DRIVING DOWN THE COST OF OFFSHORE WIND by mpm19987

VIEWS: 34 PAGES: 31

									DRIVING DOWN THE COST OF
     OFFSHORE WIND
                      by
  Bo Mørup, Vice President, Sales & Marketing
             Vestas Offshore A/S
WHY HAS THE PRICE OF OFFSHORE
 WIND RISEN SO DRAMATICALLY?

  (“Because the turbine manufacturers are scre**** us!”)
                             Content

Development in contract prices 2000-2009
Cost Drivers
  Commodities
  Component suppliers
  Wind turbine manufactures
  Foundation manufacturers
  Vessel Providers
  Electrical suppliers
  Related businesses
Recommendations
Conclusion
                 Contracted projects 2000 - 2009
Project name     Installation year # WTG MW EPC price £m £m/MW                      Source
Middelgrunden        2000              20     40     33   0,84   Report: "The Middelgrunden Offshore Wind Farm"
Horns Rev            2002              80    160    166   1,04   Case Study: "European Offshore Wind Farms"
North Hoyle          2003              30     60     80   1,33   Renewable Energy UK 13/12/06
Nysted               2003              72   165,6   174   1,05   Case Study: "European Offshore Wind Farms"
Scroby Sands         2004              30     60     70   1,16   Vestas press release 03/03/03
Kentish Flats        2005              30     90    105   1,16   Kentish Flats press release 20/11/03
Barrow               2006              30     90     70   0,77   Bowind press release 25/09/06
Egmond Ann Zee       2006              36    108    139   1,29   Case Study: "European Offshore Wind Farms"
Beatrice             2007              2      10     29   2,86   www.beatricewind.co.uk
Burbo                2007              25     90    131   1,46   ReNews Issue 130 25 October 2007
Lillgrund            2007              48   110,4   136   1,23   Windpower Monthly October 2007, Volume 23
Q7                   2007              60    120    267   2,23   Q7wind press release 25/10/06
Alpha Ventus 1       2008              12     60    125   2,09   Alpha-ventus press release 13/06/07
Lynn ID              2008              54    180    307   1,70   Siemens press release 06/03/07
Rhyl Flats           2008              25     90    190   2,11   Npower press release 10/07/2007
Robin Rigg           2008              60    180    325   1,81   Eon press release 21/12/06
Thornton Bank        2008              6      30    107   3,56   Repower press release 23/05/07
Gunfleet Sands       2009              30    108    200   1,85   Dong Energy press release 19/04/07

Exchange rates
EURGBP                      1,43436
DKKGBP                       10,6925
USDGBP                       2,11039
                                                                                                                   £m/MW
                                    M
                                        id
                                          de




                                                                0,0
                                                                      0,5
                                                                               1,0
                                                                                                      1,5
                                                                                                                         2,0
                                                                                                                                               2,5
                                                                                                                                                               3,0
                                                                                                                                                                     3,5
                                                                                                                                                                                  4,0
                                            lg
                                                 ru
                                                   nd
                                                      en




                                                                              0,8
                                           Ho
                                              rn
                                                s
                                                       R
                                                           ev
                                         No




                                                                                     1,04
                                            rth
                                                   H
                                                       oy
                                                          le




                                                                                                    1,33
                                               Ny
                                                  st
                                    Sc               ed
                                      ro




                                                                                     1,05
                                        by
                                                 Sa
                                                   nd
                                        Ke            s
                                          nt




                                                                                            1,16
                                             ish
                                                   Fl
                                                      at
                                                         s




                                                                                            1,16




Source: Press releases and PACE
                                  Eg            Ba
                                    m             rr o
                                                      w
                                        on
                                          d




                                                                            0,77
                                              An
                                                n
                                                       Ze
                                                         e
                                                                                                   1,29
                                              Be
                                                at
                                                   ri   ce
                                                                                                                                                               2,9




                                                  Bu
                                                    rb
                                                       o
                                                                                                           1,46




                                              Li
                                                 llg
                                                    ru
                                                       nd
                                                                                              1,23




                                   Al                   Q
                                        ph               7
                                          a
                                                                                                                                        2,23




                                              Ve
                                                nt
                                                   us
                                                           1
                                                                                                                                 2,09




                                               Ly
                                                  nn
                                                           ID
                                           Rh
                                                                                                                  1,70




                                              yl
                                                 F     la
                                                          ts
                                          Ro
                                                                                                                                 2,11




                                             bi
                                                n
                                                 Ri
                                    Th              gg
                                       or
                                          nt
                                                                                                                     1,81




                                             on
                                   G            Ba
                                     un             nk
                                        fle
                                                                                                                                                                           3,56




                                           et
                                              Sa
                                                  nd
                                      Eu             s
                                          ro
                                                                                                                         1,85




