Annals of the University of North Carolina Wilmington International Masters of Business Administration http://csb.uncw.edu/imba/ POTENTIAL FINANCIAL COST AND FEASIBILITY OF OFFSHORE WIND POWER IN GERMANY Nils Goettner A Thesis Submitted to the University of North Carolina Wilmington in Partial Fulfillment of the Requirements for the Degree of Master of Business Administration Cameron School of Business University of North Carolina Wilmington 2010 Approved by Advisory Committee Peter Schuhmann Vince Howe Christopher F. Dumas Chair Accepted by ______________________________ Dean, Graduate School TABLE OF CONTENTS TABLE OF CONTENTS....................................................................................................II ABSTRACT...................................................................................................................... IV ACKNOWLEDGEMENTS............................................................................................... V LIST OF TABLES............................................................................................................ VI LIST OF FIGURES .........................................................................................................VII CHAPTER 1 ....................................................................................................................... 1 INTRODUCTION .............................................................................................................. 1 CHAPTER 2 ....................................................................................................................... 4 LITERATURE REVIEW ................................................................................................... 4 Historical Review............................................................................................................ 4 Economic Efficiency of Wind Energy............................................................................ 7 Parameters of Wind Power Economics....................................................................... 8 Wind Power Generation Cost ................................................................................... 11 Comparison of Wind Power with Conventional Power Generation......................... 13 External Costs ........................................................................................................... 16 Offshore Wind Power ................................................................................................... 18 Outlook and Planning for Offshore Wind Power in Germany ..................................... 22 CHAPTER 3 ..................................................................................................................... 25 OBJECTIVES AND RESEARCH QUESTIONS ............................................................ 25 ii CHAPTER 4 ..................................................................................................................... 26 DATA AND METHODOLOGY...................................................................................... 26 Data Collection Process ................................................................................................ 26 Data Description ........................................................................................................... 27 Methodology................................................................................................................. 29 CHAPTER 5 ..................................................................................................................... 31 RESULTS AND DISCUSSION....................................................................................... 31 Descriptive Statistics and Discussion ........................................................................... 31 Correlation Statistics and Discussion............................................................................ 34 Multiple Regression Analysis and Discussion.............................................................. 35 Equation Model and Potential Cost Drivers ................................................................. 39 Model Application to German Offshore Wind Farm Plans.......................................... 41 CHAPTER 6 ..................................................................................................................... 43 CONCLUSIONS AND RECOMMENDATIONS ........................................................... 43 Final Conclusion ........................................................................................................... 43 Recommendation .......................................................................................................... 47 REFERENCES ................................................................................................................. 49 APPENDIX....................................................................................................................... 57 iii ABSTRACT This study investigates the financial feasibility of offshore wind energy projects in Germany. The investment costs necessary for German offshore wind projects are compared to similar costs for German onshore wind projects and to conventional energy investment costs. A review of the literature finds that wind power generation is almost cost-competitive with conventional energy production in Europe and will likely become increasingly competitive with coming improvements in wind turbine technology and rising fossil fuel prices. Offshore wind farms have access to higher wind speeds but incur higher investment costs. German offshore wind projects face higher challenges than such projects in other countries due to legal restrictions that push projects farther out to sea into deeper waters. The data set contains information for a mix in offshore wind farms located worldwide and onshore wind farms located in Germany. Multiple regression analysis is used to estimate potential offshore wind farm investment costs per annual energy output. Results indicate that distance to shore and water depth are important cost drivers for offshore wind projects and that offshore wind farms in other countries are cost-competitive with onshore ones. The regression model is used to estimate investment costs for planned offshore wind energy pilot projects in Germany. Results indicate that offshore investment costs average almost 30 percent higher than onshore investment costs; however, one-third of the twenty-two offshore projects have estimated investment costs within the range of onshore investment costs. Furthermore, it is likely that offshore investment costs will decrease further due to coming improvements in offshore turbine efficiency and the learning-by-doing and scale economies resulting from offshore industry expansion from pilot to commercial scale. iv ACKNOWLEDGEMENTS My thanks go to the chair of the committee, Dr. Chris Dumas. He did a great job by guiding my thesis project over such a long distance (4253.82 miles) without any loss of efficiency. I still remember our discussions via skype. Special thanks go to my wife, Kirsten. For many hours, she took care of our new born daughter, Pia Marie, so that I might have the research and writing time necessary to complete this project. v LIST OF TABLES Table Page 1. Example data for calculating unit cost of wind-generated power............................11 2. Example data or calculating unit cost of conventional power .................................14 3. External costs of energy sources in Germany, 2005................................................17 4. German offshore wind farm planning......................................................................23 5. Descriptive statistics for all (onshore/ offshore together) wind farm locations.......31 6. Descriptive statistics for offshore wind farm locations............................................32 7. Descriptive statistics for onshore wind farm locations ............................................32 8. Correlation statistics for wind farm data set ............................................................34 9. Multiple regression model with all variables...........................................................36 10. Multiple regression model (date and offshore variables excluded) .........................37 11. Multiple regression model with quadratic elements (capacity and date).................38 12. Potential investment costs for German offshore wind farms in pilot phase ............42 vi LIST OF FIGURES Figure Page 1. Global cumulative wind power capacity, 1990 – 2008 (in MW)............................. 6 2. Annual installed capacity by region 2004 – 2008.................................................... 6 3. World top 5 cumulative and new installed wind power capacity in 2008 ............... 7 4. Calculated costs per kWh of wind-generated power ............................................. 12 5. The present value costs of wind-produced power.................................................. 12 6. Current cost comparison: conventional power plants vs. wind power, 2010 ........ 14 7. Sensitivity analysis of power generation costs to fossil fuel prices....................... 15 8. Forecast cost comparison: Electricity generating costs in the EU, 2015/ 2030..... 16 9. Total offshore wind power installed by end 2008.................................................. 18 10. Operating and planned offshore wind farms in Europe as of end 2008................. 19 11. Average share of investment