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United Kingdom

UK offshore wind enters the next chapter

UK: Dong Energy's Burbo Bank Extension is the first project to be commissioned after winning support in the UK's initial contracts for difference tender in 2014. David Milborrow looks at the balance sheet for this new round of offshore wind farms.

Pathfinder… Burbo Bank Extension is the first offshore project to be built under the UK's contract for difference scheme
Pathfinder… Burbo Bank Extension is the first offshore project to be built under the UK's contract for difference scheme

After a period of some uncertainty, the offshore wind industry is now moving ahead.

Officially inaugurated last month, Dong Energy's Burbo Bank Extension wind farm is sited 7km off England's north-west coast and comprises 32 Vestas V164 8MW turbines.

The total rating of the project is quoted as 258MW, suggesting the turbines may be rated at a little over 8MW. The projected yield is around 920GWh a year.

Where the money goes

Wind turbines are the most costly component of an offshore wind farm, accounting for around 40% of the total capital cost (see chart).

Foundations come next, accounting for a little over 20%, and installation costs come in at just under 20%. The precise amounts vary between projects.

The figures shown in the chart below come from the Crown Estate's "Offshore Wind Cost Reduction Pathways Study".

The total capital cost of one of their notional wind farms, with characteristics similar to Burbo Bank, was £2,575/kW (€3,064/kW).

Although Dong was responsible for laying the grid connection, the UK administrative arrangements put the ownership of the connection into the hands of an offshore transmission operator, which then levies a charge on the offshore wind-farm owner.

In the case of Burbo Bank, this amounts to £9/MWh (€11/MWh). Additional transmission and use of system charges are levied by the system operator.

Operations and maintenance

Operation and maintenance (O&M) costs account for around 25% of the costs of offshore wind energy.

There is a range of charges to be taken into account and the chart shows a typical breakdown, with figures mostly drawn from analysis by the Crown Estate.

Seabed rents are uniform across the UK, but transmission charges vary. The large contribution from "unplanned maintenance" is an average figure but, in practice, could be more or less than the figure quoted. Lower maintenance costs would result in increased profitability for the wind farm.

UK policy

The Burbo Bank Extension wind farm was among a group that successfully bid for the first batch of contracts for difference (CfD) in 2014 and it is the first of that batch to be commissioned.

The government set an administrative strike price of £150/MWh (2012 prices). All the successful bidders will be paid the strike price for 15 years, which, with inflation, has now reached £162/MWh (€193/MWh).

The UK government was criticised by its spending watchdog, the National Audit Office (NAO), for this approach. Successful projects can expect good rates of return as a result of the policy.

Allowance needs to be made for a power purchase agreement discount that has to be negotiated with the electricity supplier buying the energy. If this is 5%, the owners of Burbo Bank will receive about £154/MWh for the electricity generated.

The NAO also criticised the government for index-linking CfD prices to the consumer price index. The watchdog pointed out that generators could fix the cost of their debt repayments, which form a major component of the cost of energy.

However, most elements of the operation and maintenance costs will rise with inflation. The result is that index-linking has a small, but significant, impact on profitability. It may be noted that the low offshore tender prices recently reported for the Netherlands and Denmark are not index-linked.

The group of wind farms that includes Burbo Bank benefited from the generous pricing strategy. Rates of return depend on the particular finances of the individual projects, but if the remuneration were not index-linked, the rate of return would be reduced by about one percentage point.

If the bill for unplanned maintenance can be halved, the rate of return goes up by about one percentage point.

A combination of lower maintenance costs and lower costs of capital is leading to substantial reductions in the costs of energy, as the recent Dutch and Danish auction results illustrate.

Increased confidence in the UK means that interest rates are coming down and it is expected that the 2020 cost-of-energy target of £100/MWh will be realised ahead of time.

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