Wind Economics: Installed costs to fall from last year's peak

EUROPE: After a period of some uncertainty, offshore wind costs are now moving downwards. The EU/FOWIND's Offshore Wind Policy and Market Assessment suggests that installed costs of offshore wind peaked at just under €4,000/kW in 2014 and are now falling.

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It also indicates that by

2017 installed costs will be around €3,700/kW.

The European Wind Energy Association (EWEA)'s Key Trends and Statistics 2014 report hails the Gemini project (600MW) as the "deal of the year". Although, at €4,666/kW, it was not particularly cheap, a lot of information on the finances has been published, together with the energy price — €169/MWh.

News also came that the "strike prices" for two UK offshore wind projects are around €160/MWh, lower than expected. Further good news came with the announcement that the contract for the Danish Horns Rev 3 wind farm, to be commissioned in 2017, was secured with a bid of €103/MWh.

These electricity prices cannot be directly compared with each other, as contract lengths vary and Danish wind energy project developers do not have to pay for grid connection. Nevertheless, the downward trend does suggest that offshore wind is becoming cheaper. It has some way to go before it can compete on a level playing field with gas, but is much nearer, if not below, the electricity price from nuclear generation.

Role of finance stressed

One of the issues highlighted by the Gemini project has been the importance of financing. The project secured a loan for around 75% of the total cost of €2.8 billion at a rate of 4.75%. Although the required return on equity was not disclosed, a fairly typical rate of 12% would mean that the weighted average cost of capital (WACC) would be 6.6%. Most recent studies have used higher rates, and the UK Department of Energy and Climate Change calculates generation costs on the basis of a 10% WACC, meaning that its offshore wind energy prices appear high.

The weighted average cost of capital has a significant effect on the generation cost, as illustrated in the graph above. A hypothetical wind farm with an installed cost of €4,000/kW, a construction time of two years, a capacity factor of 49.5% and operation and maintenance costs of €24/MWh was used as an example. With a 15-year contract and a 10% WACC, the cost of energy is €157/MWh, and this comes down to €125/MWh with a 6% WACC. With longer contracts, further reductions can be achieved in the energy price. At a 6% rate of interest, the cost of energy can be reduced as low as €109/MWh with a 20-year contract.

Innovation influence

The importance of WACC was highlighted in a paper by Giles Hundleby, issued in March by BVG Associates. Its typical wind farm had an installed cost of €3,800/kW, a capacity factor of 45% and a 25-year loan repayment period. With these assumptions, the levelised cost of energy drops from around €140/MWh with a 10% WACC, to around EUR106/MWh with a 6% WACC. These savings are of the same order as those illustrated in the above graph.

Given the affect of the WACC, it is important to understand the factors likely to influence debt interest rates and equity returns. Hundleby's paper discusses these and lists those that are likely to have negative, neutral and positive impacts.

New innovations, where there might be concerns over possible failures and repair costs, have a negative impact on the debt — that is, a higher rate would be likely — and these include superconducting drive trains and array cables with high operating voltages.

Innovations with a likely neutral impact include improved wind-farm-wide control, introduction of direct-drive trains and improvements in blade aerodynamics. Positive impacts that may help to lower interest rates would stem from reductions in uncertainty and risk, including a greater level of geophysical and geotechnical surveying, improvements in weather forecasting and in personnel transfer access from the support vessel to the turbines.

The title of Hundleby's paper is apt: Never mind the technology — feel the WACC, as offshore wind energy cost reductions will stem from innovations in the technology, and, as it becomes more reliable, reductions in the cost of finance.

At a glance — This month's report conclusions

Offshore Wind Policy and Market Assessment: A Global Outlook, 2014, by EU and FOWIND (Facilitating Offshore Wind in India) Offshore installed costs are falling from 2014 peak of almost €4,000/kW to potentially €3,700/kW by 2017.

The European offshore wind industry - key trends and statistics 2014, by European Wind Energy Association Gemini wind farm costs, at €4,666/kW, show importance of financing costs. See, facts and figures page.

Never mind the technology - feel the WACC, by G Hundleby of BVG Associates Shows influence of capital cost on generation costs, and that 6% rate can lower energy cost from circa EUR140/MWh (at 10%) to circa €106/MWh.

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