The higher the risk, the higher returns lenders expect. That may be part of the reason why the cost of electricity from commerically developed offshore wind stations in British waters is coming in so much higher than government sponsored projects in Denmark.
The gap between the cost of offshore and onshore wind power facilities has grown steadily wider during the past decade. While installed costs onshore fell progressively for many years, the opposite has happened offshore. Ten years ago, a fully installed offshore wind farm in sheltered coastal waters in Denmark cost around EUR1200-1500 for each kilowatt of generating capacity. That was about 30-50% higher than onshore wind. Today, offshore wind costs are twice that of onshore wind, with some current plant under construction, or planned, coming in at more than EUR4000/kW.
The higher cost of offshore turbines, their installation, cables and infrastructure, is partially offset by the higher energy yields of stronger winds at sea. Even so, the cost of generating electricity from wind plant at sea is still about twice that of wind generation on land. The reason lies in higher capital and financing costs. Not only does the hardware and its installation cost more offshore than onshore, leading to bigger loans to pay interest on, investors also tend to expect higher returns on their equity to cover the perceived extra risk of an offshore project, or insist on shorter capital repayment periods. In short, offshore wind farms are more capital intensive than onshore wind farms and the capital repayments account for around 80% of the generating costs compared with 70-75% on land.
At the low end of today's range for the cost of electricity generated from an offshore wind plant lies Denmark's government-sponsored Rodsand II project. The contracted power purchase price for electricity from Rodsand II in the Baltic Sea is around EUR84/MWh. It is the Danish government, however, paying the bill to connect the wind farm into the electricity network, bringing the installed cost for the owner down to just under EUR2100/kW. The Rodsand II electricity purchase price is almost half that of a levelised offshore electricity cost of EUR166/MWh reported to the UK government by Ernst & Young, based on an assumed installed cost of EUR3680/kW and a rate of return on the total investment of 10%. The example serves to illustrate that energy costs from offshore wind farms cannot yet be established with the same precision as those for onshore installations.
Offshore wind farms built during 2001-2003 cost between EUR1000/kW and EUR2000/kW, but prices started to rise in 2007, partly reflecting a steep increase in the price of raw materials that took place around this time (fig 1). The rising cost of wind turbine hardware has been one of the major contributing factors pushing up total installed costs (table 1). Current prices of turbines for onshore use are around EUR1000/kW. Available data for offshore wind farms suggests that the additional costs of the adaptations needed to make an onshore turbine suitable for offshore use add around 30% to its cost.
Foundation costs have increased only slightly since construction of the Danish Horns Rev I offshore wind farm in 2002. The indication is that more efficient methods of construction have been found that offset the increases in raw material costs. It is not clear why British estimates for machines and foundations from Ernst & Young are higher than the quoted costs for Rodsand II. Even if an allowance of EUR500/kW is made for Rodsand II's cost of grid connection, which the Danish government is paying for, there is still a significant difference between the cost of that project and the commercially owned British projects.
Offshore operation and maintenance (O&M) costs are, unsurprisingly, higher than onshore costs, which on average come in at EUR12-20 per MWh of production. Ernst & Young estimates a total O&M cost for offshore wind of EUR34/MWh (table 2), with turbine maintenance alone accounting for EUR19/MWh of the total. That is slightly higher than the EUR16/MWh for offshore turbine maintenance quoted by the European Wind Energy Association's report, Wind Energy - The Facts. It is not clear if the association's figure includes any other costs.
Electric utility E.ON, reporting on the performance of its Scroby Sands wind farm off the east coast of England, quotes a "total actual spend for 2007" that corresponds to EUR16/MWh. This implies that the Ernst & Young estimate may be too high, although it is possible that operating costs at Scroby Sands may increase with time.
As with capital costs, the exact scope of published offshore O&M costs is not always clear and a distinction must be drawn between costs associated with turbine maintenance and others such as grid charges, insurance, land leases and decommissioning charges. Real life examples already reveal that O&M costs for these incidentals can be similar to the cost of maintaining the actual turbine.
Offshore cost increases with distance from the shore. With larger offshore wind farms now being located further out to sea and in deeper water, prices are being pushed up. The highest quoted cost for 2009, over EUR4100/kW, comes from Germany's Alpha Ventus demonstration plant, which is 45 kilometres from shore in waters of 30 metres.
To keep their cost down, offshore wind farms should be sited close to shore to keep cable costs and transport costs down. Shallow waters also mean lower foundation costs. As has been demonstrated in Germany, however, concerns for the local ecology mean building offshore wind farms in shallow waters close to shore may not always be possible, with distance and depth adding to their installed cost (fig 2). The advantage of going further offshore is that winds are generally higher, raising production, and less turbulent, reducing wear and tear.
