Orsted Drops Projected OSW Capacity Factors

Orsted’s Hornsea 1 wind farm off the coast of England. Source: Orsted

By Steve Haner

The company that will partner with Dominion Energy Virginia to build a massive offshore wind farm off our coast has just cut the energy production forecasts for its own facilities, sufficient to lower its profit margins and drop its stock values.

“Our models weren’t sophisticated enough,” Orsted’s chief financial officer is quoted in one energy industry outletBloomberg’s article, one of many based on the company’s open discussion of the issue yesterday, described the problem this way:

The tests show that the company’s current production forecasts underestimate the negative impact from the so-called blockage effect, which arises when the wind slows down as it approaches turbines. It also underestimated the negative effect of the so-called wake effect, in which wind speeds drop between wind parks, it said.

The change will drop what’s called the lifetime load factor to 48%, down from a range of 48%-50%. That figure represents an estimate of how much electricity the machines produce divided by the potential capacity of the turbines. Since the wind doesn’t always blow strongly enough to turn the wind turbine blades, the load factor is always lower than capacity.

The number seems small, but for a giant windfarm like Orsted’s Hornsea One off the east coast of England, a change could shift income by 10s of millions of dollars every year, according to an analysis by BloombergNEF.

“2% is a big deal,” said Tom Edwards, an analyst at Cornwall Insight. “Over the lifetime that’s a lot of energy.”

Yes, a big deal.  It will be a lot of lost energy from the Virginia project, as well, over a 30 or 40-year lifetime. Exactly what capacity factor has been promised to Dominion and the Northam Administration is unknown, but if it was 50% and is now 48%, that is actually a four percent reduction.  It does change all the financial equations substantially.

The Financial Times picked up on another point:

As a result, Orsted cut its forecast rate of return for seven of its largest offshore wind projects under construction, reducing the lifecycle internal rate of return for these projects from about 8 per cent to about 7.5 per cent. “We do see a couple of effects that we believe will have more of a negative drag on production than we forecast,” said Henrik Poulsen, chief executive of Orsted, calling the change in guidance a “relatively small adjustment”.

Fifty basis points of lower return on investments of that size is a small adjustment? Wrong. As previously noted, the stock markets didn’t agree and knocked down Orsted and others in the field on the news.

That’s no problem for Dominion, of course.  The way its deal is proposed to be structured, as best we know to date, the rate of return will be the fixed profit margin the utility enjoys across its capital rate base, plus a 100-basis point reward for its green virtue.  That will be far above 8% and probably above 10%.  All the performance risk is on the ratepayers, including the risk that five, ten or fifteen years in these capacity factors begin to erode further, or storm damage takes the project offline for a long period.

As with my story last week on Governor Ralph Northam’s warning shot over electricity retail choice legislation, this news is not going to get much attention in Virginia unless somebody pushes.  I’m sure the reply will be this is of minor importance.  Democratic dreams of glory depend on waves of environmentally inspired voters rushing the gates of the Emerald Commonwealth, and the harsh reality of what is really coming – the same old tilted regulatory structure and accelerating customer costs — will be clear only after the votes are counted.

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11 responses to “Orsted Drops Projected OSW Capacity Factors”

  1. LarrytheG Avatar

    well something is not right: ” Current offshore wind
    In 2016 the Norwegian Wind Energy Association (NORWEA) estimated the LCoE of a typical Norwegian wind farm at 44 €/MWh, assuming a weighted average cost of capital of 8% and an annual 3,500 full load hours, i.e. a capacity factor of 40%. NORWEA went on to estimate the LCoE of the 1 GW Fosen Vind onshore wind farm which is expected to be operational by 2020 to be as low as 35 €/MWh to 40 €/MWh.[120] In November 2016, Vattenfall won a tender to develop the Kriegers Flak windpark in the Baltic Sea for 49.9 €/MWh,[121]”

    121 “Vattenfall wins tender to build the largest wind farm in the Nordics”. corporate.vattenfall.com. Retrieved 17 November 2016.

