Pricing Offshore Wind

Offshore wind power is an environmentally and economically beneficial energy source which significantly reduces harmful pollutants.  Though more expensive than land based wind power and conventional energy sources, it is one of the least costly renewable energy sources.  This large, clean resource is also the largest renewable energy source for many coastal states.  Based on these facts, it seems logical to invest in offshore wind power; however, its cost relative to conventional sources and fluctuating power output offer some obstacles to its implementation.  Regardless of these obstacles, the advantages of offshore wind power have spurred policymakers across the globe to prioritize offshore wind power, relative to other renewable sources, and begin to deploy it on a large scale.  Policy and investment decisions regarding this technology require an accurate cost analysis over time.  Levitt and his colleagues at Elsevier used two such cost models for their analysis.  The first, the Levelized Cost of Energy (LCOE), measures the total financial cost of produced energy without considering policy of financial structures.  The second measure, the Breakeven Price (BP), gives the minimum electricity sale price for financial viability given a particular policy, tax, and purchase contract structure.  These models can help decision-makers by giving the information needed to bring down costs and make offshore wind financially viable.—Donald Hamnett
Levitt, Andrew C., et al. 2011. Pricing offshore wind power. Elsevier. doi:10.1016/j.enpol.2011.07.044

            The LCOE is calculated based on two factors: energy production and costs from construction and operations.  For each year, the cost cash flows of the project’s operation, including construction, are compiled into nominal values.  The Net Present Value (NPV) of each year of the plants lifetime is assessed using the nominal values and nominal interest rates, thus not adjusting to inflation.  Next, the energy production for each year of the project is determined and each unit of energy is given a dollar value that is constant over the life of the project, in real terms.  Simply put, the LCOE is the NPV of costs (terms of currency) divided by NPV of energy produced (in terms of energy units).  LCOE and BP share four determining input factors, with BP encompassing an additional three.  The shared principal determinants are Capital Expenditure (CAPEX), the cost to buy and build the plant; Operating Expenditure (OPEX), ongoing costs to operate and maintain the plant; discount rate, the return on investment required to attract project investors; and net capacity factor, the fraction of power generated over the long-term dividend by nameplate power.  The further parameters covered in BP are tax and policy inputs as applicable to the scenario; price escalator, the price increases each year as determined by the power purchase contract; and financial structure (debt term, term of power purchase agreement, etc.).  BP is calculated similarly to LCOE, but with consideration of cost and benefits based on U.S. policies.
            In the analysis, LCOE and BP were calculated with consideration of four financial structures and three cost structures.  The financial structures used were Corporate, Tax Equity, Project Finance, and Government Ownership.  The three cost structures are First-Of-A-Kind (FOAK), a scenario under which the plant is the initial project in an underdeveloped market such as the United States; Global Average (GA), a scenario similar to Northern Europe in which the market is more mature; and Best Recent Value (BRV), the best case under the current European market and available technology.  Several patterns were learned in the analysis, of which the most pertinent to the aforementioned factors follow.  First, it was found that Project and Corporate structures yield similar results, while the Tax Equity structure prices are higher than the LCOE due to high required returns.  Second, BRV prices are between 2.1 and 3.8 times lower than FOAK due to different in many parameters.  The DOE loan guarantee program modestly positively impacts FOAK, but has no or an adverse effect on the other cost structures.  However, the program currently only applies to FOAK, so it is just as well.  Lastly, the BP is lowest for Government Ownership under the FOAK and GA structures.  This is due to the low cost of government buying, and the absence of high required returns for investors.  From the analysis, we have learned that the high current FOAK costs are not representative of the actual cost of offshore wind power.  To reduce costs to the GA, then BRV point, the policy must be to increase the industrialization and manufacture of offshore wind.  This policy, along with furthered research and development, has the potential to bring the costs of offshore wind below the BRV point.

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