Can new offshore windfarms make a profit?

[AMontford]

The accounts of Moray East, one of the major offshore windfarms due to come onstream in the next few years, suggest that it cannot make a profit at the Contract for Difference price at which it is supposed to sell electricity to the grid. Indeed it will be hugely lossmaking. Having not quite completed the foundations at last year end (Dec 2019) it had spent 1.2 billion, suggesting a completion cost somewhere just shy of £4 billion, approximately the industry norm. To make a profit at its CfD of £67, it can't spend much more than £2 billion in total. This is not going to happen.

It seems that offshore wind is expensive and will remain so.

What game could the developers of these windfarms be playing? I'd be interested in people's views.

The implications for groups involved in the offshore industry (SSE, Scottish Power etc) are disturbing, as are those for the economy as a whole.

[dspp]

The accounts of Moray East, one of the major offshore windfarms due to come onstream in the next few years, suggest that it cannot make a profit at the Contract for Difference price at which it is supposed to sell electricity to the grid. Indeed it will be hugely lossmaking. Having not quite completed the foundations at last year end (Dec 2019) it had spent 1.2 billion, suggesting a completion cost somewhere just shy of £4 billion, approximately the industry norm. To make a profit at its CfD of £67, it can't spend much more than £2 billion in total. This is not going to happen.

It seems that offshore wind is expensive and will remain so.

What game could the developers of these windfarms be playing? I'd be interested in people's views.

The implications for groups involved in the offshore industry (SSE, Scottish Power etc) are disturbing, as are those for the economy as a whole.

Have you any links to allow us to dig into it a bit without wasting our time ?

- dspp

[daveh]

The accounts of Moray East, one of the major offshore windfarms due to come onstream in the next few years, suggest that it cannot make a profit at the Contract for Difference price at which it is supposed to sell electricity to the grid. Indeed it will be hugely lossmaking. Having not quite completed the foundations at last year end (Dec 2019) it had spent 1.2 billion, suggesting a completion cost somewhere just shy of £4 billion, approximately the industry norm. To make a profit at its CfD of £67, it can't spend much more than £2 billion in total. This is not going to happen.

It seems that offshore wind is expensive and will remain so.

What game could the developers of these windfarms be playing? I'd be interested in people's views.

The implications for groups involved in the offshore industry (SSE, Scottish Power etc) are disturbing, as are those for the economy as a whole.

Website for MorayEast is here:
https://www.morayeast.com

First look shows the OP already has his facts wrong as they quote a CFD price of £57.50 per MWh so without a link to the accounts its dificult to know.

[Itsallaguess]

What game could the developers of these windfarms be playing?

The implications for groups involved in the offshore industry (SSE, Scottish Power etc) are disturbing, as are those for the economy as a whole.

Hi there,

Welcome to The Lemon Fool...

Is this you by any chance?..

Subsidising renewables is not the way to boost the UK economy - By Andrew Montford and Gordon Hughes

(Andrew Montford is deputy director of the Global Warming Policy Forum)

https://capx.co/subsidising-renewables-is-not-the-way-to-boost-the-uk-economy/

Cheers,

Itsallaguess

[Urbandreamer]

It seems that offshore wind is expensive and will remain so.

Anyone, and I do mean anyone, who even thinks about investing in the wind industry knows this.
The same people also know both how much cheaper onshore wind is, and the difficulties in actually being allowed to build onshore wind. I can look out of the window and see turbines, would you be so happy?

Then again, is the alternative building Tate modern, sorry a city centre coal fired power station burning "brown", high sulfer, coal that leads to smog so much better? Ok so let's build city centre nuclear plant instead.

No good? well we can always put them places like Windscale (Seascale) / Cumbria, Scottland or rely upon someone else building them with long wires and buying for the electricity from them. You think that so much better for those who live there? Or for that matter energy or other security of our nation.

Gas, from where? We are a net importer.

SERIOUSLY. I have owned shares in companies that run coal generation, maintain it. big wind, gas, oil and even the likes of geiger investment trust.

DO you claim that the alternatives are a better bet. Let us know what you would pick.

