Shell shocked! by Giles Hundleby

One low price may be considered an exception; two, a coincidence; but a third low price in a row had better be considered the start of a trend. What, then, can we draw from the news that Shell and partners have won the latest Netherlands auction for an offshore wind farm at Borssele III & IV at a price of €54.5/MWh (25% lower than that achieved by DONG in July for Borssele I & II – both prices exclude transmission costs and development costs were paid by the government?

Firstly, with MVOW as a nominated supplier, the project can be assured of the latest and most cost-effective turbine technology. This is likely to be more than just the ‘big-rotor’ version of their current 8MW machine that we assumed for Borssele I & II, and our projections still show significant potential for bigger turbines to deliver more LCOE reduction.

Secondly, while MVOW and Mitubishi Corp do not share a strict legal connection, there is enough skin in the game from ‘team Japan’ to make it worth everyone’s while keeping the turbines running efficiently throughout their life, not just hitting availability targets till the end of the warranty period. In the long-run, finding the root cause of any problems and fixing them is the most effective approach for overall wind farm LCOE, and this should flow through to lower OPEX and higher energy production.

Finally, we have to note that the only major lever with enough range remaining to enable this scale of step in bid price is the weighted average cost of capital (WACC). With interest rates remaining stubbornly low (and even negative in some countries), it seems like the consortium has found a way to structure their project with WACC of 5% or below, which now seems to be part of the explanation for the even lower bid from Vattenfall at Kriegers Flak.

The good news for offshore wind is that low-cost capital can potentially be accessed by bidders on other projects, and is technology neutral (within reason). This means it should not impact the ongoing drive to deliver technology-based LCOE improvements. Indeed, if lower prices unlock additional volume, and / or accelerate deployment, low-cost capital may drive faster technology development.

 

A version of this blog also appears on Recharge ‘Three in a row spells a trend in low-price offshore wind‘ (subscription required)

2017-05-26T14:05:10+00:00 14/12/2016|Views|