Cost of Energy Reduction: The

European Story so far and a

forecast for the US

AWEA Offshore

Bruce Valpy

7 October 2014

© BVG Associates 2014

2/18

• Why focus on reliability

• Cost of energy

• Health and safety

• Reliability focussed approach

• 10 steps to success

Agenda

Justification

Reliability focussed approach during wind turbine development

Introduction

© BVG Associates 2014

• BAV add

Selected clients

BVG Associates

• Market analysis and business development

• Supply chain development

• Economic impact assessment

• Support to industrialisation

• Project implementation

• FIT project development (UK only)

• SCADA & condition monitoring

• O&M technical support

• Technical innovation & engineering analysis

• Support to investment in technology

• R&D programme management

• Design and engineering services

• Cost of Energy

• 1 minute lesson

• Things to remember

• Europe: The Crown Estate cost reduction study

• Methodology

• Results

• Progress in Europe

• Learning and opportunities for US

Contents

Agenda 10-minute snapshot

Selected clients

BVG Associates

• Market and supply chain

• Analysis and forecasting

• Strategic advice

• Business and supply chain development

• Technology

• Engineering services

• Due diligence

• Strategy and R&D support

• Economics

• Socioeconomics and local benefits

• Technology and project economic modelling

• Policy and local content assessment

3/12 © BVG Associates 2014

Cost of energy 1-minute lesson

LCOE breakdown LCOE

© BVG Associates 2014 4/12

Where:

LCOE Levelised cost of energy in $/MWh

= revenue needed (from whatever source) to obtain rate of

return W on investment over life of the wind farm

(tax, inflation etc. not modelled)

Ci Capital expenditure in $ in year i

Oi Operational expenditure in $ in year i

Di Decommissioning expenditure in $ in year i

Et Energy production in MWh in year i

W Weighted average cost of capital in % (real)

= (cost of debt x % dept ) + (return on equity x equity portion)

n Operating lifetime of wind farm (baseline 20 years)

m Years before start of operation when expenditure first

incurred

i i year of lifetime (-m, ..., 1, 2, …n)

Project development and permitting up to FID

1% Project management and contingencies from FID

to WCD2%

Nacelle20%

Rotor15%

Tower5%

Foundation supply11%

Array cables2%

Foundationinstallation

5%Array cableinstallation

2%

Turbineinstallation

1%

Transmissioncharges

20%

Unplannedservice

8%

Operation and planned maintenance

5%Other

4%

Decommissioning1%

CAPEX64%

Balance of plant supply

13%

Operation, maintenance and service

35%

Turbinesupply39%

Installation8%

Project4%

0%

20%

40%

60%

80%

100%

120%

0 10 20 30 40 50 60

No

rmalis

ed

LC

OE

Cumulative installed capacity (GW)

Cost of energy Things to remember

© BVG Associates 2014 5/12

LCOE for a well designed, well

operating wind farm a strong

function of:

• Energy production – driven

by wind speed distribution

• CAPEX - driven by water

depth, distance to shore

and technology

• OPEX – driven by accessibility

• Can vary +/- 30% just due to DNA

of projects

1. There is no single cost of energy

2. LCOE is more than CAPEX

Project development and permitting up to FID

1% Project management and contingencies from FID

to WCD2%

Nacelle20%

Rotor15%

Tower5%

Foundation supply11%

Array cables2%

Foundationinstallation

5%Array cableinstallation

2%

Turbineinstallation

1%

Transmissioncharges

20%

Unplannedservice

8%

Operation and planned maintenance

5%Other

4%

Decommissioning1%

CAPEX64%

Balance of plant supply

13%

Operation, maintenance and service

35%

Turbinesupply39%

Installation8%

Project4%

0

100

200

300

400

1980 1990 2000 2010 2020 2030

Co

st o

f E

nerg

y (€/M

Wh)

Year of f irst commercial installation

Onshore

Offshore

0.01

0.1

1

10

100

1980 1990 2000 2010 2020 2030

Rating

(M

W)

Year of f irst commercial installation

Onshore

Offshore

© BVG Associates 2014

4. Cost of energy reduction is matter of life and death

Bill Shankly,

Liverpool Football

Club

6/12

3. Wind industry is doing it already

Cost of energy Things to remember

4 Dimensional cost model: Time, types of wind farm site,

turbine sizes, industry scenarios

6 Industry day-long workshops (in UK, DK, DE)

20 Deep industry interviews (4 hours +)

125 Industry individuals directly involved

215 Pages – available for download

from our website

Methodology in numbers: technology work stream

Europe: The Crown Estate Cost reduction pathways study

Overview

• 2011 UK Government Energy white paper:

