in the procurement process. Reservation agreements may also help ensure key factory slots are ring fenced.

3. Decarbonisation

The UK’s Net Zero target has created a continual focus on the decarbonisation of the supply chain. In order for offshore wind to maintain its position as a key enabler for Net Zero, it has to set the benchmark as to how carbon is addressed in the supply chain. At this moment, whilst offshore wind is a green energy provider, the construction and operation of an offshore wind project has a substantial carbon footprint and this will only come under increasing scrutiny and pressures.

A) Challenges to decarbonisation

Alongside environmental impacts through landscape and habitat loss, wind farms emit carbon throughout their life cycle. There are carbon emissions associated with the production of materials, materials transportation, on-site construction, installation and assembly, operation and maintenance and decommissioning and dismantlement of wind farms.

Construction materials and methods (such as steel, aluminium, copper and concrete) tend to have a large carbon footprint due to intensive extraction, manufacture and transportation of materials at the outset and to the offshore site, the construction process itself, decommissioning and subsequent recycling of materials. Recent articles have highlighted wind turbine blades are difficult to recycle (due to the composite materials used to manufacture them), with many blades from developments that are reaching the end of their lifetime being sent to landfill. Attempts to crush or cut blades in order to more efficiently dispose of them has only proven to produce further emissions. Investment in new composite materials that are easier to manufacture, are lighter and more energy efficient could provide a solution to this problem.

B) Possible solutions

It is possible that the vehicles used to feed the supply chain could become decarbonised themselves as the relevant technology improves. Indeed, the world’s first carbon neutral liner vessel set to be launched in 2023. Due to costumer demand for decarbonised supply chains, AP Moller Maersk plans to launch a methanol-fuelled vessel 7 years ahead of the initial 2030 target. The company has also posed alcohol-lignin blends and ammonia as potential alternative fuel sources.

Whilst localised manufacturing hubs will assist with capacity issues noted above, they will also help to cut the carbon footprint associated with the transportation of offshore components to the quayside. A future innovation may sit with hydrogen integration. The government has outlined potential investment of £20 million for exploring hydrogen and other zero emission lorries, this could help minimise costs of transporting materials to the quay side. Trials are also underway for hydrogen powered vessels which could eventually see vessels used in constructing and maintaining offshore projects powered by green hydrogen. In the future, it could be possible that an array could generate hydrogen which can subsequently be used to fuel the vessels used to service it.

Contractual Considerations

Whilst there is an element of remoteness to ensuring the wider supply chain is meeting Net Zero targets mandated by a developer, it is worth exploring how contracts will need to evolve to include appropriate obligations and incentives included in contractor contracts to ensure that the supply chain is considering and meeting the challenges that the sector faces.

For example, contracting parties may look to include clauses to ensure contractors are incentivised to decarbonise their supply chain and provide a required level of oversight. These could include:

  • provisions which require a contractor to align its Net Zero targets with that of the developers, with relief available for the developer if such obligations are not achieved and that look to enable the developer to indirectly meet any Net Zero targets it has published (for example by allowing a developer to offset the supply chain’s carbon impact at the contractor’s cost)
  • warranties from the contractor that specifically look to environmental performance on a repeating basis; looking, for example, at the carbon footprint of the relevant contractor’s supply chain
  • auditing rights over the contractor’s wider supply chain and its carbon impact which incentivises the contractor to meet specified targets and provides remedies for a breach
  • bonus pools which, if a project as a whole meets certain carbon requirements, entitle all participants in the project to benefit from a bonus payment with a view to facilitating and encouraging cooperation and collaboration across the project.

Planning for significant expansion in supply chain demand over the coming years and a decarbonised future will require investment from all stakeholders within the industry. Everyone will have a role to play with active engagement required from governments, contractors and developers by:

  • future proofing the supply chain and ensuring that local economies have the relevant expertise to deliver newer technologies
  • ensuring that the necessary infrastructure is in place to see these projects delivered
  • driving decarbonisation of the wider supply chain from the top down.

We would be happy to discuss any queries or thoughts you may have on any points raised above. Our construction team and wider offshore wind team is well placed to advise on all aspects of a procurement issues. Please get in touch with Lloyd JamesCraig Bruce, Campbell Hutcheon or your usual Burges Salmon contact.

This article was written by Lloyd James, Craig Bruce and Campbell Hutcheon.

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Lloyd James

Lloyd James Partner

  • Construction and Engineering
  • Energy and Utilities 
  • Infrastructure

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