Wind Power Economics Rhetoric & Reality

WIND POWER ECONOMICS RHETORIC & REALITY The Performance of Wind Power in Denmark Gordon Hughes WIND POWER ECONOMICS RHETORIC & REALITY Volume ii The Performance of Wind Power in Denmark Gordon Hughes School of Economics, University of Edinburgh © Renewable Energy Foundation 2020 Published by Renewable Energy Foundation Registered Office Unit 9, Deans Farm Stratford-sub-Castle Salisbury SP1 3YP The cover image (Adobe Stock: 179479012) shows a coastal wind turbine in Esbjerg, Denmark. www.ref.org.uk The Renewable Energy Foundation is a registered charity in England and Wales (No. 1107360) CONTENTS The Performance of Wind Power in Denmark: Summary ........................................ v The Performance of Wind Power in Denmark ............................................................ 1 1. Background ........................................................................................................... 1 2. Data on Danish wind turbines ............................................................................ 4 3. Failure analysis for Danish turbines .................................................................... 6 4. Age and turbine performance in Denmark ...................................................... 16 5. The performance of offshore turbines .............................................................. 20 6. Auctions and the winner’s curse ...................................................................... 23 7. Kriegers Flak and the economics of offshore wind generation ....................... 27 8. Financial investors and Kriegers Flak ................................................................ 36 Conclusions ............................................................................................................ 39 Acknowledgements ................................................................................................ 43 References ............................................................................................................... 43 Appendix A Data on turbines, generation and wind speeds ............................................................... 45 Turbine register ...................................................................................................... 45 Wind speeds ............................................................................................................ 47 Appendix B Technical progress and models of wind farm performance .............................................. 50 Appendix C Assumptions for the financial model of Kriegers Flak offshore wind farm ....................... 57 THE PERFORMANCE OF WIND POWER IN DENMARK: SUMMARY 1. This paper re-examines and extends my 2012 analysis of the relationship between age and performance of wind turbines in Denmark using a much larger dataset for the period from 2002 to 2019. It focuses on differences between different generations of turbines, in particular between (a) the small turbines with a capacity of less than 1 MW that were standard until the early 2000s, (b) larger turbines, especially ones with a capacity of 2+ MW, that became standard from 2005 onwards, and (c) offshore turbines – initially with a capacity of up to 3.6 MW but more recently with a capacity of 6+ MW. 2. Ageing may affect the performance of wind turbines in two ways. First, they may experience major breakdowns or less serious equipment failures which cause a loss of output until they are repaired. Electrical failures at substations or in transmission lines may also lead to a partial or total loss of output from a wind farm. Offshore facilities are notably vulnerable to such failures. Second, the yield from turbines may decline gradually as a result of blade erosion and other factors which reduce the aerodynamic or mechanical performance of turbines. 3. Major breakdowns and equipment failures have been analysed using standard reliability models to estimate the time to first breakdown or failure and then recurrences later in the life of the turbines. The results of the models show that small onshore turbines of < 1MW were signifi- cantly more reliable than onshore turbines of 2+ MW. Most of the Danish turbines in the 2012 study were small turbines; it is now clear that this difference in composition accounted for much of the difference between Danish and UK turbines in that study. Offshore wind farms with turbines from 2 to 8 MW are likely to experience a much higher rate of breakdown and failure than onshore turbines. About 80% of offshore turbines experience a major breakdown or equipment failure in their first 8 years of operation as compared with only 20% for small onshore turbines. 4. Problems of reliability combined with more gradual loss of output lead to a significant decline in the average load factor for large onshore and offshore turbines as they age. Identifying the effect of ageing is complicated by technical progress in operational and maintenance practices that increases load factors gradually over time. In the case of small turbines, the combined but offsetting effects of ageing and technical progress lead to a small decline in average load factors as turbines get older. In this respect the current results are quite similar to those reported in the 2012 study. v THE PERFORMANCE OF WIND POWER IN DENMARK 5. However, for larger 2+ MW onshore and offshore turbines, the age-related decline in performance is much more significant, amounting to a decline of about 3% per year for onshore turbines and a decline of as much as 4.5% per year for offshore turbines. At age 16, an onshore wind turbine or farm will only produce 63% of the output that it produced at age 1, while for offshore turbines the output will be down to 50% of peak output. In addition, operating and maintenance costs per MWh of output are likely to rise at similar rates, both to fix breakdowns and failures and because fixed costs have to be allocated across a declining output. These factors mean that the economics of keeping a turbine or wind farm in operation look increasingly unattractive once it passes an age of 16 years. 6. The results suggest that new generations of turbines seem to experience an extended period of low reliability and poor performance following their introduction. This period may last for a decade or more. Experience suggests that the causes of such initial problems can eventually be dealt with but there is clearly a lengthy period of learning for each new generation that should be taken into account. This is important for offshore developments because both manufacturers and operators switched to a new generation of 6+ MW turbines in the mid-2010s. There is a strong possibility that these will experience significant problems of low reliability and poor performance into the latter half of the new decade. In addition, manufacturers are contemplat- ing a shift to yet another generation of 12+ MW offshore turbines with all of the likely problems associated with such transitions. It is far from clear that the manufacturing industry, which does not have a strong financial record or reserves, has the resources to cope with generational changes at this rate. 7. In recent years there have been a number of auctions linked to the development of offshore wind farms which have received extensive publicity, including the Kriegers Flak project in the Danish sector of the Baltic Sea. In this case the power purchase contract price excluding transmission costs is €49.9 per MWh (fixed in nominal terms) for 11-12 years. Many commentators assume that the headline prices for such auctions provide reliable evidence for trends in the cost of offshore wind generation. Such claims do not take account of the “winner’s curse” that is often an important factor in such auctions. A financial model of the Kriegers Flak project is used to examine the economics of the project and the implications of the decline in the reliability and performance of offshore turbines due to ageing. 8. The assumptions required to justify the auction price set are extremely optimistic, even without allowance for the decline in performance with age. As an illustration, one break-even scenario for the project assumes that the market price of power for the DK2 (East Denmark) region region will rise at more than 5% per year in real terms for 25 years along with eliminating the discount for wind generation. If reasonable allowance is made for forecast risks, the net present value of the project is a loss of about €400 million. If both forecast risk and performance decline are taken into account the break-even contract price is about €85 per MWh, or 70% higher than the auction price. vi SUMMARY 9. In effect, the winner’s curse associated with the auction for Kriegers Flak has transferred a large part of the subsidy required by the project from Danish electricity consumers to Swedish taxpay- ers who own Vattenfall. While residents of Denmark may welcome the transfer, the outcome is not a realistic way of funding long term investment in offshore generation. Further, Danish investors should not bail out Vattenfall by buying into the project, either during development or after completion, unless this is on terms that the developer is likely to find very unattractive. 10. More generally, financial investors such as PensionDanmark need to exercise extreme caution when evaluating investments in offshore wind projects for which development rights have been awarded by some form of auction. The risks and potential size of the winner’s curse are so large as to mean such investments

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