TODAY’S STUDY: SCALE WILL CUT 1/3 OF OCEAN WIND COST

Cost Reduction Potentials of Offshore Wind Power in Germany

22 August 2013 (Prognos AG and Fichtner Group)

Overview of Results

In Germany, offshore wind power is at the beginning of its growth path. In the North and Baltic Sea, there are about 400 MW in operation. In the North Sea alone, there are currently seven wind farms under construction, with a total capacity of about 2,000 MW. Wind farms with an additional capacity of over 4,000 MW have been already approved. There are another 1,200 MW approved in the Baltic Sea. In Germany, the installed offshore wind power capacity is expected to reach between 6,000 and 10,000 MW by the year 2020.

For the currently operational offshore wind farms, the levelised costs of energy, i.e. the average cost for generating electricity over an operational time of 20 years, amounts to 12.8 to 14.2 Cent2012/kWh in real terms. According to scenario 1 and depending on the actual site, these costs can be gradually reduced by up to 32 %, and in the optimum market conditions of scenario 2 by up to 39 % over the next ten years. The main driver for the cost reduction is a continuous technological development across the entire added value chain of the offshore wind power industry. It may bring about substantial savings regarding investment, operation and financing.

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14 percentage points of the cost reduction in scenario 1 and 21 percentage points in scenario 2 are due to investment costs. Short-term, an improved logistics infrastructure for installing wind power plants will bring down the costs. In the long run, the trend towards larger turbines and more efficient production processes regarding the support structure will determine the development. In scenario 2, an intensified competition and economies of scales due to larger turbines and production volumes will lead to large cost reductions.

In scenario 1 and 2, respectively, 5 or 8 percentage points of the cost reduction result from bringing down operating and maintenance costs. This reduction is also triggered by an improved logistics infrastructure and faster ships. In the long run, particularly in scenario 2 inter-operator maintenance concepts further decrease costs.

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In scenario 1, the reduction of the cost of capital and reduced contingency provisions for project risks account for another 12 percentage points of the cost reduction potential. As investment costs decrease at a lower rate, in scenario 1 this issue is more important than in scenario 2 where it amounts to 9 percentage points. As the growing experience with the technology results in reduced risk premia as part of the financing concepts this cost reduction potential is only indirectly a technological one. In both scenarios, reduced decommissioning costs account for about 1 percentage point.

The cost reduction potentials can be only realized if industry, politics and administration jointly create the necessary conditions. Stable legal and political framework conditions are essential in this context.

Already in the short term, an efficiency increase in the industry provides a substantial cost reduction potential. Technical standards for plant components and grid connections are an important prerequisite for serial production. Approval and certification criteria need to be simplified and standardised. Joint installation and maintenance concepts for adjacent wind farm locations increase installation and operating efficiency.

Technological innovation is a long-term field of action. More efficient turbines, optimised support structures and installation logistics offer a large potential for improvement. Here it is important to maintain a balance of innovation and risk minimisation…

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Cost Reduction Potentials

More than half of the total cost reduction potentials can be attributed to investment costs. The reduction of operating and maintenance costs as well as a decreased cost of capital offer the largest individual potentials, though. The cost reduction potentials of offshore wind power over the next ten years amount to between 32 % in scenario 1 and 39 % for optimum market conditions (scenario 2). The main part can be attributed to the direct technological potential. The remaining reduction potentials (financing and risk) can be related indirectly to potentials that are triggered by technology.

Technological cost reduction potentials regarding investment, operating and decommissioning costs

ƒ An increased generator capacity results in substantial economies of scales for substructures and support structures. It reduces the specific costs of this large cost item and thus decreases levelised costs of energy. In the long run, serial production and increased competition additionally contributes to a cost reduction of another 5.5 (scenario 1) or 6.6 percentage points (scenario 2), respectively.

ƒ Improved operating and maintenance logistics also constitute a large technological potential (5.4 to 7.8 percentage points). In the short term, faster and larger ships as well as an improved infrastructure particularly determine the reduction potential. In the long run, inter-operator sea-based maintenance concepts result in decreasing costs.

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ƒ An improved installation logistics due to larger, faster ships and the adaptation of installation processes reduces costs by 3.6 to 5.0 percentage points. Larger ships increase transport capacities and allow for utilizing favourable weather slots. In addition, larger and more powerful installation ships are required in order to be able to utilize the economies of scales of larger turbines.

ƒ The reduction of the absolute contingency provisions for installation risks decreases total investment costs and thus levelised costs of energy by 1.8 to 2.6 percentage points and is directly triggered by the technological development.

ƒ The standardisation of technical dimensions and an intensified competition regarding wind farm transformer stations account for a cost reduction potential of 1.6 to 1.7 percentage points.

ƒ As specialisation regarding the dismantling of offshore wind farms (decommissioning) increases over time, the energy generation costs can be reduced by 0.9 to 1.3 percentage points.

ƒ Uniform approval and certification standards as well as a growing experience regarding project planning contribute a cost reduction potential of 0.8 to 1.6 percentage points.

