3 wind turbines against a light blue sky.

Wind can do amazing things: carve canyons, move boats across oceans, power machines that grind grain, and—when channeled correctly—create electricity to run our appliances and gadgets. People have been harnessing the power of the wind since the windmill was invented in eighth-century Persia. The vertical windmill exploded in popularity in medieval Europe and is the forebearer of the massive white wind turbines increasingly common on land and sea. Today, as climate change compels us to pursue a net-zero emissions pathway, wind energy and other renewable forms of power, such as solar, geothermal, hydro, and biomass, could play a key part in the broader energy transition. In this article, we take a deep dive into these winds of change and what makes those huge turbines turn.

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How is wind harvested?

Wind is harvested when it turns the blades of a wind turbine. When the turbine’s propeller-like blades turn, they spin a generator that creates electricity. A medium-voltage power collection system transfers that electricity via a current to a substation, where a transformer increases the current’s voltage and connects it to a high-voltage electric-power-transmission system.

A wind farm is a collection of many wind turbines. An offshore wind farm is a collection of turbines at sea; an onshore wind farm is a set of wind turbines on land. The largest wind farm in the world is the Gansu Wind Farm in northwest China, which has around 7,000 turbines. Generally speaking, offshore wind turbines produce more megawatts than onshore ones because winds are usually more powerful at sea. But with onshore wind farms, the land between the turbines can be used for agricultural or other purposes.

What’s the role of wind energy in the shifting global energy market?

Global energy demand has been soaring for decades. Between 1950 and 2000, global energy demand grew by 3 percent annually. This growth has slowed and will continue to do so, though demand for electricity is still predicted to grow at seven times the rate of that for other energy sources. And meeting energy demand is becoming more complicated, as environmental concerns lead to calls for new non-carbon-emitting energy technologies.

As the world shifts to meet the demands of a warming climate, wind energy has the potential to provide a substantial proportion of the clean energy our industries, societies, and economies will need. In the 2010s, the offshore-wind industry experienced significant growth. The global commissioned capacity of offshore wind increased from three gigawatts in 2010 to approximately 66 gigawatts in 2023. That’s roughly enough to meet the entire electricity demand of Spain for a whole year. During this period, the cost of offshore-wind generation decreased by about 60 percent, as a result of increased competition, low interest rates, and technological advancements.

Renewable-energy generation is growing worldwide. Globally, between 2010 and 2023, the installation capacity of renewable energy grew about 20 percent per year. As of September 2024, wind power deployments (onshore and offshore) are expected to grow by more than 20 percent per year until 2050. Yet despite this expectation, wind generation pipelines are generally delivering below what’s needed to achieve the 2015 Paris Agreement’s decarbonization targets for 2030.

The European Union and the United States are shifting to make renewables part of their strategies to address the energy crisis. In Europe, the European Green Deal aims to make the European Union climate-neutral by 2050, with an intermediate goal of reducing greenhouse gas emissions by at least 55 percent by 2030, compared with 1990 levels. In the United States, President Biden issued an executive order in 2021 calling for 30 gigawatts of offshore-wind capacity to be installed by 2030. The 2022 Inflation Reduction Act could also stimulate additional wind capacity via financial incentives for renewable-energy development. Many other countries are pursuing offshore-wind power, including Azerbaijan, Brazil, Canada, Colombia, India, Oman, the Philippines, Sri Lanka, and Trinidad and Tobago.

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How is technological progress boosting the outlook for offshore-wind energy?

Until recently, offshore wind turbines were installed onto bottom-fixed foundations grounded on the seafloor in waters up to 50 meters deep. These depth requirements limit the areas of the ocean where turbines can be installed.

New turbines with floating foundations are expanding the possibilities. These can be installed regardless of the terrain that lies below, potentially in waters as deep as 1,000 meters or more. This advancement increases the viable sea area for offshore wind by a factor of five. France and Italy are already exploring floating-foundation offshore wind farms.

The power rating of wind turbines is also growing quickly. By the end of 2024, 13- to 15-megawatt models are likely to hit the market—a significant improvement from the three- to four-megawatt models that used to be the standard. Turbines with capacities of more than 15 megawatts are expected to be available within a few years.

What is a wind energy auction?

When a local or national government decides it wants to install wind energy–based electricity, it issues a call for tenders—essentially auctioning off the rights to the project. Project developers then submit bids for a price at which they can complete the project. Bids will usually represent a price per unit at which the project will sell electricity, but sometimes a bid can be for a seabed leasing price. The government then assesses the bids based on price and other criteria and enters into a contract with the winning developer.

Renewable-energy auctions are becoming increasingly popular. They have also accelerated the transition toward renewable-energy sources by driving down margins in the value chain. In 2009, nine countries held renewable-energy auctions; by 2013, this number had risen to at least 44, of which 30 were developing countries. This increase in auction schemes is a result of the decreasing costs of renewable-energy technologies and may ultimately lead to the accelerated penetration of renewable-energy sources. This could also increase the pressure on fossil fuel industry players.

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How much does wind energy cost to produce?

In the past, one of the biggest drawbacks for using renewables has been production costs. Wind and solar energy couldn’t be generated at an industrial scale without government subsidies. In markets such as the European Union and the United Kingdom, the cost of wind energy (and solar, for that matter) are now lower than the cost of traditional fuel, and they are likely to fall further in the next decade.

