CHAPTER 3: Methodology
3.1. Cash Flow Model
3.1.2. Cost Parameters
The costs incurred by a floating offshore wind farm are capital expenditures (capex) that are incurred at the outset of the project, operational expenditures (opex) and taxes that are incurred during the operational phase of the project, decommissioning costs and any costs associated with the funding received, for example, interest payments if the policy support constitutes a loan.
Capital Expenditure
The initial installation costs are generally referred to as the capital expenditure position (Gribben, Williams and Ranford, 2010). Capital costs are made up mainly of the upfront investment costs and include wind turbine generators, substructures, mooring lines, anchors, assembly halls, road construction and grid connection, project development and planning costs, installation, medium to high voltage substations if applicable, transportation, craning, assembly and tests, as well as the administrative, financing and legal costs that are incurred with respect to the installation process (ATKINS, 2014). This cost position is by far the biggest for any floating offshore wind farm developer, accounting for between 75% (Krohn, Morthorst and Awerbuch, 2009) and 80% (Blanco, 2009) of the total costs of a wind farm over its lifetime.
IRENA (2012) even claims it can account for as much as 84% of total installed cost.
This capital-intensity at the very outset of the project is in stark contrast to
conventional fossil fuel-based technologies, such as natural gas, where the capital costs only account for 30% to 60% because up to 40%-70% of the costs of those plants are related to fuel and O&M costs (Krohn, Morthorst and Awerbuch, 2009).
Floating offshore wind structures offer a few cost advantages when compared to fixed offshore projects. Floating project, for example, incur lower foundation costs as they require less steel than fixed projects, and generate lower installation costs (see Figure 3-2 below).
While assembling a fixed offshore turbine requires specialised heavy-lift vessels that can only operate under certain weather conditions, a floating turbine – especially a semi-submersible structure – can be fully assembled at a dock in the harbour and then towed out once fully erected by a standard tug boat that only costs about a third to hire than a specialist vessel (James and Costa Ros, 2015). Similarly, decommissioning floating offshore wind farms is much simpler and less costly than decommissioning fixed structures. This is reflected in the day rates for the vessels required to accomplish each respective installation and decommissioning: standard tug boats, which are sufficient to tow out fully erected floating turbines only incur about a third of the costs of the heavy-lift vessels required for fixed turbine installation and decommissioning (James and Costa Ros, 2015). In Chapter 4, we will detail the capital costs of our model floating offshore wind farm.
Figure 3-2: Cost breakdown for a typical fixed and floating wind farm
Source: The Carbon Trust, 2015
Operating Expenditure
Operational expenditures associated with floating offshore wind farms include most notably operation and maintenance (O&M) costs as well as cost elements related to insurance, scheduled and unscheduled maintenance, repair, spare parts, site rent, consumables, administration, and power from the grid (Krohn, Morthorst and Awerbuch, 2009). O&M costs only account for about 15%-25% of the total wind farm costs (Blanco, 2009; Krohn, Morthorst and Awerbuch, 2009; IRENA, 2012), and thereby constitute a rather small component compared to capital expenditures.
Krohn et al (2009) state Spanish data indicates that about 60% of operational expenditure is spent on O&M of the turbine, labour costs and spare parts. The remaining 40% go in equal parts to insurance, land rental and overheads. Like capex, operational costs can vary significantly between countries, regions and even sites (Blanco, 2009): Some governments, for example, request continuous environmental evaluation and conservation studies, which can become an additional cost factor (Gribben et al., 2010). Other countries, such as France, place a special tax on all offshore wind turbines in operation. The distinct advantage of wind energy, compared to other forms of energy, with respect to operational expenditures is that once the installation process is complete and assuming that the wind resource has been calculated correctly, the generation costs for the entire project lifetime are predictable with reasonable certainty. This is, for example, why we did not add a contingency cost to our opex model figures, something we did for our opex cost estimates (see Chapter 4).
Opex will be adjusted to the inflation index just as other parts of the model will be indexed to inflation. For an explanation of the inflation rate, please see below (Section 3.1.3 Other Cash Flow Parameters).
Taxes
Generally, floating offshore wind and other renewable energy projects are required to pay taxes on their earnings. The formula for taxation is:
Taxes payablet
=
(
𝐼𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑒𝑙𝑒𝑐𝑡𝑟𝑖𝑐𝑡𝑖𝑡𝑦𝑡+𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑓𝑢𝑛𝑑𝑖𝑛𝑔𝑡‒ 𝑜𝑝𝑒𝑥𝑡‒ 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑡)
× 𝑇𝑐
(3)
Where,
t: any given year Tc:corporate tax rate
Taxes will be adjusted for each funding regime because the authors view taxes as part of the funding schemes (see section 3.2).
Other Costs
The developer of a floating offshore wind farm may incur costs other than the three types mentioned above if, for instance, the funding scheme consists of a loan that needs to be paid back with interest over a certain amount of time.
Cost of Debt
Our model will not use debt financing. We do not ignore debt, but assume that every project considered needs a stately guarantor who guarantees the debt of the project, such as the infrastructure guarantee fund in the UK. For simplification purposes we will henceforth assume that projects are all equity-financed, because debt financing would complicate the model unnecessarily. This is an aspect the authors decided on after consulting a developer of an ongoing project in Scotland, who also suggested to keep debt considerations out of the analysis to construct the model only as complicated as necessary1.