Horns Rev 2 – mounting the platform (Photo: Danish Wind Energy Industry Association)
Analysing public data on offshore wind in Denmark, energy consultant Mike Parr concludes that existing offshore wind is already cheaper than gas-fired power plants. Future offshore wind farms will be cheaper still – and up to 60% less expensive than the proposed nuclear power plant at Hinkley Point C in the UK. This means, writes Parr, that government support for offshore wind can be quickly and substantially reduced.
Offshore wind is routinely criticized for being too expensive. It is true that some offshore wind farms are getting large subsidies. But that does not mean they are expensive. It rather means that their operators are making a lot of money. In fact subsidies can go down considerably and probably will, as I will show in this article.
In a previous article for Energy Post, I profiled developments in the Danish sectors of the North Sea and the Kattegat. In these two locations there are two modern wind farms: Dong Energy’s Horns Rev 2 (2011) in the North Sea and Anholt (2013), another Dong project, in the Kattegat. I showed that the Kattegat in particular represents a great opportunity for offshore wind, with very high capacity factors.
Just after finishing this article, the Danish Energy Agency announced that Dong’s Swedish rival Vattenfall had won the competition to build Horns Rev 3 (400MW) in the North Sea with a bid price of €103/MWh for 10 years. This is the amount that Vattenfall will get from the Danish government for that period. Furthermore there are plans for more farms both in the Kattegat (Saeby – 200MW) and the Baltic proper (Kriegers Flak – 600MW). The Danish offshore wind target is 1350MW by 2020.
Denmark publishes data on the monthly output of every single wind turbine onshore and offshore in the country. It also provides hourly data on the aggregate output of the offshore farms. This data facilitates a financial analysis of existing and future wind farms for Denmark and by extension for developments in the German sector of the North Sea. Note that the UK, which has the largest fleet of offshore wind turbines, does not provide any data on the production of individual wind farms, despite the extensive public support they receive.
Financial (R)Evolutions?
When we analyse the available data, we can draw some interesting conclusions about the evolution of costs in offshore wind. Offshore wind turbines already appear to be cheaper than combined-cycle gas turbines (CCGT’s), although this is not yet reflected in the subsidies that the operators get.
Horns Rev 2 the platform (photo: Danish Wind Energy Industry Assocation)
The table below shows the main results of my analysis. Note that Anholt has been built, Horns Rev 2 is in planning and Saeby will soon be out for tender. The estimate for the capacity factor (CF) for Anholt in a normal year is around 77%, as I have explained in my previous article, but to be conservative I have assumed a CF of 65%. Horns Rev 3 will be built near Horns Rev 2 which has a known CF of 50%. Saeby will “enjoy” a CF similar to Anholt because of its location in the Kattegat.
Note that the bid price is what the operators get from the government for 10 years. These are guaranteed payments. After that, they can sell the electricity on the wholesale market. I have assumed a wholesale price of €25/MWh for a period of 15 years after the 10-year period is over. This is obviously an estimate, since nobody knows what the market price will be 10 years from now.
I have also assumed a discount rate of 5% (cost of capital/debt) for all projects. This is based on the cost for Dong to raise bonds. Investment costs of the projects are based on statements from the companies. I have made some other assumptions with respect to operation and maintenance costs. The net present value (NPV) represents the total revenues over the 25-year period minus the costs, with a discount factor of 5%. In other words, this is the profit the project makes recalculated as net present value.
Anholt
As the table shows, Dong invested €1.355 billion in Anholt. With a capacity factor of 65%, a bid price of €140.00/MWh for 10 years, a wholesale price of €25/MWh, net present value comes out at between €763 and €1180 million. This represents an internal rate of return (IRR) of 21-25%. By year 6 the project will go (cumulative discounted) cash positive. By year ten when the €140/MWh finishes it will be €1bn cash positive.
Given these numbers it is not surprising that some Danish pension funds (PKA A/S and PensionDanmark )were keen to take part in the project! This is not to say that the subsidies were unjustified. They were probably necessary to get the offshore wind ball rolling. But the government’s support can be (and is being) reduced substantially for future projects.