[AMontford]

I'd post a link to the accounts, but the system tells me I'm not allowed to post links. (Is that because I'm new around here?) They are easy enough to find at Companies House.

In answer to the poster who queried whether it's me at the GWPF, the answer is yes. I've written something about this at our website, but again I can't link.

I haven't actually got my facts wrong about the CfD. Moray East was awarded a CdD at £57.50, but it's currently worth £67 or so with the various adjustments that are made to it. The details can be found at the website of the Low Carbon Contracts Company.

Moray East's costs look like they will be well over £100/MWh.

[AMontford]

DO you claim that the alternatives are a better bet. Let us know what you would pick.

This is not really the subject of my post, which is specifically about the costs of offshore wind. For me, I'd be going for a mixture of modular nuclear and gas (we have lots of gas under Lancs). As California is currently finding out, until we have seasonal storage, renewables are a disaster waiting to happen.

[Urbandreamer]

DO you claim that the alternatives are a better bet. Let us know what you would pick.

This is not really the subject of my post, which is specifically about the costs of offshore wind. For me, I'd be going for a mixture of modular nuclear and gas (we have lots of gas under Lancs). As California is currently finding out, until we have seasonal storage, renewables are a disaster waiting to happen.

Information about the likes of gas imports and exports can be found at the governments web site.
https://www.gov.uk/government/statistic ... rgy-trends

In 2019, ignoring LPG and sticking to natural gas we imported over 317 Gw and exported less then 88 Gw.

Suggesting fracking as a solution is about as acceptable as suggesting new onshore wind.
I'm afraid that claiming XYZ is expensive demands the question, compared to what.

At the moment demand for power is down significantly. Here is part of a RSN from TRIG in April.

It said the global pandemic had led to a reduction in demand for electricity, and caused gas and carbon prices to fall.

The FTSE 250 company said those impacts were expected to continue over the near term impacting all power generators.

That fact is going to effect all PRODUCERS of energy. Those who buy gas and convert it to electricity may suffer less, but they will also be suffering due to the fall in demand.

[AMontford]

OK, but coming back to the original post, Moray East will be lossmaking. What's going on?

[Urbandreamer]

OK, but coming back to the original post, Moray East will be lossmaking. What's going on?

Will it be lossmaking?

If you are right that they need to spend less than £2bn then they knew that they would be lossmaking before they started, given that the predicted costs were £2.6bn.

It is going to cost more than that due to covid delays, but could those have been predicted?

[dspp]

Wearing my Moderator hat please can I gently say a few things, most especially for the benefit of any newcomers to TLF,

1. New users cannot post links initially, but after a certain number of posts linking is automatically enabled.
2. Advertising in any way shape or form is prohibited, and will very quickly attract robust Moderator attention (via the Alert system from TLF Users, i.e. the little ! icon/button in the top right of any post) if it takes place, as will any other forms of undesirable behaviour.
3. This Oil & Gas & Energy board (viewforum.php?f=16) is for polite discussion of relevant investment matters. Whilst Climate Change is peripherally touched upon it should not directly be central to anything on this board. If anyone wishes to discuss Climate Change then I started a thread over on The Natural World (viewforum.php?f=59) which is as good a place as any other for Climate Change matters (see viewtopic.php?f=59&t=24728), or users can start their own threads over there. Alternatively the Science board (viewforum.php?f=83) tends to slice & dice quite finely.
5. I quote from Wiki that,
"The Global Warming Policy Foundation (GWPF) is a lobby group in the United Kingdom whose stated aims are to challenge "extremely damaging and harmful policies" envisaged by governments to mitigate anthropogenic global warming.[2] The GWPF as well as some of its prominent members have been characterized as promoting climate change denial.[3][4] In 2014, when the Charity Commission ruled that the GWPF had breached rules on impartiality, a non-charitable organisation called the "Global Warming Policy Forum" was created as a wholly owned subsidiary, to do lobbying that a charity could not. The GWPF website carries an array of articles "sceptical" of scientific findings of anthropogenic global warming and its impacts." https://en.wikipedia.org/wiki/Global_Wa ... Foundation
which suggests that the OP may have an agenda in coming here. In that respect point #2, #3 and #7 below are especially brought to everybody's attention.
6. It is permissible - indeed encouraged - for anybody making serious claims of a financial nature to set out their sums. This is an investment board and we would expect that. Links are not required to do sums in public.
7. Politics is quite another matter. If there is a political debate then the entire thread that is affected will ordinarily get exiled to the dungeons of Polite Discussions (viewforum.php?f=63) as, ordinarily, it swiftly becomes unrealistic to sort out the evidence-based wheat from the evidence-less chaff.
8. There are a wide range of users of this board, with considerable experience of investment, finance, economics, earth sciences, engineering, and all forms of the energy industry. We all wish to learn from each other and share information with each other in a mutually supportive and beneficial manner. The more controversial the point you wish to make the more you should expect to be able to substantiate it. If you are merely trolling then expect to either get banned, or relegated to the dungeons of Polite Discussions.
9. Moderation is not permissible as a subject for discussion on this board.

