Offshore Wind Energy Strategic Initiatives
Reduce the cost of fixed-bottom offshore wind to $51/megawatt-hour (MWh) by
The offshore wind industry is at an inflection point. Having proved to be an increasingly scalable source of renewable energy, the industry has enjoyed a decade of growth and value creation.
This article is a collaborative effort by Alexander Weiss, Andreas Schlosser, Florian Kühn, and Jakub Zivansky, with Knut M. Aanstad and Sverre Akersveen, representing views from McKinsey''s Electric Power & Natural Gas Practice.
However, the current macroeconomic environment is impacting the offshore wind industry, putting pressure on its growth and profitability.
In this article, we discuss why the industry has been so hard hit and when it could reemerge into structural profitability. We delve into potential scenarios—based on in-depth discussions with industry executives and leaders—that could affect the outlook of the industry. We conclude with key steps that developers can take to ensure ongoing growth.
In the 2010s, the offshore wind industry experienced significant growth, making this technology increasingly affordable. The industry has understandably held an optimistic view of the future. Developers have remained profitable and seen volume growth year after year. Governments have viewed offshore wind as a complementary and clean source of energy, with potential to play a major role in the energy transition. Last year, global government targets for total installed capacity by 2030 exceeded 400 gigawatts [GW] (Exhibit 1).
The global commissioned capacity of offshore wind increased from 3 GW in 2010 to approximately 66 GW in 2023—roughly enough capacity to meet Spain''s electricity demand, assuming a capacity factor of 45 percent.
Recent macroeconomic trends—rising raw commodity prices, interest rate hikes, and supply chain bottlenecks—have put pressure on offshore wind developers'' profitability. This vulnerability is largely due to the industry''s exposure to material costs, which has impacted financing costs and slowed down growth, especially in Europe and the United States.
As a result, our analysis shows that since the beginning of the decade many developers have experienced inflated project costs, with communicated levelized cost of electricity (LCOE) increases of around 40 to 60 percent compared to 2020. Further, many projects have contracts for difference (CfD) that are not inflation adjusted, rendering these projects unprofitable.
The industry is experiencing severe consequences—for example, only about 40 percent of capacity that was expected to reach a final investment decision (FID) in February 2022 had taken FID by the end of 2023.
Following the macroeconomic shocks, it is uncertain when the industry will achieve structural profitability again. We see five drivers impacting the future of the industry: the position on the cost curve, the regulatory landscape, market pull, supply chain capacity, and developer behavior. These drivers can help us understand recent and future developments in the offshore wind industry and what circumstances may affect profitability (Exhibit 2).
The market pull for green energy is expected to be an important factor in offshore wind growth and its build-out as a scalable technology. The adoption of regulatory frameworks—such as the Renewable Energy Directive III (RED III), the Net-Zero Industry Act (NZIA) in the European Union, and the Inflation Reduction Act (IRA) in the United States—and other country commitments, will play a central role in the demand for green energy from offshore wind.
With the current levels of uncertainty, three conceivable scenarios for the next decade of the industry emerge. These have been developed through numerous discussions with offshore wind clients globally in the past 12 months.
The ''structurally challenged'' scenario anticipates that developers and regulators cannot solve the current challenges and may gradually prioritize alternative sources of renewable energy that are becoming increasingly cost competitive. In this scenario, there will most likely be a continuation of the pattern of canceled or delayed projects, and frequent market or industry exits.
The ''just for the heroes'' scenario expects that the industry will continue to grow despite its challenging cost position. Profitability will be structurally reset as the offshore wind margin premium evaporates compared to onshore renewables. In this scenario, industry leaders who are present in the "right" markets will be able to realize value-accretive projects.
The ''profitability restoration'' scenario is one in which market forces help restore industry predictability and profitability, allowing for healthier developer margins in line with announced profitability targets or beyond.
The belief in the plausibility of this scenario is based on expected developments in the macroeconomic environment, regulatory landscape, and market pull.
First, the macroeconomic environment is expected to experience prolonged difficulties, with commodity prices and interest rates above 2022 levels. Second, the regulatory landscape might gradually attract more capital, however, the speed of regulatory change will likely be influenced by expected budget constraints. Third, there is a trend toward increasing market pull for green power among transition leaders in select geographies, but cost is expected to remain an important factor.
Other factors, such as the position on the cost curve and supply chain issues, could point toward an even less optimistic scenario for offshore wind. We have also seen limited developer consolidation to date—however, current project cancellations, delays, and market exits might be the first signs of future consolidation.
There are various key trigger events worth monitoring that might have a significant impact on the industry''s future—including the outcome of upcoming seabed and CfD auctions, and commitment in the European Union and the United States to achieving net zero by 2050.
Previous McKinsey research points to two types of business leaders that emerge during challenging times.
The second type of leader takes similar defensive actions, while also leaning into the volatility, using it as a catalyst to grab new opportunities. They think about the next decade, not just the next month, and rethink opportunities and strategy in light of current conditions. Stakeholders in the offshore wind industry could take inspiration from this approach. Of course, there is no silver bullet solution to position for continued value creation, however, there are four value-accretive mindsets that developers and energy companies could explore:
The offshore wind industry is facing significant challenges in the current macroeconomic environment. However, developers can take steps to navigate this changing landscape to ensure continued growth. By taking smart market bets, actively considering consolidation, maximizing efficiency, and collaborating strategically with suppliers, developers can position themselves to thrive in volatile times. While the industry''s future profitability is uncertain, there are early signs of improvement, and we remain optimistic about the potential of offshore wind as a clean and renewable energy source.
Alexander Weiss is a senior partner in McKinsey’s Berlin office; Andreas Schlosser is a partner in the Munich office; Florian Kühn is a partner in the Oslo office; Jakub Zivansky is a partner in the Prague office; and Knut Aanstad is a senior advisor based in the Oslo office, where Sverre Akersveen is a consultant.
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