Horns Rev 3 (HR3)
HR3 will enjoy wind speeds of 10m/sec typical of the west coast of Jutland (source: Dansk Energie). Vattenfall bid €103/MWh for 10 years. The average capital cost of a MW at the Anholt farm was €3.355m. However, the permit granted to Vattenfall is for WTs in the range 6MW to 10MW. These can be expected to reduce project costs and increase CFs due to the need for fewer turbines. Thus one of the financial assumptions for HR3 is that there will be a 15% reduction in costs (to €2.9m) per MW installed. Based on this, in year 9 the project goes cash positive and by year 10 is cumulative cash positive at €125m. The change in capacity factor (50% vs 65%) and the drop from €140 to €100/MWh has made a difference to the IRR and NPV.
Saeby
Denmark aims to install a further 1GW of offshore wind by 2020. It will soon be tendering for a 200MW offshore wind farm in the Kattegat near Saeby, just north of Anholt. Project costs should be around €580m based on HR3 assumptions. The project should go cash positive by year 7 and have cumulative discounted cash of €238m by year 10.
Cheaper than gas-fired power and nuclear
What is interesting to note, in addition to the high profitability of Anholt in particular, is that the Danish auctioning process seems to be successful at driving prices down (26% reduction over 5 years Anholt vs Horns Rev 3).
Even more importantly perhaps are the actual costs of offshore wind, which are lower than the bid prices. In the column “lifetime costs per MWh” I have calculated the costs for each of the three projects. This is based on the energy produced in the first 10 years of operation multiplied by the bid e.g. €103/MWh for Horns Rev3 plus the energy produced over 15 years at an estimated wholesale price of €25/MWh. This sum is then divided by the total energy produced by a given project over 25 years. Whilst this is crude, it provides some indication of a “lifetime” cost per kWh for the consumer. In the case of Saeby a simple sensitivity analysis was undertaken with the aim of matching Saeby’s internal rate of return to that of Horns Rev3. A bid price of around €90/MWh would lead to a “lifetime” cost of €51/MWh.
Horns Rev 1 (photo Danish Wind Energy Industry Association)
Recent reports such as this one by Ernst & Young on wind in Europe, while positive about offshore wind, still imply that offshore wind is expensive. According to this report, offshore wind power has a price similar to that of CCGTs. Based on the Prognos report for the Bavarian government (published in November 2014) this is around €90/MWh (levellised cost of electricity or LCOE). Anholt turns out to be 14% cheaper and Horns Rev3 around 37% cheaper than CCGT power. If the EU ETS was functioning then the differential would be even greater.
Note that the energy-only component in a Danish electricity bill for 2013 is around €48/MWh. This is close to the €51/MWh from Saeby over 25 years. Furthermore, as more projects are built costs are likely to come down further.
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If we compare the offshore wind farms to the cost of the nuclear power project proposed at Hinkley Point, which will get £92.50 (about €125) per MWh for 35 years, Anholt delivers electricity that is 40% cheaper, Horns Rev3 will deliver electricity that is 58% cheaper and Saeby 60% cheaper. Of course the authorities should ensure that they will get competitive bids.
The only uncertainty in this is how wholesale prices in Denmark will evolve in the next 25 – 30 years. What is certain is that once 10 years have elapsed, the owners of Danish wind farms will be at the mercy of the markets and the wind. By contrast, owners of UK nuclear plants seem to have been granted certainty on both price and market access. Whilst the UK talks about energy markets, the socialist Danes seem to have implemented them. Funny that.
Editor’s Note
Mike Parr is Director of energy consultancy PWR. He previously worked for one of the UK’s distribution network operators as a systems engineer running their network Merseyside. He then moved into industrial engineering running the services (and energy saving activities) at Sony’s Bridgend TV plant. In the late 1990s he founded PWR Consultants which undertakes research in the area of climate change and renewables for clients which include a G7 country and global corporations.
To be conservative you’ve used 65%? You must realize this doesn’t sound conservative – it sounds unprecedented. Also… I don’t see where you’ve added in transmission costs? These can be very high for off-shore projects.
Joe, the 65% capacity factor is explained in Mike’s previous article on the subject: https://energypost.eu/offshore-wind-kattegat-unique-opportunity-europe/
It is based on publicly available data.
As to transmission costs, I don’t think they are included here, so they should be added. But if you regard these as “external costs”, then note that other ways of producing energy, e.g. nuclear or gas-fired, also have their external costs.
