by Gavin Smart, Investment & Financial Analyst
Some additional analysis on the Cost Reduction Monitoring Framework for your delectation and delight. A tale of turbine rating increases, advances in technology and supply chain efficiencies. And, better still, a bright outlook.
You’ve seen the headline CRMF results. The LCOE for UK Offshore Wind has reduced from £142/MWh for projects taking Final Investment Decision (FID) in 2011/12 by 32% to £97/MWh for projects taking FID in 2015-16. This follows the 15% reduction to £121/MWh reported previously in the first CRMF report, published in February 2015.
This is a great achievement, considering the target set was to reduce costs to £100/MWh for projects taking FID in 2020. In other words, the target has been achieved four years ahead of expectations.
The Qualitative Summary report outlines how much progress is being made in the areas of technology, supply chain and finance. The Quantitative Summary report details the methodology and process used to calculate the LCOE figures.
So, taking all of these as sources of inspiration, how did we get from £142 to £97 in the space of roughly four years? The reduction to 2012-14 FID projects was predominantly driven by increased turbine ratings, with a move to 6MW turbines earlier than most had anticipated. The further reductions to 2015-16 FID appear to be driven largely by supply chain efficiencies, competition (including in OFTO bidding) and performance improvements. Some portion of this can likely be attributed to the industry reacting positively to the continuity provided by FID-enabling rounds and visibility of future CfD auctions – with the benefits again being realised earlier than most would have expected.
Here’s how I like to visualise it, using publicly available information (including the document links, above) and ORE Catapult valuation modelling.
I think this chart speaks for itself.
It’s been two months since my last waterfall chart (IEA Wind Programme colleagues, I know 2016 was a bumper year, it’s been a slow start to 2017), so this is a picture (not an exact science, but informed estimation) of what has driven cost reductions realised to date, taking the Pathways Study (2012) Site Type A £140/MWh (including seabed lease fees) as the starting point, as that was the basis for the £100/MWh target.
And, finally, a slightly different view bundling these steps into higher-level groupings
Those were the pictures, here are the words.
Scale – average turbine rating increased from 4MW assumed in Pathways 2011 baseline to an average of 6MW in both the 2012-14 and 2015-16 FID samples (2015-16 is strictly speaking an average of 6.3MW) with direct reductions to balance of plant and OPEX costs
Technology advance – increases to capacity factors and longer useful life as well as reduced installation times and improved fabrication methods (increased turbine ratings are also advances in technology, but are significant enough to call out separately)
Supply chain – increases in competition, economies of scale, improved methods and partnering/integration
Site conditions – analysis of publicly available site data shows sites taking FID on average as being in slightly deeper waters, but similar distances from shore and with higher mean wind speeds than the Pathways Site Type A
Finance – reduction in (pre-tax real) discount rate from 9.24% to 9% (see the Quantitative Summary report)
Again, high-level, but think of these few points:
Scale – weighted average turbine size in the 2015-16 FID sample is 6.3MW. Projects are now routinely taking FID with 7MW and 8MW turbines – there is still cost reduction to come from increased turbine ratings with technology already available and, ultimately, hopefully, larger turbines to come
Technology advance – the Qualitative Summary report (based on direct industry feedback) has found that progress is being made in most areas and we should expect contractors to continue looking for that competitive advantage, driven on by continued investment in R&D and innovation and don’t forget the innovation assessment criteria for CfD contracts
Supply chain – competitive auctions (the 2015-16 FID sample includes only one competitively won CfD) are likely to further drive supply chain efficiencies, including further vertical integration and strategic partnering
Finance – as outlined above, only approx. 1.5% of the reductions banked to date are attributable directly to lower cost of finance; with all-in lending rates at all-time low levels and offshore wind an increasingly attractive sector, plus competitive auctions likely to put pressure on returns, there should be scope for further impact from cost of capital
I’ll let you draw your own conclusions about where costs will go next – but it would be great to hear people’s thoughts. Don’t try and second-guess too much though – there’ll be an auction soon anyway…..