This makes a significant difference to the prices developers need in order to make projects viable. With typical prices and performance characteristics, extending a contract from 15 to 25 years means bids can be around €20/MWh lower, as shown in the chart.
Dong Energy CEO Henrik Poulsen picked up on this point at the WindEurope/RenewableUK Offshore Wind Energy Conference in June, and expressed a wish that the Belgian support mechanism, currently under review, would go down a similar path.
There are sound reasons for pursuing this strategy. Denmark's first offshore wind farm, at Vindeby, operated for 26 years and a recent report from Megavind, a Danish Wind Industry Association partnership, showed the median age for decommissioning wind turbines was 17 years.
There are more than 700 wind turbines operating in Denmark that were installed more than 20 years ago, so with the improvements in technology that have occurred, lifetimes of 30 years should be easily attainable.
Support schemes
The UK, Danish and German support mechanisms for offshore wind are all different, as shown in the table, below.
The UK support only runs for 15 years, but for the developer it has the advantage of contract prices being linked to the consumer price index. The contract price for the nuclear power station at Hinkley Point is also index-linked.
Since the principal component of the levelised costs from nuclear and wind energy is the cost associated with repaying the initial capital cost - which is fixed by the interest charge — it could be argued that index-linking wind-energy prices is unnecessarily generous.
However, most elements of the operation and maintenance costs are likely to rise with inflation, which may be the justification for index linking. Partial index linking is a theoretical possibility, but would add complexity.
There are advantages for the developer to index-linking, and it keeps "headline" prices down.
A notional offshore wind farm, costing €3,000/kW, with a 45% capacity factor, typical operation and maintenance costs, and financed with 80% debt and 20% equity, would give an equity return of around 12%, with a price of €100/MWh, with 2% inflation.
Without index-linking, the developer would need to raise the bid price from €100/MWh to around €113/MWh to deliver the same equity return.
Protecting against falling gas prices
Although onshore-wind energy costs are now close to, or lower than, those of electricity from combined-cycle gas turbines, it is often difficult for wind to take advantage of this situation.
Gas-fired generation tends to set the wholesale electricity price, and wind is not protected if a drop in gas prices pushes wholesale market prices down.
A recent report for UK utility ScottishPower by consultants Arup proposes a mechanism to provide wind projects with a "market stabilisation contract for difference".
It suggests an administrative strike price - essentially a ceiling on auction prices - of around £50-55/MWh (2012 prices) (€55-61/MWh) would be fair, while at the same time encouraging the growth of carbon-free generation.
Arup used two methods to derive these estimates. The first is based on a levelised calculation of the wholesale market revenue for a gas-fired generator, from which the system integration costs from wind were subtracted.
The other used a levelised generation cost for combined-cycle gas turbines, taking into account likely variations in gas prices over the next 15 years.
AT A GLANCE - THIS MONTH'S REPORT CONCLUSIONS
Market Stabilisation Analysis: Enabling Investment in Established Low Carbon Electricity Generation, Arup, July 2017 Outlines a way of establishing fair competition between wind and gas through the use of an administrative strike price
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