Offshore wind uses dedicated submarine transmission lines. This is very expensive compared to land based power where you aren’t necessarily building a dedicated line and if you are the length and cost per mile is less. Smart development of resources like wind or solar can be done in a way that avoids new transmission and/or relieves flow on existing lines. For example in Germany over 90% of solar is hooked up to low/medium voltage and gets consumed locally – that’s over 35 GW or so. Several studies have shown that it is frequently more efficient to site wind in suboptimal areas local to demand vs. optimal areas remote from demand… This tells you transmission costs and reliability constraints are of critical importance.
As to capacity factors, we shouldn’t be extrapolating from one year of data. If it comes to be that these extremely high capacity factors are achieved year after year well then that’s fantastic and then some… As things stand it just a data point and not a trend.
My apologies for questioning the quoted capacity factors. I spoke with a wind expert and he confirmed that these high capacity factors are indeed achievable if the rotor is oversized relative to the generator. He went on to explain that capacity factor is a poor measure of wind turbine performance because of this independent relationship between generator size and swept area… I made a novice mistake in assuming a legacy relationship between sizing…
In Mike’s example he’s bringing up capacity factor AND cost to calculate an LCOE so I don’t see a problem with using capacity factors as a good metric in this specific case.
The point about transmission costs still holds. I’d also say one year of data is shouldn’t drive investment… Many years of data are needed.
Ultimately what we’re getting at is.. what does this stuff cost and how are the costs trending. Mike’s article suggests a fresh look at the data is warranted. Again… Sorry for jumping the gun on those surprisingly high capacity factors.
In response to JoeJoe. Indeed submarine tx costs are considerable if a long way from shore (Round 3 Uk & current German build out). But Danish systems are near shore (+/- 20km) so fall into the category of peanuts when compared to the cap’ cost of the WTs etc. Main thrust of both articles – build off-shore where there is plenty of wind & do not impose unnecessary costs on the industry (ref: UK & maybe Germany) by having the WFs built 70km off-shore..
Regarding the “one year of data” – I don’t use one year of data – I use 4 years for Horns Rev (’cause HR2 has 4 years of data) and it is very simple to correlate HR2 to Anholt (and to HR3). So in summary, the two articles are based on 4 years of data. The only uncertainty is: is it the case that these 4 years happen to be exceptional. However, I do not believe that this is the case – but rather that the 4 years CFs for HR2 are typical & that 2014 was a low wind year.
Thank you for bringing these numbers together, I have been away from the offshore wind discussion while we (in the US) have been twiddling our thumbs for the past 10 years. The CFs being achieved are nothing short of remarkable. However, I can’t find where are you capturing O&M costs in the last 15 years. I know it’s part of the strike price for the initial period; but unless the early estimates were as far off as the capacity factors, the 25/MWh number would be hard pressed to cover it.
Have those numbers been developed? If so, would you have them handy?
In response to Mr Whitaker: we took two O&M estimates (emphasis on the word “estimates”) – Euro20k/MW installed (low balling) or 5% Cap Ex (high balling). The “truth” probably lies somewhere in between. I’d also observe that close to shore installations may have lower O&M than something sitting 70kms out at sea. Outside of wind output – O&M has a massive impact on NPV & IRR – hence the high/low approach. The industry is somewhat coy regarding real O&M costs – which are also probably non-linear (less once things have settled down – more later on).
Thank you Mr. Parr, for the excellent info, and in my humble opinion you have been conservative, the future will tell. A very high impact of future cost will come from lower equipment cost, as well as improved quality and therefore lower O&M. I think most of the manufacturers are on the right track.
The author seems to be comparing his “costs” (which he determined using math and methods that are debatable), to the bid prices of nuclear and (perhaps) gas. Apples to oranges. Personally, I would just stick to a bid price comparison.
His table shows that the bid prices for offshore wind are similar to Hinkley (one higher, two lower). Thus, offshore wind delivers intermittent kW-hrs for the roughly same price that nuclear, or gas, delivers reliable kW-hrs.
The renewables industry now often claims that they are competitive w/o subsidy, but then they continue to fight for the continuation of those heavy subsidies (and outright mandates for use). Until those subsidies go away, I will always be skeptical of such relative cost claims.
My personal view is that cost estimates are subject to error and bias, and that we should leave it up to the market to decide between clean energy sources (or means of emissions reduction. It’s past time to eliminate all subsidies and mandates, and replace those policies with a market price on CO2 emissions and harmful pollutants emitted into the environment.