The Investment Potential of Offshore Wind in Germany: An Investigation of the World's First Zero-Subsidy Offshore wind Farm

Abstract

In April 2017, Danish utility Ørsted won the right to develop an offshore wind project in the German North Sea with a zero-subsidy bid, which marked the first time in the history of offshore wind. Numerous factors where essential in bringing down the cost of electricity, including the potential of larger turbines becoming available, increased capacity and extended operational lifetime. In this thesis, we wish to analyse the profitability of this subsidy-free project and how it is affected by the availability of the three cost reducing options mentioned above. We will base our analysis on an in-depth investigation of the financial and technical aspects of the project, the theory that substantiates these aspects and how they affect the performance of the project. Based on historical data, we will construct stochastic models for simulating relevant inputs for the investigation, such as the wind flow, production and spot price. We will then use the Monte Carlo method to forecast the future revenue of the project. The costs of the wind farm have been estimated using a regression analysis of existing German offshore wind projects. We find a decreasing relationship between Total Capex per MW and total capacity, which confirms the existence of economies of scale in offshore wind power. Furthermore, an investigation of the dependency of total Capex per MW on turbine size has been conducted. We find that increasing turbine size decreases Total Capex per MW and also Opex, resulting from fewer turbine positions. Using the traditional NPV valuation approach, we find that the project in the case where none of the mentioned factors are available, the base case, is unprofitable and should not be pursued by Ørsted. Analysing the sensitivity of the project to changes in the underlying drivers reveals that the forecasted trend in the spot price of electricity and the estimate of Total Capex are the most influential determinants of the profitability of the project. Following the preliminary valuation, we investigate the value of the three options that may become available to the project with a real option approach. We find that all three has a positive effect on the value of the project, but that none of them, when exercised separately, delivers a return above the required return. If however all three become available, exercising all of them creates a combination effect and delivers both value and a somewhat satisfactory return, which would justify the zero-subsidy bid. In the last section, we construct a stochastic model for the technological development of large scale electricity storage as a function of investment in research and development. We use this to develop a framework suited for analysing the option to invest in this technology. Although we believe the method could be useful in the future, the lack of data and research on the effect and cost of the technology makes it hard to extract meaningful insights from applying the method today