THE ECONOMICS OF WIND POWER

NORCOWE summer school 2015

By Jørgen R. Krokstad

(with contributions from Øyvind Kristiansen)

Contents Net Present Value – controlling investments

Cost of energy and LCOE definitions

Social Cost of Energy – SCOE

Cost reduction – how? (Innovation, R&D possibilities, supply chain)

Example of support regime – CFD in UK

2

NPV – basic definition

3

Present value and net present value

Net PV:- Add the present value you receive - Subtract the present value you pay- Work out year for year

NPV = 0 gives you the Internal Rate of Return

Accumulate throughout the life of the investment

4

Reflection Why is the NPV better when the interest rate is lower?

Could see any problems with this way of thinking?

5

Contents Net Present Value – controlling investments

Cost of energy and LCOE definitions

Social Cost of Energy – SCOE

Cost reduction – how? (Innovation, R&D possibilities, supply chain)

Example of support regime – CFD in UK

6

Cost of energy The cost of energy is

- a measure of the cost of generating a unit of electrical energy (e.g. one kWh or MWh), taking into account construction cost and operating cost.

- a measure of the average price (per kWh or MWh) needed for the producer to break-even over the lifetime of the project

Discounting is taken into account, i.e. the fact that toan investor with an expected annual return on his capital, - an income in the future is worth less than the same income

today, and - a cost in the future is preferred relative to the same cost today

(even when corrected for inflation)

Different names and abbreviations:- Cost of energy (CoE)- Cost of electricity (CoE)- Levelized cost of energy (LCoE)- Levelized cost of electricity (LCoE)

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CoE definition in 1-2-3CoE =

Discounted values: To an investor with an expected annual return on his capital, an income in the future is worth less than the same income today,and a cost in the future is preferred relative to the same cost today (even when corrected for inflation)

CoE ⋯

⋯

/ 1/ 1

1)

2)

3)

Used to compare different energy sources Wikipedia definition of “Cost of electricity by source” (redirected from “Levelized cost of energy”):

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Symbol Item In offshore windIt Investment expenditure in the year t Cost of developing1 and constructing the wind farm

(CAPital Expenditure=CAPEX)

Mt operations and maintenance expenditure in the year t OPerations EXpenditure = OPEX

Ft fuel expenditure in the year t = 0 for wind power: the wind is free

Et electricity generation in the year t Net Annual Energy Production (net AEP), measured in e.g. MWh

r discount rate Varies much between purposes, studies2, companies, can be nominal or real (corrected for inflation), pre or post tax

n expected lifetime of the system or power station Typically 20-25 years

1) Cost of developing the wind farm, i.e. costs of obtaining consent, surveys, planning and engineering before financial investmentdecision (FID) is called development cost (DEVEX) and is sometimes excluded or kept separate from the main construction cost (CAPEX) after the FID. The same applies to decommissioning cost (removal of the wind farm in the end).

2) Example: The Crown Estate pathways study 2012, PwC financial report: for projects w/FID 2011: 10% nominal post taxThe discount rate can be nominal or real (corrected for inflation) and pre or post tax

Worth noting about use of CoE A CoE number has little meaning without specifying the discount rate used in deriving it.

In a full CoE calculation, many assumptions are employed, on what is being included, on temporal phasing (e.g. of construction costs), discount rate, exchange rates, assumed lifetime of wind farm etc. => Output of different CoE models/set-ups can only be adequately compared when taking this into account.

Relative impact:- 1% improved net production (e.g. by lower unavailability) => 1% lower CoE (factor 1/1.01≈0.99)- 1% reduction in CAPEX => ≈ 0.65-0.80% lower CoE- 1% reduction of OPEX => ≈ 0.20-0.35% lower CoE

Investment decisions in the industry are not being made based on CoE calculations, but based on more complete financial modelling. However, CoE is a “proxy”.

CoE is - Useful for assessing the impact of innovations and improvements, enabling prioritization.

A key reference is The Crown Estates Pathways to Cost Reductions study from 2012 (particularly BVG’s technical report for this audience)

- Useful for comparing relevant concepts for a given wind farm in a planning phase where pros & cons within net production, CAPEX and OPEX need to be weighed against each other.

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Definition of LCOE – Levelised Cost of Energy The sum of discounted lifetime generated cost (£)- divided by

the sum of discounted lifetime electricity output (MWh)

Generation cost: Capital (CAPEX), operating (OPEX) and decommissioning costs including transmission costs (OFTO) over the lifetime of the project

An expression of cost rather than revenue

The discount rate is the Weighted Average Cost of Capital over the lifetime

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CoE split (typical UK R2 project)

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Turbine

Foundation

Electrical onshore

Electrical offshore

Installation

Transport & logisticProject management

Project completionInsurance

CAPEX ~ 2/3 OPEX ~ 1/3

Unscheduled WTG service

OFTO

Other

Grid cost (BSUoS)Preventive WTG service

Reflection How to connect LCOE with R&D?