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ƒ Due to increasing technical requirements for larger generators and rotor diameters, in scenario 1 the turbine provides with 0.2 percentage points only a small contribution to cost reduction, whereas in scenario 2 the contribution of 2.4 percentage points is significant. Gross electricity yields per plant and MW increase by up to 8 %. The increasing gross yield is, however, partially compensated by larger wake losses. In the long run, new market players enter the market and the increased competition contributes to cost reduction.

ƒ A more efficient cable production as well as an increased availability due to more competition result in a cost reduction of 0.4 to 0.6 percentage points. Indirect technological cost reduction potentials regarding financing costs and contingency provisions for installation risks

ƒ In scenario 1, the substantial decrease of risk premia for financing due to increased planning, construction and operation experience and the higher reliability of the plants contributes 9.6 percentage points to cost reduction; and thus reduces costs to a larger extent than in scenario 2 (8.4). In addition, the equity share required by banks is lower. As debt usually requires less return than equity, financing costs further decrease. In total, the reduction of the cost of capital due to a changed risk profile of the technology together with more experience is one of the main drivers of cost reduction.

ƒ In addition, the relative contingency provisions made by investors in order to cover risks during project realisation decrease. The growing installation experience and the further development of installation technology will reduce both downtimes and technical risks. Altogether this contributes another 2.3 (scenario 1) or 0.7 percentage points (scenario 2), respectively, to cost reduction…

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How to Exploit the Potentials

Industry, politics and administration only jointly can exploit these potentials.

It is essential that all affected parties in industry, politics and administration are actively involved in order to be able to exploit the presented cost reduction potentials of offshore wind power over the next ten years. Not only the technical areas such as investment, operating and decommissioning costs, but also the minimisation of risk premia provide significant reduction potentials. A stable regulatory framework provided by the political environment is a prerequisite for this. For the offshore industry itself, technological innovations and a more efficient use of technology are key variables.

All fields of action presented in the following affect project risks. For offshore wind power projects, the active risk management is an important part of cost reduction. An improved management of the interface between wind farm operators, manufacturers, installation companies, grid operators and authorities can further reduce the risks.

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Recommendations regarding the political and regulatory environment

ƒ Creating stable legal and political framework conditions

Stable framework conditions constitute the basis for a reliable investment climate. In addition to stable refinancing options stated in the EEG (Renewable Energy Act), this also refers to the exemption of already carried-out investments and investment decisions (“Bestandsschutz”). It is of particular importance to keep up the development even after the first development phase runs out in 2017. A long-term perspective regarding the regulatory environment helps the offshore industry with its long planning horizons to adapt to it.

ƒ Defining technical standards for plant components and grid connections

The introduction of technology standards for components and grid connections can substantially decrease the costs for installation and maintenance. It would be useful to develop these standards in close cooperation with the industry and throughout Europe in order to further minimise the costs of offshore wind power in all Europe.

ƒ Simplifying certification and approval criteria

The joint review of certification and approval standards by the industry, operators, certifying entities and the Federal Maritime and Hydrographic Agency can optimise processes and standards. Uniform certification standards simplify the complex situation and reduce the current cost levels. It is recommended to use the experience gained from certification processes in the power station and plant construction industry as well as other industries outside the classical offshore segment.

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Recommendations to the industry regarding technological innovation

ƒ Optimising plant technology in order to maximise utilisation and wind yield

Depending on the site, both optimising plant technology in order to reach a high utilisation and maximising the wind yield offer potentials for decreasing levelised costs of energy. For close-to-shore sites, a higher plant utilisation through larger rotors will be advantageous. The higher the installation and maintenance costs due to larger distances to port, the more reasonable it becomes to maximise wind yield by economies of scales that larger turbine capacities contribute.

ƒ Optimising existing support structures and developing new ones

Optimising the foundation design provides an opportunity for standardisation. Particularly jacket fabrication can become more efficient with higher volumes. In the short to medium term, processes for installing support structures can be optimised by drilling or vibration, for instance. In the long run, new substructure concepts such as gravity or floating substructures can lead to further improvements.

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ƒ Improving installation logistics

Installation logistics should be improved by more powerful ships and ports as well as the adjustment of processes. The larger transport capacities that are achieved this way allow for a better utilization of favourable weather slots. This is a prerequisite for utilising the economies of scales of larger turbines.

ƒ Intensifying research and development

Development, testing and market introduction of innovative plant concepts and support structures should be intensified. Supported by the political environment, the creation of test fields and use of demonstration facilities could be useful in this context.

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Recommendations to the industry regarding an increased efficiency

ƒ Developing inter-operator maintenance and installation concepts

In the medium term, substantial cost benefits could be achieved by joint concepts for the operation and maintenance of wind farms. The goal should be to jointly use fleet and logistics infrastructures (landing and fuelling facilities for helicopters, ships, material storage, joint rescue and safety concepts). Offshore logistics centre where replacement components of various manufacturers are stored would reduce downtimes of wind farms. In the long run, operators of adjacent wind farms using the same type of plant could develop joint concepts and thus achieve cost benefits also during the installation phase.

ƒ Accelerating serial production

Regarding turbine and support structure technology as well as grid-connection components, serial production offers substantial cost reduction potentials. The further development of serial production will, however, only be successful if there is a dynamic market development and a far-reaching implementation of technology standards…

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