Compared with a reference wind farm built no more than ten kilometres from shore in a water depth of 10-20 metres, a wind farm built 50-100 kilometres offshore at the same depth is 18% more expensive. Greater depth pushes up costs more steeply than greater distance. A wind farm within ten kilometres of the coast in a water depth of 40-50 metres is 39.6% more expensive than the reference wind farm. At the extreme limits of the plotted data (fig 2), a wind farm between 50 and 100 kilometres from land in waters that are 40-50 metres deep will be 65% more expensive than the reference installation plant.
Going forward, prices may drop. The forecast price for a project scheduled to complete in 2015 is around EUR3000/kW, though a price for one wind farm does not constitute a trend. According to BTM Consult, a wind consultancy in Denmark, the current average of around EUR3000/kW will change little in the next five years. This view is consistent with data from British consultants Garrad Hassan and from Ernst & Young, but the cost base in Britain, where most offshore wind capacity is being built, is higher, at around EUR3500/kW.
Electricity generating costs
The cost of wind-produced electricity is a result of the installed cost of the wind farm, its running costs, the interest rates used for the project financing and the site wind speed. An offshore wind farm built near land and in shallow water is not likely to benefit from the high wind speeds found far offshore, but will be relatively cheaper to install (fig 3). Conversely, a wind plant is unlikely to be built far offshore, at greater cost, if the wind speed is not high enough to justify the extra expense.
Near the top of the installed cost range for a wind project way offshore, a wind farm costing EUR4000/kW and with a project interest rate of 10% (about the highest rate used) generates electricity for an estimated EUR191/MWh at a wind speed of 8 m/s, falling to EUR140/MWh at 10 m/s. Applying a low-end interest rate of 5% to the same project results in much cheaper electricity: EUR134/MWh at 8 m/s winds and EUR100/MWh at 10 m/s.
Electricity from offshore wind plant does not necessarily get cheaper for projects installed at the lower end of the cost range closer to shore, since lower wind speeds are likely to prevail. In winds of just 6 m/s, a project installed for EUR2800/kW and with a 10% interest rate applied will generate electricity for a relatively high EUR227/MWh. That drops to EUR158/MWh at a 5% interest rate.
A wind project built for the same installed cost located at a site with a much higher wind speed of 9 m/s can generate electricity for EUR119/MWh at a 10% interest rate. If the interest payments on debt and returns on capital are low enough for the financing cost to be no more than 5%, electricity can be generated by offshore wind farms for as little as EUR86/MWh on sites with average winds of 9 m/s.
Purchase prices being paid for offshore wind power in northern Europe mainly lie within these bands. Some national price structures pay a higher rate in the early years and a lower rate in subsequent years, some are linked to capital subsidies and others are linked to the market price of electricity together with income from the sale of green certificates. Green certificates are allocated to renewable energy generation in countries that require electricity retailers to buy certificates to demonstrate they are including a rising proportion of green power in their supplies to customers.
Future offshore wind costs are uncertain. Garrad Hassan, in a study for the British Wind Energy Association, UK Offshore Wind: Charting the Right Course, identifies a range of factors that are likely to influence costs, suggesting they could rise or fall by 20% by 2015 from the current British value of EUR3570/kW. Some of these cost drivers, however, are related specifically to the British market, particularly the link between the British pound and the euro.
Raw material prices, supply chain difficulties in the offshore market and competition for wind turbines with players on the main onshore market will all have a marked impact on the end price of offshore wind. But given that the offshore sector is still relatively new and that manufacturers and constructors are still innovating, the prospects for "learning by doing," with accompanying cost reductions, are good - provided commodity prices are stable.
ESTIMATES FROM BRITAIN
Offshore O&M cost, EUR/MWh
Component Onshore Offshore
Turbine service 7 19
Grid charges 2 3
Insurance 3 4
Lease charges 2 2
Decommissioning 1 6
Total 16 34
SOURCE: VARIOUS/ERNST & YOUNG
THREE DIFFERENT OPINIONS
Estimated offshore cost, EUR/kW installed
Component EWEA1 Rodsand II E&Y2
Turbines 815 1329 1725
Electrical 355 n.a. 690
Foundations 350 400 805
Other 160 n.a. 40
Total 1680 2077 3680
NOTE: Not all costs for the Danish Rodsand II project are in the public
domain. 1. European Wind Energy Association; 2. Ernst & Young