kind regards, dspp

Moderator Message:
- thank you all -

[dspp]

OK, but coming back to the original post, Moray East will be lossmaking. What's going on?

Some personal thoughts,

1. Prove it will be losmaking. Do the sums here, in public.
2. State clearly who are the affected investors.
3. Explain why investors might deliberately engage in a loss-making project. Or was this not intended to be loss-making and is simply just another project gone wrong (of which we have all been there: I have personally been on some $bn hydrocarbon howlers in the mge/tech team trying to correct them).
4. Is there any systemic investment-related learning, or is this just an outlier.
5. And who cares and why. If this is just a loss making private venture then that's (surely ?) fine as the public purse is not affected.

regards, dspp

[AMontford]

I have no problems with anything on DSPP's polite message. I came here looking for investment community views on what windfarm operators' game might be.

[dspp]

I came here looking for investment community views on what windfarm operators' game might be.

1. New offshore windfarms can most certainly make a profit.
2. You still need to do the sums in public to show that this one won't.
3. And then my other questions below may assist.

regards, dspp

[AMontford]

My estimates of costs are in a standard levelised cost model, so a bit complex to post here, but it should be possible to do a simplified back-of-a-fag-packet version. I'll need to work that through though and it will take a little time. In some ways though, that process can be shortcut by simply pointing to this data:

1. Levelised costs of offshore windfarms are typically over £100/MWh. Data in the link below is from Aldersey-Williams et al. (Energy Policy 128 (2019) 25–35). The windfarms are sorted L to R by date of commissioning. https://twitter.com/aDissentient/status ... 72/photo/1

Typical capital costs are £2 to 4m/MW. As I've pointed out, the capital costs of this windfarm look normal. How can it accept a sales price that is half of anything anyone else has taken before, and that appears to be just half of its underlying costs?

I’ll revert with more detailed calculations shortly.

[AMontford]

OK, here's a quick and dirty calculation.

Revenue
Moray East is 950MW. Allowing a generous 45% capacity factor, that's 950 x 0.45 x 8760 = 3744900 MWh in year 1. It sells this at £67 to derive income of £251m.

Costs
Assuming (again generously) a lifespan of 25 years, its depreciation charge is £3.8bn/25 = £152m.
Allow (again generously - this is in deep water of around 48m) £125/MW for opex = 950 x 0.125 = £119m

Our costs running total is £271m so we are lossmaking even before considering interest payments. And the windfarm's performance will deteriorate by 2% per annum.

[AMontford]

In answer to your other points (taking them in a different order to make the story a bit clearer):

3. Explain why investors might deliberately engage in a loss-making project. Or was this not intended to be loss-making and is simply just another project gone wrong (of which we have all been there: I have personally been on some $bn hydrocarbon howlers in the mge/tech team trying to correct them).

As I said, I came here to see if anyone could suggest why they would do this. It makes little sense to me. It's systemic though. There are a series of offshore windfarms coming on stream in the next few years that have very low CfDs and which have announced costs that seem to suggest they will not be profitable. Triton Knoll is almost complete, has a CfD at £75 and has announced costs at £3.5.MW. Hornsea 2 is at £65. Interestingly, the next one, NgN has a CfD at £114. Then the ones after that are low again.