                                             pe
                                                20
                                                    07
                                      Eu
                                          ro
                                                                                                          1,42




                                             pe
                                                20
                                   US               10
                                       FP
                                                                                                                          1,90




                                            LE
                                   US           20
                                                                                                                                                                                        EPC cost per installed MW - 2000 to 2009




                                                   10
                                       PA
                                                                                                                                                 2,48




                                           CE
                                                20
                                                   10
                                                                                                                                                        2,67
                Pace – Global Energy Services
 ”We enable industry decision makers to understand energy
  markets and formulate strategies and actions that deliver
  results…” excerpt form Pace mission statement

 Pace has evaluated the economics of the offshore wind project for
  The Long Island Power Authorities.
    In 2007 the costs in Europe are expected to be approximately 1,42 £m/MW
    In 2010 the costs are expected to reach a level of 1,90 £m/MW (incl.
     interests but excl. contingencies and interconnection expenditures)
    In 2010 the costs for the LIPA project have been estimated by FPLE to be
     2,48 £m/MW (excl. interconnection)
    In 2010 the costs for the LIPA project have been estimated by PACE to be
     2,67 £m/MW (incl. finance charges and interconnection)



   Source: Pace Global Energy Services
                              Cost Drivers

Foundation manufacturers


Vessel providers
    Installation of foundations, installation of turbines, cable laying and vessels for
     O&M


Electrical suppliers
    Substations and cables


Project costs in related businesses
    Onshore demand and Oil & Gas industry
                            Indexed Prices for Commodities 2004 - 2007
                           450
                                                                                                        367 %
                           400
Price Index (2004 = 100)




                           350                                                                          202 %
                           300
                                                                                                        200 %
                           250
                                                                                                        101 %
                           200
                                                                                                         63 %
                           150

                           100

                            50

                             0
                                          2004                   2005               2006               2007

                                           Lead         Copper          Crude Oil          Steel   Aluminium


                                 Source: MEPS and LME
                          Component suppliers

Turbine manufactures have faced a significant increase in costs for
main components




Source: Vestas Offshore
                  Component suppliers

Components have increased due to
   Cost of commodities have increased (steel, cobber etc.)


   Increase in logistics due to fuel price hikes


   Higher warranty provisions


   Higher profit margins (sellers market)
Wind turbine manufactures – equipment supply
 Wind turbine prices have increased due to

  Transportation cost
     Road transport prices have increased approximately by 30 % (measured
      on the German market)
     Sea transport prices have increased approximately by 70 % (measured on
      the US market)


  Materials
    For example some less known materials
        Acrylonitrile (commodity to produce Carbon) has increased by 48 %
         from 2004 to 2007
        Epoxy has increased by 27 % from 2004 to 2007




  Source: Icis-Lor
Wind turbine manufactures – equipment supply

  Better understanding of risk
     Higher risk aversion


  Contingencies
     Past contingencies have proven insufficient


  Higher profit margins
     Manufacturers are actually turning a profit now – necessary for the
      continued growth of the industry
            Wind turbine manufactures – O&M
The cost of Operations & Maintenance has increased approximately
  250% from 2002 to 2007. This is due to
 Increase in cost of components and wear and tear parts
 More conservative estimates for adverse weather
 Higher logistics cost (accessibility, fuel, vessel rates)
 Higher contingencies
 Higher profit margins
 Horns Reef
    22 technicians
    1 OP Manager
    2 Assistants




Source: Vestas Offshore
            Foundation manufacturers

Foundations have increased due to
   Cost of steel have increased


   Increased transportation cost


   Higher contingencies (past experience)


   Higher warranty provisions (past experience)


   Higher profit margins (sellers market)
                            Vessels Providers
 The day rate for
  cable installation
  vessels has
  increased approx.
  90% in the period
  2002 to 2007

 The day rate for
  foundation/
  installation vessels
  has increased
  approx. 25% in the
  period from 2004
  to 2007

  Source: Vestas Offshore
                        Vessel providers

Vessel rates have increased due to
    Increase in cost of fuel


    Price level in competitive segments (e.g. oil & gas) have increased


    More conservative (realistic) estimates for weather down time


    Higher contingencies (past experience)


    Higher profit margins (sellers market)
                              Electrical suppliers
 Substations
    Power transformers have increased with approximately 50% in the period from
     2004 to 2006


 Cable works
    Cable prices have increased with more than 100% due to an increase in copper
     and lead prices
The significant cost overruns the past 5
years on cable laying operations have
Meant:
 More conservative (realistic) estimates for
  weather down time
 Higher contingencies (past experience)
 Higher profit margins (sellers market)
    Source: Vestas Offshore
               Project costs in related businesses
 According to Cambridge Energy Research Associates (CERA) the costs
  of major oil and gas production projects have risen more than 53%
  from 2005 to 2007