• Central scenario 13GW by 2020

• Minded to support to 18GW if cost of energy

reduced – target £100/MWh

• The Crown Estate cost reduction pathways study established to

evidence what industry thinks could be done

• Supply chain, finance and technology work streams

= + +

• Published summer 2012

Context

Cost reduction pathways study: results

• Given right external conditions, industry

can meet target:

• Confidence in market size to beyond 2020

• Smooth and timely transition under EMR

• Permitting timelines reliably met

• Clear and predictable offshore grid

regulatory framework

• Facilitation of new technology introduction

• To deliver, industry also needs to work together:

• Best practice, standardisation,

risk management, accessing new finance

© BVG Associates 2014 7/12

Technical potential impact for given

Site Type, turbine size and year

Anticipated technical impact

for given Site Type, turbine size and year

Maximum technical potential impact of

innovation under best circumstances

Technical potential impact for a given Site

Type and turbine sizeRelevance to turbine size &

site type

Commercial readiness

Market share

• Models changes in risk, with resulting impact on financing cost

• Numerous other stated assumptions, agreed with industry

Methodology Robust cost model and industry-supported baselines

Cost Model

Wind turbines

Wind farm sites

Impact of innovations

Baselines

© BVG Associates 2014 8/12

Results Where are the greatest savings?

Technology

70% 75% 80% 85% 90% 95% 100%

LCOE for wind farm with FID in 2011

Increase in turbine power rating

Optimisation of rotor diameter, aerodynamics,design and manufacture

Introduction of next generation drive trains

Improvements in jacket foundation design andmanufacturing

Improvements in aerodynamic control

Improvements in support structure installation

Greater level of array optimisation and FEED

About 30 other innovations

LCOE for wind farm with FID in 2020

Impact of innovation in on LCOE

Source: BVG Associates

© BVG Associates 2014 9/12

Results Where are the greatest savings?

Supply chain

© BVG Associates 2014 10/12

70% 75% 80% 85% 90% 95% 100%

LCOE for a wind farm with FID in 2025

Contract forms

Horizontal cooperation

Non-EU competition

Asset growth and economies of scale

EU competition

Vertical cooperation

LCOE for a wind farm with FID in 2014

Anticipated by 2020 Progress

Turbine

Balance of plant

Installation

OMS

Development

Overall technology

Overall supply chain

Finance

Progress in Europe Industry doing well, despite tough environment

Progress check

-2%

-2%

- -5%

-17%

© BVG Associates 2014 11/12

-4%

-25%

-15%

-2%

EU landmarks

Learning and opportunities for the US Rainbow of opportunities for the wise

What could a 3GW pa market look like?

12/12 © BVG Associates 2014

Shared with

other sectors

For

10GW

installed

capacity

• Build and preserve confidence – building an offshore wind industry

is a long game

• Establish continuity of competition - critical mass means

confidence in a ~3GW pa market

• Focus R&D and culture support on maximum cost of energy

reduction and collaborate rather than duplicate

• Technology is rapidly transportable – supply chain and culture

take longer

• Drive cost reduction agenda at developer level via market design

• Don’t constrain wind farm design too early – builds in cost

• Use experience from other sectors but don’t think offshore wind is

the same

• Keep focussed on the business case – share common languages

in talking costs, jobs, benefits etc

Big picture learning

5 Big projects, 350 turbines

3 Coastal nacelle assembly facilities (Alstom, MHI V, Siemens?)

• Geared and direct drive generators

• 50T+ castings

• Plus non-coastal supply

3 Blade facilities (2 in-house, LMWP?)

3 Tower facilities

1 Monopile facility, 100 monopiles (up to 8MW, 35m depth)

2-3 Jacket / floating foundation facilities, 200 jackets

1? Concrete gravity base facilities (1 project per year)

• Plus a lot of secondary steelwork

7 Offshore substations (HVAC, AC collector and HVDC)

800 km array cable (mainly 66kV)

1500 km export cable (mainly HVAC)

8+8 Foundation + turbine installation vessels

(some bespoke for floating / gravity bases)

12 Subsea cable installation vessels

2 Heavy lift vessels

150 Personnel transfer & 15 service operation vessels

7 Large component replacement vessels

2000 Offshore technicians

• Plus refurbishment and other support services

Thank you

BVG Associates Ltd.

The Blackthorn Centre

Purton Road

Cricklade, Swindon

SN6 6HY England, UK

tel +44 1793 752 308

info@bvgassociates.co.uk

@bvgassociates

www.bvgassociates.co.uk

The Boathouse

Silversands

Aberdour, Fife

KY3 0TZ Scotland, UK

tel +44 1383 870 014

This presentation and its content is copyright of BVG Associates Limited - © BVG Associates

2014. All rights are reserved.

You may not, except with our express written permission, commercially exploit the content.

Charlie Nordstrom

4444 Second Avenue

Detroit, MI

48201 USA

tel +1 206 459 8506

cjn@bvgassociates.com