Costs have dropped for a few reasons, including factors outside the industry’s control such as low interest rates and low steel prices. But in some markets, costs remain high. And when governments can’t or don’t prioritize renewable-energy subsidies, financial institutions can step in.

What are the limitations of wind energy?

One major hindrance to the development of wind energy is the unreliability of natural forces. Put simply, wind farm managers can’t make the wind blow. To tackle this challenge, companies working in the wind energy sector can either work on supply-and-demand management or embark on radically improved storage systems. (One way to do this is by repurposing used electric-vehicle batteries as storage devices.)

Another challenge is the cost. While prices for wind energy (and all renewables) will continue to drop, offshore wind still comes at a premium. Building at sea requires more materials, and rough weather makes installation and maintenance expensive. Offshore wind farms also require expensive connectors to the inland transmission network.

For developing countries, as in the case of Vietnam, pursuing wind power is seen as a more challenging investment than solar for several reasons. For one, wind projects are more technically complex than solar and, as such, take longer to finish. Typically, wind projects take two years to construct, as opposed to six months for solar projects. The requirements for implementing wind projects are also much more variable than those for solar projects. What’s more, wind projects have higher financial barriers to entry, with an average total installed cost for offshore wind turbines of about $3,200 per kilowatt, compared with a cost of roughly $900 for solar plants. (Onshore wind, however, is a lot less expensive than offshore, at about $1,400 per kilowatt.)

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What challenges do companies pursuing offshore-wind projects face?

Competition in the offshore-wind market is heating up. This is due to two main factors: the industry’s promising growth prospects, in both the short and the long term, and the increasing efforts to achieve net-zero emissions. Along with companies already working in the offshore-wind space, utility companies, major oil conglomerates, and other large capital project developers are eyeing and entering the market.

In addition to increased competition, governments are moving toward tougher requirements for organizations bidding for offshore-wind projects. In several recent European tenders, governments have awarded the contract to bids that included no government subsidies—a financial cornerstone on which the industry has traditionally relied.

If a company does win the contract, more risk awaits during the implementation phase. Offshore- wind projects normally take a few years to complete, but total costs are based on calculations made well in advance of the auction. In the meantime, the price of raw materials and rare earth metals such as steel can fluctuate. McKinsey estimates that the metals neodymium and praseodymium, which are needed for the high-power magnets in wind turbine generators, will face a shortage of up to 60 percent in 2030. And some of the construction equipment that’s required for the project, such as wind turbine installation vessels (WTIVs), is extremely scarce. For example, globally, there are only about ten WTIVs that can accommodate ten-megawatt turbines.

Macroeconomic pressures also threaten growth and profitability. Rising raw-commodity prices, interest rate hikes, and supply chain bottlenecks have limited offshore-wind developers’ profitability. At the end of 2023, only about 40 percent of the capacity that was expected to reach a final investment decision in February 2022 had been closed.

But these challenges are not insurmountable. Here’s how players in the offshore-wind business can move through uncertainty:

• Develop a clear strategy about which technologies to include in a portfolio. As with most portfolios, a diversified one carries a lower risk than one that’s devoted solely to offshore wind. Companies should also consider which geographic markets to target and maintain a clear understanding of their own capabilities and limitations in this space.
• Execute the engineering, procurement, construction, and installation (EPCI) phases. The key elements of each phase should be designed with the company’s capabilities and the specific opportunity in mind. Successful EPCI execution requires a thorough understanding of the offshore-wind value chain, good availability of supply and installation resources, and deep in-house capabilities for project execution.
• Adhere to operations and maintenance (O&M) best practices. This can be achieved by employing third-party O&M service providers or performing O&M in-house.
• Manage market prices (also known as merchant risk) by understanding the company’s exposure and how much revenue should be guaranteed as part of any new project or deal. Until now, the industry has been relatively protected from market volatility due to government pricing mechanisms and long-term offtake agreements. But moving forward, the industry’s exposure to market risks will increase significantly.

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Articles referenced:

• “Global Energy Perspective 2024,” September 17, 2024
• “The energy transition: Where are we, really?,” August 27, 2024, Diego Hernandez Diaz, Humayun Tai, and Thomas Hundertmark, with Michiel Nivard and Nicola Zanardi
• “Offshore wind: Strategies for uncertain times,” July 12, 2024, Alexander Weiss, Andreas Schlosser, Florian Kühn, and Jakub Zivansky
• “Renewable-energy development in a net-zero world: Disrupted supply chains,” February 17, 2023, Alberto Bettoli, Florian Heineke, Nadine Janecke, Thomas Nyheim, Andreas Schlosser, Sophia Spitzer, Christian Staudt, Raffael Winter, and Jakub Zivansky
• “Infrastructure leaders need new capabilities to move toward net-zero emissions,” June 9, 2022, David Cowan, Greg Stanmore, and Hugh Thorneycroft
• “How to succeed in the expanding global offshore wind market,” April 20, 2022, Florian Kühn, Friederike Liebach, Tim Matthey, Andreas Schlosser, and Jakub Zivansky
• “Global Energy Perspective 2022,” April 26, 2022
• “The raw-materials challenge: How the metals and mining sector will be at the core of enabling the energy transition,” January 10, 2022, Marcelo Azevedo, Magdalena Baczynska, Patricia Bingoto, Greg Callaway, Ken Hoffman, and Oliver Ramsbottom
• “Capturing the wind: Renewable-energy opportunities in Vietnam,” November 1, 2021, Marco Breu, Antonio Castellano, Jonathan Deffarges, and An Nguyen

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