4. Is there any systemic investment-related learning, or is this just an outlier.

The Aldersey-Williams data suggests that costs are high and not falling quickly.

2. State clearly who are the affected investors.

In Moray East's case, a third of the company is ultimately owned by Engie, a company listed in France.
SSE and Scottish Power are involved in some of the other windfarms.

5. And who cares and why. If this is just a loss making private venture then that's (surely ?) fine as the public purse is not affected.

If they are lossmaking, then there is a real possibility that they will need to be bailed out. The game that earlier windfarms have played is to develop the facility and then sell it off to a pension fund. That's fine for earlier windfarms with CfDs at £140. One hopes no pension fund manager will buy into these ones though.

[Urbandreamer]

I find is pleanty of claims about how cheap they can produce the electricity. To me it looks like they are using this as a competative argument, which could of course be wrong.

As many of us know turbines are getting bigger and bigger. This "should" provide econnomies of scale. Less turbines producing more power means less construction and maintenence work. Hence cheaper power. The MHI Vestas V164-9.5MW will produce 35% more power than the 7Mw previous model. Hence three turbines for every four needed for earlier windfarms. Naturally new options plays havoc when trying to use previous costs per mWh.

As an engineer I am well aware of the fact that unforseen problems could occur when new devices are used in the field for long periods of time. They may be less fortunate than they predict in terms of maintenece costs.

As a small retail investor I am more likely to invest in established projets. The reason that I knew about the TRIG market update is because they are my chosen investment. There are pleanty of options and alternatives.

[AMontford]

As many of us know turbines are getting bigger and bigger. This "should" provide econnomies of scale.

Yes, and there is an effect, but the impact on costs seems to be quite small because bigger turbines/longer blades cost more to maintain etc. Here's levelised cost by swept area. https://twitter.com/aDissentient/status ... 22/photo/1

The effect may be obscured by the fact that windfarms have been moving to deeper waters at the same time as moving to bigger turbines.

[dspp]

In answer .....

AM,
1. Your proforma sums do indicate a loss, £251m income vs £271m costs. However you are assuming all energy sold at CfD price. Firstly even in a bad year we would expect some to be sold above CfD floor. Secondly there ought to be an assumption regarding future price pathway over 25yr lifespan. Third there are other parts of the value chain where profits can be made but which are dependent on owning (sufficient) upstream assets. Add in all three and rerun your sums I suggest.
2. For complex spreadsheets easiest way is to make a jpg image and then use imgur and post using the Img button. If you look on the HUR thread (viewtopic.php?f=16&t=796) you will see examples. If you look in Testing (viewforum.php?f=28) you will find a sandbox that gets autoscrubbed where you can play around with editing functionality in semi-private.
3. Be careful of relying on backwards-looking levelised costs. Best to judiciously include also forwards looking ones as there are a lot of improvement curves in play.
4. Are there any other project-specific value-adds in Moray East ? For example does it act as the enabler for either extensions, or further additional farms.
5. Or is Moray East simply the price of being in the game and for those principals (SSE, SP, Engie) to work down the learning curve and thereby execute more clearly profitable projects in the future.
6. And is Moray East suffering from project specific cost overuns. Granted it is difficult to get that in the public domain, but the continued bidding on CfD auctions down towards £nil indicates that something odd is going on with Moray East vs industry norms.

I would have to dredge my personal memory banks, which are suffering as I age, but I think I was slightly involved with Moray East (and neighbours, and others) about 5-10 years ago. My vague recollection is a somewhat protracted development process and quite a lot of scope changing. You will understand I cannot say much more. If I am right (and it was a long time ago) then that may be the issue here, i.e. old chickens coming home to roost. But project-specific ones rather than industry-wide ones. If - as I suspect - you are seeking a bad example to prove a point, then you may have found one, but I am not sure it is genuinely representative if you are genuinely seeking the truth.

regards, dspp