Until a few years ago, Offshore wind operations sometimes felt like an afterthought to developers and deal makers chasing ever bigger wind farms and new partnerships in exciting new countries. More recently, anguish within the industry has been loud and clear. Most developers got caught out by rising costs to build combined with more expensive borrowing.
The business case to build offshore wind depends on construction costs, borrowing rate and contracted power prices, right? So, who even cares about operations? What difference does operations make to whether I get to build my wind farm?
In this three-part insight, Inside Edge looks at the commercial choices facing developers, operators, and joint ventures as they consider their best operating model and why they make a difference.
Part one highlights the relationship between operations and wind farm viability, Part two will look at the commercial options for developers and part three will discuss the knock-on consequences to those options for developers and turbine suppliers.
Operations, the make of break of the business case
While robust construction and lean CAPEX has always mattered, operating costs matter more now than before in determining whether an offshore wind farm gets built because the relative impact of OPEX on any business case has become fundamental.
Let us look at the figures in the GB market for instance. Here, support for offshore wind has declined from GBP 140 – 150 /MWh (2012 prices) awarded in 2017 - 2019 to GBP 54 – 59 /MWh (2012 prices) in last year’s CfD auction round 6.[1] This 60% reduction in per MWh revenue, means that the materiality of operating costs has increased. Take for example the SSE led 588 MW Beatrice Wind Farm completed in 2019. In 2023 Beatrice generated 2.155 TWh in 2023 and generated income of GBP 402m largely from its CfD strike price of 140/MWh (2012 prices).[2]
If we take an educated guess that Beatrice’s direct operating expenses[3] are c.GBP 55,000 /MW, then its annual operating cost of GBP 32m comprises c. 8% of revenue.
By comparison, once built in 2027, ESB and Red Rock’s 1080MW Inch Cape expects to generate up to 5 TWh[4] at a blended CfD price of 41.52 / MWh (2012 prices)[5][6]. Forecast revenue in an average year might therefore run at c. 260m GBP (in 2024 prices). If we assume more efficient O&M costs (say GBP 45,000/MW on account of Inchcape’s comparable scale) then Inch Cape’s annual operating costs (GBP 48m) equate to 20% of its revenue.
This relationship of operating costs becomes even more pronounced when considering some of the unavoidable structural expenses that any power asset like Inch Cape faces.
Starting with its GBP 2.7bn finance package. Say lenders require 6% interest. If so, then depending on the timing of its OFTO sale, Inch Cape might begin life paying 162m a year interest alone. Add unavoidable transmission charges (TNUoS) of say £11-12m[7] and the table below shows what is left from revenue to pay down all other costs including debt principal.
Cost efficiency in operations is no longer an afterthought but fundamental to an offshore wind farm’s business viability. The difference between operating costs of GBP 45,000 per MW and 55,000 per MW per year in operations could now make the difference between positive and negative cash flows in the first few years of operations. An offshore wind farm’s operating model may even be the deciding factor as to whether any distributions to the shareholders ae possible in the first few years.
Worth noting, this relationship will be further pronounced among offshore wind farms operating without price support (for instance some in Germany, Holland, and Denmark) as well as those whose support is due to end.
Table 1: Simplified work-through: OPEX impact
* Figures purely illustrative and extrapolated from publicly available sources noted in the footnotes. The author has no inside knowledge of Inch Cape. Inch Cape will have commercial levers which are not in the public domain. Inch Cape selected for illustrative purposes only and because of its recent newsworthy announcement of reaching Financial Close. Congratulations to all involved. It is fabulous news for the industry and for the UK. In no way should these figures be interpreted as anything other than illustrative for the wider industry.
In part 2 (coming soon), Inside Edge will look at some of the choices developers and owners have in their operating strategy to improve their returns and cash flow.
References and Source Material
[1] In 2024 prices the equivalent is GBP 194 – 208 / MWh (2024 prices) to GBP 75 – 82 / MWh
[2] BEATRICE OFFSHORE WINDFARM LIMITED filing history - Find and update company information - GOV.UK
[3] So, excluding semi-fixed costs such as insurance and transmission costs such as TNUoS and BSUoS
[5] Comprising 813.89 MW at GBP 37,35 / MWh and 261.11 MW at 54.23/MWh both 2012 prices). Equivalent 2024 price c. GBP 57-58/MWh.
[7] Assuming Cockenzie is in Zone 11 Transmission Network Use of System (TNUoS) Tariffs | National Energy System Operator
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