The pie chart shows the contribution of each major cost element to levelised cost of energy (LCOE).
The cost is comprised of:
LCOE is defined as the revenue required (from whatever source) to earn a rate of return on investment equal to the discount rate (also referred to as the weighted average cost of capital (WACC)) over the life of the wind farm. Tax and inflation are not modelled. In other words, it is the lifetime average cost for the energy produced, quoted in today’s prices.
LCOE is used to evaluate and compare the cost of electricity production from different technologies and at different locations. It is a good way to compare the cost of a unit of energy (say in pounds per megawatt hour of electricity (£/MWh)) produced. LCOE also does not consider costs relating to balancing supply and demand.
Lower LCOE benefits the electricity consumer (and tax payers if any subsidy is paid to generators), so decreasing LCOE is a key focus for the offshore wind industry.
LCOE combines costs and energy production into one metric, rather than comparing cost and energy production separately. It is used by technology players and industry enablers, but typically not by project investors who may be more interested in internal rate of return (IRR) or net present value (NPV) of an investment, taking into account more company-specific features like tax.
In the typical case shown in the pie chart above and table below, the LCOE is compatible with the bid prices seen in recent UK Government Contract for Difference (CfD) auctions.
CfD bid price is the revenue (£/MWh) sought by the developer for a 15 year duration. Revenue after this will come from the open market. The bidder’s prediction of future market prices and its approach to risk and competition will determine how it sets its CfD bid price. The CfD bid price therefore is not equal to LCOE, though there is a relationship between the two. In different markets, the scope of supply of the project developer and the terms of the competition vary, meaning that there is a different relationship between CfD bid price and LCOE.
The technical definition of LCOE is:
It : Investment expenditure in year t
Mt : Operation, maintenance and service expenditure in year t
Et : Net energy generation in year t
r : Discount rate (or WACC), and
n : Lifetime of project in years
LCOE reduction can come from reduced costs, increased energy production or changes in financing and lifetime of the project. Reduced cost can be from process or technology changes during the manufacturing, installation or operations phase. Increased energy production may be as a result of technology or by reducing lost energy via better operational processes. Reducing project risk is the main way to affect financing cost.
As shown in the chart, LCOE across Europe varies between projects (blue dots) but overall are continuing to reduce significantly over time. The LCOE has been back-calculated based on assumptions of full-life revenue & transmission costs, where applicable, as well as the auction price). The band takes into account range in site conditions and support mechanisms / local requirements that impact LCOE.
Some of the key drivers of cost are:
Average and storm wind and wave conditions, tidal ranges and tidal flows also impact LCOE. Higher mean wind speeds increase cost, but have a net benefit for LCOE due to increased energy production. In some markets (for example in Asia), typhoon winds drive design changes that add cost. Tidal ranges add to cost due to having to keep a minimum clearance from sea level to blade tip at all times. Tides and waves make it harder to access turbines, especially for unplanned service activities in bad weather, adding cost and reducing energy production.
Likewise, projects further from shore take longer to access, which adds cost and increases downtime, hence reducing energy production. At about 60km, it may be most cost effective to use a service operation vessel (SOV) spending weeks at sea, rather than crew transfer vessels (CTVs) travelling to and from port daily. Projects further from shore typically also have longer grid connections, adding to transmission CAPEX and OPEX.
In some areas, such as turbines, the market is not big enough to have more than a handful of suppliers competing globally. This limits competition. In other areas, such as cables and foundations, transport costs are low enough to enable a geographically diverse supply base to bid for supply. In areas such as provision of port services, distance to the wind farm is key, which localises competition.
Vessel charter prices are a good example of the impact of pan-sector competition. Whether considering large floating installation vessels or common tugs, cyclic variations in regional wind and oil and gas activity can have a significant effect of price. Large turbine and foundation jack-up vessels are typically purpose-built for wind, so price volatility depends much more on the pipeline of offshore wind projects.
Larger turbines help drive down the per MW cost of foundations, installation and operation, whilst reaching higher into the wind field, so increasing energy production per MW installed. Larger turbines drive a need for technology development at a component level, as offshore wind turbines use the largest castings, bearings, generators and composite structures in series manufacture in any industry.
Industry incorporation of digital, autonomous, artificial intelligence and other applicable technologies is also enabling significant cost reduction, especially through improved wind farm operation and control.
Typical costs have been provided based on a project with the following parameters, typical of an upcoming UK offshore wind project.
|Wind farm rating (MW)||1000|
|Wind turbine rating (MW)||10|
|Water depth at site (m)||30|
|Annual mean wind speed at 100m height (m/s)||10|
|Distance to shore, grid, port (km)||60|
|Date of financial investment decision to proceed (FID)||2019|
|First operation date||2022|
Detailed, bottom-up assessment of this typical project gives the following inputs to the LCOE equation:
As discussed above there can be quite a range in prices of any element, due to specific timing or local issues, exchange rates, competition and contracting conditions. Prices for large components include delivery to nearest port to supplier and warranty costs. Developer costs (including internal project- and construction management, insurance, typically spent contingency and overheads) are included in the highest-level boxes but are not itemised.
A more detailed breakdown of typical costs is presented in the table below. Note that figures presented are each rounded, hence totals may not equate to the sum of the sub-terms. As discussed above, there can be a large variation in costs between projects, so values stated should only be seen as indicative.
|Category||Rounded cost (£/MW)|
|Development and project management||120,000|
|Development and consenting services||50,000|
|Environmental impact assessments||8,000|
|Other (includes developer staff hours and other subcontract work)||42,000|
|Benthic environmental surveys||450|
|Fish and shellfish surveys||400|
|Ornithological environmental surveys||1,000|
|Marine mammal environmental surveys||1,000|
|Onshore environmental surveys||550|
|Human impact studies||350|
|Resource and metocean assessment||4,000|
|Geological and hydrological surveys||4,000|
|Engineering and consultancy||4,000|
|Other (includes lost projects that incur development expenditure)||54,000|
|Nacelle auxiliary systems||7,000|
|Small engineering components||25,000|
|Rotor auxiliary systems||4,000|
|Fabricated steel components||8,000|
|Other (includes assembly, wind turbine supplier aspects of installation and commissioning, profit and warranty)||340,000|
|Balance of plant||600,000|
|Buildings, access and security||8,000|
|Other (includes electrical equipment and systems)||22,000|
|Installation and commissioning||650,000|
|Offshore substation installation||35,000|
|Onshore substation construction||25,000|
|Onshore export cable installation||5,000|
|Offshore cable installation||220,000|
|Electrical testing and termination||6,500|
|Other (includes cable-laying vessel, survey works, route clearance, cable protection systems||186,000|
|Weather forecasting and metocean data||300|
|Other (insurance, contingency (spent) and construction project management)||212,000|
|Operation, maintenance and service (per annum)||75,000|
|Health and safety inspections||400|
|Other (insurance, environmental studies and compensation payments)||22,000|
|Maintenance and service||50,000|
|Turbine maintenance and service||33,000|
|Balance of plant maintenance and service||18,000|