    1. Steve Haner Avatar
      Steve Haner

      That may be making the point: a 40 percent capacity factor is far more realistic than the up to 50 percent Orsted was claiming. And if that 40 percent is really 38, that changes the numbers….. All just speculation until Dominion and Orsted reveal all the numbers – don’t hold your breath. You are also highlighting the point where we likely agree – those Orsted or Norwegian projects have the financial risk on the wind developer, while Dominion wants to put the performance risk on us! Change that and I care far less.

  2. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    Thank you, Steve, for continuing to monitor these issues. Now, if you can only get the members of the General Assembly to pay attention and change the regulatory structure to put more of the risk on Dominion investors, or, at least, take away Dominion’s guaranteed profit margin on these projects.

  3. Good catch, Steve. Orsted has been running wind turbines in the North Sea for many years. I’m surprised they didn’t have a better handle on this crucial variable. Just goes to show, we’re still learning a lot about the economics of renewable energy.

    A profile of Governor Jerry Baliles today noted that he used the phrase (as I recall) of being “cautiously aggressive.” That’s the way I look at renewable energy. By all means, let’s press forward. But let’s be cautious. The true believers will promise all sorts of wonderful numbers. But we really won’t know until we’ve got a lot more experience under our belts. This is all the more true for renewable energy sources which are dependent upon local climatic conditions.

    A Mitsubishi-powered combined-cycle natural gas unit is going to perform pretty much the same anywhere you put it. Not so with a wind turbine or solar panel.

    1. Steve Haner Avatar
      Steve Haner

      Even if all the global warming hysteria is finally recognized as overblown (won’t surprise me), there are great reasons to use solar and wind as a substantial energy source and cut back on fossil fuels. Oil and coal are just stored solar energy, after all. Go to the source. As noted, my concerns about the Virginia OSW field would be greatly diminished if a third-party were building it and selling the power to us under a fixed PPA. But that is not The Virginia Way.

  4. Yes also I saw an article about how the blades lose efficency due to errosion damage (they are epoxy) and ice in winter. Not sure if the ice issue is ocean turbines or not.

    The more I learn, the more merit I see in the planned test turbines. The research step is not such a bad idea. In fact as a retired researcher, I know too well currently we are too anxious to skip the R&D steps.

    In the old days we used to test the heck out of things, to prevent commerical failure. Today the mentality is that we cannot possibly afford the high expense and delay of a test phase. We must urgently build an enormous project without testing. It is cheaper to have a major multi-billion dollar project fail, than it is to do the due diligence to make the project actually work.

  5. PS- Every Virginian knows the North Anna nuke plant story, right?

    The research before construction showed the chosen nuclear plant site was unexpectly sitting on an active earthquake zone. But our elected officials felt the jobs and money flow was the greater good, and that the construction needed to begin urgently without delay.

    The decision was made to move forward with construction, and hold the earthquake zone discovery as a secret from the public until constuction was completed and there was no choice in the matter.

    1. Steve Haner Avatar
      Steve Haner

      Well, and the rest of the story is it went through a pretty solid shaker in 2011 with very little issue. The reactor tripped, but overall there was little damage. Always takes me back to that key question: How many died at Three Mile Island? That would be…none. I bet more have died in installation accidents on offshore wind towers (good luck finding out.)

      1. Well that gets us off topic for Wind. My dad was sub nuke engineer, gave some advice to TMI, and worked for Adm Rickover for the first test nuke plant start-up at Shippingsport, so I know there is some ambivalence re: large (read humongous) commerical nuke reactor risk.

  6. Peter Galuszka Avatar
    Peter Galuszka

    Steve. The 2011 earthquake went beyond north anna’s design requirements. It shut the units down for 80 days. The NRC checked all reactors. It was not a small event.

    1. OK but the point is, I am hearing analogous full-speed ahead, darn-the-torpedos talk about Va. off-shore wind. “We cannot afford to wait, Va. must aggressively take the lead on off-shore wind. Failure to do so represents unaccetable loss of an enormous economic opportunity, that will save Virginia from certain climate-change armageddon.”

      The correct answer from a business perspective is that we do not have to rush it, it might be way better to wait and see. The best way to take the long-term lead might be to take a cautious approach. I am not totally opposed to off-shore wind. I may prefer that to large nukes as a very expensive way to make electrons. But I can also think of other expensive ways to make electrons.

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