Paris, France (May 28, 2008) – Supply chain bottlenecks and the resulting increases in capital costs for offshore wind power could create new challenges for Europe’s target of generating 20 percent of its energy from renewable resources by 2020, according to a new report by Cambridge Energy Research Associates, an IHS Inc. company. The report, Offshore Wind: It’s Not a Breeze outlines the major factors affecting offshore wind investment in the next decade.

“Big things are expected of offshore wind but this fledgling sector could be at risk given ongoing increases in capital costs, especially if government subsidies do not keep pace,� said Matt Brown, CERA senior director and head of the European power service . “Further increases of 20 percent in offshore wind capital costs over the next few years should be expected. That means capital costs will increase from €2300 per kilowatt to €2800 per kilowatt.�

Europe will need to rely heavily on offshore wind to meet its 20 percent target by 2020. Within the next two years the offshore wind industry could be installing two gigawatts of offshore turbines per year around the continent, although the amount of electricity produced will be dependent on the success of wind technology in coping with the harsher offshore environment.

The rapid push to increase capacity will put the industry’s nascent supply chain under pressure and lead to higher capital costs. Offshore wind capital costs will increase not only due to increases in raw materials and engineering costs, as for other energy industries, but also due to specific additional pinch points in the supply chain. One of the major factors in the rise of costs is the lack of a sufficient number of purpose-built installation vessels to install the turbines, resulting in less efficient and more costly options being used.

“With this pinch point companies should consider investment in installation vessels, as this part of the supply chain is where the higher value will be found,� Brown said.

Currently only one of the existing purpose-built vessels, a few barges with the necessary modifications and large barges used in the oil and gas industry can install a five megawatt wind turbine. Conversion of existing vessels requires up to twelve months, which could further prolong governments’ energy targets and increase the costs of installation.

Offshore wind developers need to adjust their investment strategy in this sector as a result of the cost increases. "For companies investing in the sector, assuming that subsidies adjust, the markers of success will be securing the most efficient vessels through chartering, obtaining preferential agreements with wind turbine manufacturers based on long term contracts to manage turbine cost increases and ultimately switching to the new five megawatt-class turbines to benefit from economies of scale,� Giacomo Boati, CERA associate, European power added. “This means they need to be committed to the sector long-term and may have to pace their investment to manage cycles in the sector and pinch-points in the supply chain.