Reducing cost of offshore wind in the UK

There are two strategies for reducing the cost of offshore wind in the UK.  Easy to state and, in fact, easy to implement.  They are:

1.    Short term:  introduce a transparent simply calculated support price for offshore wind
2.    Build lots of offshore wind;  watch the supply chain build up and see how scale and experience work as they have worked in every industry up to now to bring costs down

The reason why simple support prices work is that they remove risk from the price of electricity delivered from offshore wind (or anything else that requires large capital spend).  The key to cheapness is to get as much debt as possible into projects at the lowest interest rate.  Banks, pension funds, in fact each class of lender loves visibility of the stream of cash-flows coming from the project.  If the cash flow is not dependent on anything except the quantity of electricity delivered, then the bank can concentrate on what that quantity is.  They don’t have to worry about balancing costs, basis price risk, negative pricing, counterparty risk or anything that impinges on price.

In fact an unambiguous fixed price makes for plentiful Project Finance.  That is what IPPs bring to the generation game.  A project funded by Project Finance has recourse to the assets of the project, only, and the simpler the stream of cash flows, the more debt can be allocated to the project.  It has been pointed out elsewhere that Utilities do not have the balance sheets to build all the new plant needed in this transition to sustainability.  Policy makers need to ease the path for Project Finance.

We have seen how Germany, Denmark and Spain organised their support schemes around the so called REFIT,  The Renewable Energy Feed In Tarriff.
Easy for risk averse bankers to understand and calculate, the REFIT works like a charm.

In the second last blog post we showed how the proposed UK CFD could be made to behave exactly like a refit.  This involved the creation of a Green Auctioning mechanism.  Perhaps the strongest part of the green auctioning mechanism is that it subjects the Balancing Charges, much touted by the utilities, to a market test.

Under the Green Power Auction Market (GPAM), utilities would bid for power over the coming 6 month period.  They would do this at each six month interval for the duration of the Contract for Difference.  Their bid would be reduced by the amount they thought they had to pay for balancing.  Of course the clever utility would realise that this cost was near zero, and would succeed in achieving very nice fixed priced wind, on its portfolio for the coming time period.

The really clever utility would be lobbying the DECC to be able to buy wind, at a fixed price for 20 years.  This way they would change their risk of exposure to variable fossil fuel prices, and make more profits.

Tags: , ,

One Response to “Reducing cost of offshore wind in the UK”

  1. Anil Raj P.E. 14. Jun, 2013 at 4:59 pm #

    Dear Mr. O’Connor;

    You hit the proverbial ‘nail on the head’ when coming for a title for this blog. The NIMBY (Not In My Back Yard) syndrome, when combined with where the wind sources are the best and most consistent, most of the times leads the designated location to be Offshore. Bringing cost parity between Offshore Wind Farms and Onshore Wind Farms is a technical challenge. The capital cost of the top sides (above the water line) is at par with that for Onshore. This reduces the challenge to (1) cost of the base structure and securing methods below the water line (2) the installation of the base structure below the water line (3) the life cycle maintenance of the base structure and generator and rotors in the marine environment. These three cost items can only be reduced by innovative designs, installation techniques and maintenance methods. Under all circumstances the capital cost will likely never be at par with a shore based wind farm. The cost of produced power per KHW however can be par or better than shore based installation in many cases, if such innovative methods are utilized and the net power production cost per KWH is computed considering the additional wind available offshore. The additional intangible but important benefit is that the installation is no populated back yard, and hence easier for politicians and elected officials to approve.

    I would like to introduce a system which AAET in conjunction with a partner company has been developing. Our system, which is well along in the US and International patenting process is based on using a Guyed Tower approach, not too dissimilar in concept from guyed cell phone or TV transmission towers on shore. This system is designed to lower the installed and maintenance cost of the support structure in deeper waters. It works well, and is significantly less expensive to build and maintain than other floating systems being considered. It is capable of being installed in waters up to 200 meters deep in harsh marine environments. The fundamental basis of such guyed offshore systems has been used for guy moored compliant offshore deep water oil and gas production systems. The Exxon Lena Guyed Tower was installed in 1982 and is still functioning. A specifically designed installation and maintenance vessel developed by us makes the process of installation fast, reliable and cost efficient. The Efficient Technology Offshore Wind Farm System (ETOWS) innovation is based on a combination of proven methods and techniques widely used in the offshore oil and industry thereby eliminates technical and cost risks. I realize this response may sound promotional, and to an certain extent it is, but more importantly developers need to keep an open mind to developments such as this and other similar cost saving methods towards the end objective of the title of your blog.

    A preview of the ETOWS can be seen on our web site. Please click on and click on ETOWS

Leave a Reply