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Offshore wind costs fall, but the industry still faces challenges

The cost of energy from offshore wind farms has dropped over the past five years, but there is still uncertainty around technology, regulations and grid connection limitations, according to a June 2 report from S&P's Ratings Services. Projects that reached "final investment decision" fell from $181/MWh in 2010-2011 to $121/MWh in 2015-2016. Technological advances have helped lower costs, in addition to lower internal rate of return requirements and financial optimization, the report found.

Global offshore wind capacity increased by 2,219 MW or 18% last year, of which about 1,600 MW was installed in Europe. The North and Baltic seas are expected to continue to be the major regions for wind development. A 2012 study from the U.S. government estimates the country has 4,200 GW of offshore potential, and the Global Wind Energy Council estimates worldwide installed capacity could grow by about 3,000 MW in 2017.

S&P expects the price of future offshore wind projects will continue to fall thanks to lower technology costs and larger project scales. However, the industry faces several challenges. Erecting offshore wind turbines requires large boats during construction, increasing the already-high barriers to entry. Other risks include lack of standardization and fluctuating steel prices.

In the U.S., where offshore energy is expensive compared to other power sources, the industry needs more favorable regulation if developers want to see growth similar to Europe. The Jones Act restricts US-built vessels carrying heavy-lift equipment required for offshore wind installation, though "the oil industry has so far been able to navigate this act," according to S&P.

The U.S. offshore wind industry will also likely rely on state-level incentives, such as renewable portfolio standards, in the next few years, especially as federal tax credits for wind farms have become more politicized.

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Despite those obstacles, the number of industry players has grown from eight in 2013 to 14 as of January 2017. Block Island Offshore Wind went online in December 2016 as the country's first commercial offshore wind farm. Its 30-MW output makes it tiny compared to European projects, which averaged 380 MW in 2016. Block Island has a 20-year power purchase agreement with National Grid Inc. that's priced at about $0.24/KWh. Critics say the price is high, but supporters argue that Block Island's output replaces diesel fuel oil generators that cost about $0.50/KWh.

"This demonstrates the value of offshore wind for remote and resource-constrained areas," according to S&P.

S&P Global Market Intelligence and Standard & Poor's Ratings Services are both divisions of S&P Global Inc.