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Contents Net Present Value – controlling investments

Cost of energy and LCOE definitions

Social Cost of Energy – SCOE

Cost reduction – how? (Innovation, R&D possibilities, supply chain)

Example of support regime – CFD in UK

14

Social Cost of Energy - SCOE

15

Changed compative position due to social costs

Reflection Practical use of SCOE. Any examples?

16

Contents Net Present Value – controlling investments

Cost of energy and LCOE definitions

Social Cost of Energy – SCOE

Cost reduction – how? (Innovation, R&D possibilities, supply chain)

Example of support regime – CFD in UK

17

Costs must come downOtherwise projects will not get built

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Cost per MW installed (€m/MW)

Year

Greater Gabbard

Thanet

Rhyl Flats

Gunfleet Sands

Robin Rigg

LynnBurbo

Barrow

Kentish FlatsScroby Sands

North Hoyle

Source: Emerging Energy Research 2009; Garrad Hassan 2011; Renewable Energy World.com 2009

Drivers– Rising commodity prices– Bottlenecks in supply chain– Complexity of sites, distance, depth– FX rate volatility

ROCs increased from 1.5 to 2

300MW

Innovation as input to Cost Reduction

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Offshore Wind Cost Reduction. Pathway Study: Crown Estate 2012

Potential LCOE cost reduction

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TCE study 2012: FID 2011 to 2020

0 5 10 15 20 25 30

Turbine

Foundation

Collection & trans.

Installation

O&M

Total

Potential LCOE reduction by 2020 ( %)

Technology Innovation Needs Assessment Offshore Wind

Offshore Wind Accelerator (OWA)Aim: Reduce cost of offshore wind by 10%

De-risking and cost modellingCompetition: 400 entrants, 13 to be supported

Efficient software andlayout optimisation study

Investigating possibility and benefits of moving to higher voltage for array cables

Significant opportunity for innovation to drive down costs

Development Electrical Foundations Installation Turbine O&M

Monopiles

Gravity bases

Jackets

Buckets

New layouts AC vs HVDC links

Higher voltage arrays

Radial vs loops

Port-based vs mother-ship

New vessels, transfer systems

Condition monitoring

Jack-up barges + shuttles

Floating installation vessels

Float-out and sink

Larger turbines

Blades

Drivetrain

Fabrication

Four designs prioritised for Round 3 from 104 entriesObjective: Reduce foundation costs by up to 30% in 30-60m

Shortlist Finalists

Keystone

Gifford / BMT /Freyssinet

SPT Offshore

UniversalFoundation

Airbus A320

Source: Carbon Trust Offshore Wind Accelerator 2010, IHC

IHC

Stage II focus

Installation

Demonstration

TranSPAR –ExtremeOcean Innovation

Concept development of 13 access systems is underwayVessels

Fjellstrand Windserver Nauti-Craft

SurfaceEffect Ship –UMOE Mandal

SolidSea Transfer –University of Strathclyde

Pivoting Deck Vessel –North Sea

Logistics

TranSPAR –ExtremeOcean Innovation

Reflection What has the largest impact. Innovation or supply chain?

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Contents Net Present Value – controlling investments

Cost of energy and LCOE definitions

Social Cost of Energy – SCOE

Cost reduction – how? (Innovation, R&D possibilities, supply chain)

Example of support regime – CFD in UK

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Contracts for difference (CFD)

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Support regimes

Electricity from offshore wind is not yet as inexpensive as e.g. hydropower and some non-renewables => Still requires support

Some examples:- Norway & Sweden:

- Green certificates, not sufficient to support offshore wind

- UK: - Used to have certificates: Renewables Obligations Certificates (ROC): a relatively fixed addition to the market price- Now have a feed-in tariff, so that a fixed price is received per MWh for the first 15 years, through a Contract for Difference (CfD)

So-called top-up: government pays for difference between market price and contract price- Recently moved to auction system in which the projects requiring the lowest level of support (for a given year) win:

1st auction winners at 114 and 120 £/MWh

- Denmark:- Grid connection offshore is paid by Government- Auction system, most recent winner was Vattenfall which offered to construct and operate Horns Rev 3 for 0.77 DKK/kWh (for the first

11-12 years, then normal market price)

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Reflection Consequence for assumed operational life time?

Other support regimes and principles?

Political risks?

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