Australia will not establish a viable offshore wind industry until key supply chain constraints are addressed. Presently, macroeconomic forces on supply chains are compromising the industry’s growth and profitability.1 In this article, the first in a two-part series, we address five key constraints on offshore wind industry supply chains in Australia. From Euro- and China-centric supply chains through to inflated project costs, we analyse how each constraint undermines Australia’s offshore wind industry.
Constraint One: Euro- and China-Centric Supply Chains
The offshore wind industry is burgeoning in Australia, but is in its fourth decade in Europe.2 Similarly to Europe, China’s offshore wind industry is well established. In fact, China contributed to half of the global wind power capacity additions in 2022 (30GW onshore and 7GW offshore).3 The major global suppliers of wind turbines and technologies, including Vestas, Siemens, Nordex, Goldwind, Envision and Suzlon, are also typically based in Europe or China.4
Because the Australian offshore wind industry is comparatively younger, we do not have the established infrastructure, manufacturing capability, technical knowledge or legislative and fiscal support which is available to international offshore wind industries.5 To develop local knowledge and technical skills, Australian governments and developers must collaborate with European and Chinese counterparts.6 For example, Iberdrola and Ørsted (two European international developers) were recently awarded feasibility licences for the Gippsland offshore wind zone.7
Given the reliance on international parties, the Australian offshore wind industry is susceptible to changes in foreign policy and diplomacy. Further, the Euro- and China-centric nature of offshore wind industry supply chains is problematic for Australia’s national and state economies and job opportunities. Skilled labour is likely to flow overseas to higher paying jobs without sufficient domestic policy measures to prevent this.
Constraint Two: Equipment Suppliers
Equipment suppliers in the offshore wind industry face several challenges which constrain supply chains in Australia. Low profit margins, significant supply chain capital expenditure (CAPEX) requirements and difficulties in forecasting demand have meant that international equipment suppliers are dissuaded from operating in Australia.8 Similarly, Australian investors and developers may not have the economic impetus to initiate offshore wind industry projects.
Equipment suppliers require volume certainty (a secure pipeline of orders) before they invest in establishing supply chains.9 A Beyond Zero Emissions (BZE) study into Australian wind industry supply chains suggested that if there was, for example, a 2GW pipeline of confirmed activity then multiple equipment suppliers could be persuaded to operate in Australia.10
The BZE study emphasises that opportunities exist for the Australian offshore wind industry if a certain level of market demand can be generated. Examples of such opportunities include the attendant knowledge, skills transfer and job prospects that could come from an influx of international suppliers domiciling their operations in Australia. However, without demand certainty, a deficit of Australian equipment suppliers is likely to hinder efforts to establish the Australian offshore wind industry as domestic developers do not currently possess the requisite manufacturing capability or skill.
Constraint Three: Long Lead Times
Offshore wind industry projects require in-depth environment and planning studies, regulatory approvals, complicated financing arrangements and the coordination of various stakeholders. These factors mean projects can take up to 10 years from concept initiation to electricity generation.11 Regulatory hurdles may also impede projects.12
The significant time between project initiation to commercial operation means relationships between developers and suppliers are subject to substantial change.13 Additionally, supply of offshore wind project infrastructure is usually secured toward the end of the approval process.14 These long lead times mean that developers and other supply chain stakeholders are susceptible to market forces such as inflation and major global disruptive events for extended periods.
Long lead times have important implications for the viability and profitability of projects. They can, for example, lead to increased costs due to storage and transportation requirements, financing terms and inflation pressures. Further, where a supply chain bottleneck arises, consequences of delays are likely to be amplified because of the impacts on project schedules, interdependent resources and the contractual consequences of delay.
Constraint Four: Local Content
Local content rules are rules which require “minimum levels of locally sourced services, manufacturing, or workforce and can be punitive or rewarding”.15 In Victoria, for example, developers must indicate how they will maximise local content in the construction and CAPEX stages of offshore wind industry projects in proposed competitive auctions.16
Industry participants have, however, lamented local content rules for distorting markets by pushing work to high-priced and less competitive providers.17 Further, without appropriate policy and fiscal guardrails to support competition, international participants may consider the Australian market unworkable, particularly where participants could earn more attractive profit margins in markets without local content requirements.
Constraint Five: Inflated Costs
Global inflation has pushed the cost of wind turbines up by 38 per cent since 2021.18 Additionally, commodity prices and interest rates have both risen.19 This has put pressure on offshore wind industry developers’ profitability20 and on supply chains, by causing higher production, transportation and raw material costs.21
Material differences in profitability may result in less attractive markets being deprioritised by international developers seeking better investment opportunities.22 Without sufficient fiscal measures and monetary policy interventions by the Australian government, developers will continue to focus on European and Chinese capacity additions.23
The Path Forward
The constraints on Australian offshore wind industry supply chains are complex and will be difficult to address. However, Australia has a diverse talent pool to draw on, and recent policy and legislative measures suggest a strong political appetite to establish the industry. Australia would benefit from a coordinated approach to policy and regulatory measures between federal and state authorities to overcome supply chain constraints.
Stay tuned for part two of this series, in which we explore how the constraints identified may be addressed to bolster the Australian offshore wind industry.
For more information, please contact Matt Baumgurtel and William Ryan.
1Alexander Weiss et al, ‘Offshore wind: Strategies for uncertain times’, McKinsey & Company (Article, 12 July 2024) <https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/offshore-wind-strategies-for-uncertain-times>.
2Natasha Larkin, Chantel Carr and Natascha Klocker, ‘Building an offshore wind sector in Australia: economic opportunities and constraints at the regional scale’ (2023) 55(1) Australian Geographer 45, 45.
3Rowan Moorey, Tejesh Kashyap and Sam Mella, Wind Supply Chains (Briefing Paper, April 2024) 7.
4Ibid 8.
5Ibid 1.
6Natasha Larkin (n 2) 55.
7Department of Climate Change, Energy, the Environment and Water, Gippsland, Victoria declared offshore wind area (Web Page, 18 July 2024) <https://www.dcceew.gov.au/energy/renewable/offshore-wind/areas/gippsland>.
8Alexander Weiss et al (n 1).
9Rowan Moorey (n 3) 1.
10Ibid.
11Giles Parkinson, ‘It’s not going to be cheap:” Australia warned on first offshore wind costs and supply chains’, Renew Economy (Online, 30 August 2023) <https://reneweconomy.com.au/its-not-going-to-be-cheap-australia-warned-on-first-offshore-wind-costs-and-supply-chains/>.
12Ibid.
13Rowan Moorey (n 3) 4, 5.
14Ibid.
15Rachel Williamson, ‘Offshore wind industry warns against strict local content quotas’, Renew Economy (Online, 1 August 2023) <https://reneweconomy.com.au/offshore-wind-industry-warns-against-local-content-quotas/>.
16The State of Victoria Department of Energy, Environment and Climate Change, Offshore Wind Energy Implementation Statement 3 (Implementation Statement, December 2023) 23.
17Rachel Williamson (n 15).
18Emma Woollacott, ‘The ripple effect of rising wind costs’, Latitude Media (Online, 25 October 2023) <https://www.latitudemedia.com/news/prices-wind-emerging-market>.
19Alexander Weiss et al (n 1).
20Ibid.
21Aaron Ricadela, Supply Chain and Inflation: Issues and Impacts (Web Page, 8 December 2023) <https://www.oracle.com/scm/supply-chain-inflation/>.
22Alexander Weiss et al (n 1).
