Money Talks: Cost modelling and Cost Reduc6on Opportuni6es UK Cost Reduc6on Pathways Adrian Fox Programme Manager Technology and Supply Chain 23 February 2014
The Cost Reduc@on Agenda Supply chain advancement DECC Roadmap Offshore Wind Cost Reduc@on Pathways Cost Reduc@on Task Force Offshore Wind Demonstra6on Programme Offshore Wind Programme Board Jul 11 Jun 12 Jul 12 Feb 13 Mar 13
Cost Reduc6on is required to maximise deployment of offshore wind to 2020 and beyond 18GW by 2020 high end of central scenario (2011). 15 GW 8 GW 11GW by 2020 low end of central scenario. (2011) Year of opera@on DECC EMR delivery Plan December 2013 At the strike price for offshore wind, the modelling suggests that 10GW is achievable (within a range of 8-15GW in the modelling by Na@onal Grid)
LCOE model design (single site) LCOE ( /MWh) = total discounted cost/total discounted genera@on CAPEX OPEX AEP WACC Timing Consen@ng Development/ Project Mngmt. Turbine Support structure Array electrical Installa@on Opera@ons & Maintenance Insurance Transmission charges Other Gross AEP Losses Availability Net AEP to offshore substa@on Equity returns Debt margin Debt tenor Gearing Re- financing Phasing of CAPEX, OPEX and AEP over @me Re- financing / Changes in WACC 4 Decommission ing Insurance Includes Capex: Cost reduc6on covered in separate RUK sub group study for pathways team
Industry Stories High innova@on Finance & Supply Chain Incremental improvement 3: Supply Chain Efficiency 4: Rapid Growth 36GW in Europe by 2020 (17GW in UK) Incremental technology evolu@on (e.g. steady progress to 5-7MW turbines) Greater compe@@on, investment, project collabora@on and beher risk management Deeper financial markets, lower risk / lower cost of capital 1: Slow Progression 2: Technology Acceleration 31GW in Europe by 2020 (12GW in UK) Incremental technology evolu@on, progress limited by market size Limited compe@@on/economies of scale Modest developments in financing solu@ons, reduc@on in risk / cost of capital 43GW in Europe by 2020 (23GW in UK) High levels of technology evolu@on across all wind farm elements (e.g. turbines progress rapidly to 5-7MW+) Greater compe@@on, investment, project collabora@on and beher risk management Challenging volume of finance required 36GW in Europe by 2020 (17GW in UK) High levels of technology evolu@on across all wind farm elements (e.g. turbines progress rapidly to 5-7MW+) Fragmented supply chain with some improvement in collabora@on Limited improvement in cost of capital due to ongoing changes in technology Incremental improvement Technology * Note: all GW figures refer to total opera@onal capacity by 2020 High innova@on
Capacity Trajectories by Story Operating capacity in the UK (GW) Rapid Growth 43GW by 2020 (Europe) Including 23 GW in UK Technology Acceleration & Supply Chain Efficiency 36GW by 2020 (Europe) Including 17 GW in UK Slow Progression 31GW by 2020 (Europe) Including 12 GW in UK Each Story is tied to an assumption on build out rate in UK and Rest of Europe
Generic Site Types Specified for this project Represent range of projects/zones to 2020 Site Type Average Water depth (m) Distance to nearest port (km) Average wind speed (m/s) A 25 40 9 B 35 40 9.4 C 45 40 9.7 D 35 125 10
Pathway defini@on Industry Story (x4) Site Type (A,B,C,D) Pathway (x16) Product A in 2011 Product A in 2014 Product A in 2017 Product B in 2017 Product A in 2020 Product B in 2020 Industry mix of Products Product B in 2014 Product C in 2017 Product C in 2020 Pathway Time (based on year of FID)* * FID = Final Investment Decision
Baseline of 140-143/MWh 140/MWh 143/MWh
Study Framework 3 inter- related workstreams Finance Technology Health & Safety Supply Chain
RESULTS
Technology
Overall summary Element Number of Innova6ons Windfarm Development 7 Turbine Nacelle 13 Turbine Rotor 13 Support structure 8 Array Cables 5 Installa@on 14 Opera@on 8 Scheduled and unplanned maintenance 6 13
Turbines
Turbine cost reduc@ons
Turbine cost reduc@ons
Supply Chain
Levers Asset Growth and Economies of Scale Risk Contract Risk Uncontrollable Compe@@on EU Compe@@on Low Cost Entrants Ver@cal Collabora@on Horizontal Collabora@on
Supply Chain lever reduc@ons FID 2020, Story 3, By Element
Story 1 SC Lever reduc@ons By Lever
Finance
Capital Requirements by Story
Post- Tax nominal WACC
Cost Reduc@on Pathways 160 140 LCOE ( /MWh) 120 100 80 60 40 20 0 FID 2011 FID 2014 FID 2017 FID 2020 1 - Slow Progression 2 - Technology Accelera@on 3 - Supply Chain Efficiency 4 - Rapid Progression
Contribu@ons to LCOE reduc@on
Breakdown of 2020 cost reduc@on 0-9 Cost Reduc6on ( /MWh) - 10-20 - 30-40 - 50-8 - 8-33 - 5-4 - 21-18 - 6-32 - 18-3 - 60 Story 1 Story 2 Story 3 Story 4 Technology (& transmission) Supply Chain Finance
Headline Drivers of Cost Reduc@on Next genera@on turbines (rotor size, MW ra@ng, reliability, life) & structures Offshore installa6on op@mised for cost and risk (including speed) Capacity factor op@misa@on (increase to 40-50%) New entrant suppliers contribu@ng to compe66on and constraint avoidance Steadily increasing market with predictable project commitment @mings delivers economies of scale, learning/proving, skills- growth triggers @mely investment in technology and supply capacity facilitates essen@al pre- FID commitments by developers concentrates available financial & other resources onto chosen projects Risk and cost tackled coopera@vely and end to end, within ver6cal collabora6ons ini@ated early in pre- consent development Developers abrac6ng new equity, and third party finance, to construc@on phase Smooth recycling of capital once asset is opera@onal
Comparison of DE and UK study TCE (average site type C and D) S@sung (site type B) S@sung Scenario 1 S@sung Scenario 2
Assessment DE projects risk being up to 10% less cost effec@ve due to wake effects DE development and consen@ng costs 40% higher than UK Financing costs significantly lower in DE DE O&M costs benefit from greater shared costs between projects DE installa@on costs less op@mis@c than UK.
Further Informa@on hhp://www.thecrownestate.co.uk/energy- infrastructure/offshore- wind- energy/working- with- us/strategic- workstreams/cost- reduc@on- study/