 Source: Cambridge Energy Research Associates (CERA)
             Project costs in related businesses

No significant slowing is in sight

Cost drivers
 Steel prices
 Drilling contractors
 Equipment (generators, compressors, vessels, towers and exchangers)
 Yards & fabrication
 Offshore installation vessels
 Design and project management

The offshore wind industry is competing against an industry with
much larger budgets resulting in increasing cost



Source: Cambridge Energy Research Associates (CERA)
                          Recommendations
Economics - CAPEX
The internal rate of return is rather insensitive to changes in the CAPEX
    An increase in WTG price of 10% (=CAPEX +5%) results in 0.8 percentage
     point drop in IRR!
    An increase in the tariff of 10% results in 2.1 percentage points increase in
     IRR
    A 10 m/s site will generate 4.6 percentage points higher IRR than a 8 m/s


What really matters are changes in the generated revenue (cash flow)
Revenue depends on wind * power curve(s) * tariff
Wind: Can’t do much about it after site identification
Power curve: Optimisation of site/restrictions
Tariff: Assert influence (lobbyism)
                                        Recommendations


  Price (GBP) / MW installed            WTG price -10%               1.80 mGBP / MW               WTG price +10%



      Tariff (GBP/kWh)              0,09       0,10       0,11    0,09      0,10       0,11    0,09      0,10       0,11



                   8,0             8,0%      10,0%       11,9%   7,3%      9,2%       11,1%   6,7%      8,5%       10,3%



                   8,5             9,3%      11,4%       13,4%   8,5%     10,6%       12,5%   7,9%      9,9%       11,7%



                   9,0            10,4%      12,6%       14,8%   9,7%     11,8%       13,9%   8,9%     11,0%       13,0%



                   9,5            11,4%      13,8%       16,0%   10,6%    12,9%       15,0%   9,9%     12,1%       14,2%



                  10,0            12,3%      14,7%       17,1%   11,5%    13,8%       16,1%   10,7%    13,0%       15,2%




Assumptions: WTG price = 50% of CAPEX
                          Recommendations
Data collection
    More focus on minimising the overall project risk rather than fighting about
     who should be liable!
    The more data that is made available the more risks can be
     eliminated/mitigated
    Due to recent experience (and market position) all subcontractors are very risk
     averse


Planning
    Planning of all phases of the installation of the project should be done to
     excruciating detail. Be sure to identify critical paths and interdependent
     activities
    Build in float and then some more float in the time schedules
                         Recommendations
Sustainable market
   Without a sustainable and growing market there will be no:
      Move up the learning curve
      Investment in innovation
      Attraction of new players to enter the market and increase competition
      Industrialisation of products and methods


Develop the value chain
   Sub contractors must be allowed to turn a profit (e.g. cable laying)
   Increased staying power enables move up learning curve
   But be demanding! H&S, planning, contingency plans etc.
                         Recommendations
 Site selection
    The onshore market was characterized by the “best” sites being developed first
     i.e. strong wind, easy access, close to grid connection
    This does not apply to the same degree offshore!
    E.g. protection of black ducks in Denmark
    Why develop an offshore site at 8 m/s, 150 km from the coast?
                             Conclusion
The prices have gone up – throughout the value chain (not just WTG’s)

The price of wind turbines is not likely to come down in the coming years

There are many (valid) reasons why the price of offshore wind has gone up

Collect data – as much as possible – enabling optimised design and
planning of your wind farm =>
Minimise and mitigate risk rather than distribute it!

Build professional value chain. Price pressure is short termed

Industrialisation will only kick in when there’s a sustainable market
                                          Questions?




Source: Taken by Photographer Jon Gibbs
                  Crude Oil Prices 2004 - 2007




Source: U.S. Energy Information Administration
           Copper Prices 2004 – 2007
                                    (US$/tonne)




Source: The London Metal Exchange
        Aluminium Prices 2004 - 2007
                                    (US$/tonne)




Source: The London Metal Exchange
               Lead Prices 2004 – 2007
                                    (US$/tonne)




Source: The London Metal Exchange
 Steel prices - Hot Rolled Plate – 2004 to 2007
                                 Index 100 (2005) = 500 EUR/tonne

 120
 110
 100
  90
  80
  70
  60
  50
               r




                                            r




                                                                  r




                                                                                     r
                           n ct




                                                        n ct




                                                                           n kt




                                                                                          ly
                      l




                                                    l




                                                                       l
        4




                               05




                                                            06




                                                                               07
             Ap




                                         Ap




                                                                 Ap




                                                                                    Ap
                    Ju




                                                   Ju




                                                                      Ju
        0




                                                                                         Ju
                              O




                                                           O




                                                                              O
     20




                            20




                                                         20




                                                                            20
 n
Ja




                            Ja




                                                        Ja




                                                                           Ja
     Source: MEPS - Based on average spot course

								
To top