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?
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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
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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