TODAY’S STUDY: Scale Push for Offshore Wind Could Cut Price 55%
Massachusetts Offshore Wind Future Cost Study
Kempton, McClellan, Ozkan, March 2016 (University of Delaware Special Initiative for Offshore Wind)
This study models the cost of electricity from 2,000 MW of offshore wind energy, deployed off the coast of Massachusetts throughout the period 2020-2030. We find that costs will be far lower than previously contracted prices for offshore wind in the New England region and that costs will continuously lower throughout a buildout during the decade, due to ongoing technology and industry advances and the effects of making a Massachusetts market visible to the industry.
The “levelized cost of energy” (LCOE) was above 24¢/kWh for previously contracted projects in New England including the Cape Wind project proposed for Massachusetts and the Block Island Wind farm off the coast of Rhode Island – the latter is currently in construction and will be the US’s first-built offshore wind farm.1 The results of the modeled 2,000 MW build-out show, first, that the LCOE for the initial offshore wind project -- 16.2¢/kWh -- will be much lower than projects to date. Second, the study shows that costs continue to decline in subsequent builds, so that by the last tranche of a 2,000 MW pipeline of projects, the LCOE reaches 10.8¢. Table ES-1 below displays the LCOE’s across the analyzed build-out, with and without transmission costs included, and including learning effects.
The metric of this study is calculated LCOE, which does not consider any Federal production tax credit, state renewable energy credits (RECs) or potential carbon fees, any of which would lower the actual price below our LCOE projection. The study does not address the overall comparative value of the technology versus other ways of producing electricity. This is because LCOE does not consider system benefits, job creation, environmental, or health benefits, any of which would improve the relative cost of offshore wind power.
In addition to the anticipated technology improvements that will lower the cost of offshore wind energy through the next decade, the primary mechanism of the observed downward trajectory illustrated in Table ES-1 is development of offshore wind at scale. Commitment to scale provides “market visibility” to the industry, which lowers cost over time. Table ES-2 illustrates two recent one-off project proposals in the area, compared with three tranches of the modeled pipeline of 2,000 MW. Compare in particular the first and third lines, 468 and 400 MW, two projects of about the same size. Tranche C benefits from subsequent technology improvements, but also benefits from the much greater market visibility, the two effects together generating the substantial reduction in LCOE seen in the last column.
Market visibility reduces cost by generating competition among developers and their suppliers and by creating a community of experienced project investors who see less risk and thus expect lower rates of return. Market visibility is achieved by government policy that commits to the build-out of a sequence of projects, as opposed to a policy for one single project, which has been previously seen in Massachusetts and other East coast states. Also, building a series of projects leads to experienced workforce for subsequent projects, which becomes more efficient as they learn by doing.
From the authors’ previous work on cost reduction and U.S. state policy, there are potentially additional cost savings unrelated to scale that can be affected by state policy that further reduce risk. The provision of site characteristic data, requiring winning bidders to share certain information in advance of future builds, and investing in infrastructure and workforce development, all are policy options that can reduce cost, but were not analyzed in this study.
As a check on the results, we benchmarked our LCOE results with two studies that report costs and cost trends seen in Europe. The cost trend for Massachusetts’s projects is consistent with the trend line of declining cost among recent and planned European projects. The first Massachusetts tranche analyzed yields a LCOE that is still at the high end of European cost projections. By the end of the last tranche of a 2,000 MW pipeline, Massachusetts LCOEs have reached a price range that is competitive in today’s U.S. market.
To conduct the study, we elicited estimates of each of the major costs of developing, building, financing, and operating an offshore wind project—from industry experts who are actively creating or receiving bids for components and services for projects in the region. This set of inputs was used to calculate LCOE.
Collecting forward-looking data from industry participants involved in a particular market differs from the approach of most prior studies, which estimate future costs from already-built projects in Europe. Because it can require six years from conceiving to financing, to building, to operating an offshore wind project, using already-built projects to infer costs of future projects just now conceived would give data as much as 12 years out of date--misleading in a rapidly-changing field of technology and industrial development…
To reliably project the cost of a rapidly-changing technology in the future, for example, a project that would be built and commissioned about six years ahead of the analysis, we developed an expert elicitation method. We solicited confidential expert estimates of each of the major costs of developing, building, financing, and operating an offshore wind tranche, then arrived at a weighted mean of those estimates and used the mean values as input to the public-domain CREST tool to produce the LCOE for each Tranche. We added the cost of a simple transmission solution, without eliciting data for that component.
We found that our projected costs are consistent with two published benchmarks, and show a trend line of declining cost over the 2020-2030 period due to the factors cited. The LCOE for the first tranche begins with an electricity price above today’s market. Costs continue to decline in subsequent builds, so that by the last tranche of a 2,000 MW pipeline, costs are similar to today’s market cost, and at that point the technology presumably could continue to compete on its own without any continuing legislation. Dividing the decade into three tranches, LCOE costs with learning effects on installation and operations and maintenance were 12¢, 9.8¢ and 7.8¢ per kWh, or including transmission were 16.2¢, 12.8¢ and 10.8¢ per kWh. Again, these are calculated LCOE, which does not consider any Federal tax credit, state RECs or potential carbon fees, any of which would lower the actual price below our LCOE projection.
The cost reductions are driven by state policy committing to build a sequence, of projects as well as “learning effects,” as develops skilled workfore grows locally as the Massachusetts market develops.
The forecasts here are based upon the expansion of existing technologies. Wind technology, however, is still young. The knowledge base and creativity in Massachusetts higher education and R&D sectors could well have a role to play in innovating and creating a new generation of offshore wind turbines.