Estimating the Costs of Aflandshage

When evaluating any investment, it is necessary to estimate the costs that comes along with the project and the timing of these. Especially when valuating wind farms there are several factors that make the cost profile important and it is essential to understand the type of costs related to each stage of development. Generally, costs regarding wind farms are categorized into four categories: development costs (DEVEX), construction costs (CAPEX), operating costs (OPEX) and abandonment costs (ABEX) (Megavind, 2015, p.10). In figure 27 and 28, the costs are shown under the corresponding stage, and how they fall over the lifetime of a wind farm.

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Figure 27. Source: Megavind ,2015

Figure 28. Source: Megavind, 2015

3.2.1.1 Development Expenditures

In the context of the industry of wind turbines, development costs are often associated with getting construction allowances in a specific area. As mentioned earlier (section 1.2), the construction of a wind farm through the open-door procedure requires certain environmental permissions. As Aflandshage is following this procedure, costs will be associated to the necessary preliminary permissions. These examinations are expensive but can also take up to several years to receive, and thus delay the construction of the wind farm.

The development costs are mostly paid to firms that undertake the examinations for the wind turbines.

However, DEVEX is not only regarding these examinations but are also costs related examine the profitability of different sites (wind studies etc.) and design planning. DEVEX is added to CAPEX to establish the total initial investment sum.

73 / 130 3.2.1.2 Capital Expenditures

Referencing figure 25, CAPEX are the costs that are associated to the construction stage of the wind farm development. The construction stage contains costs such as materials, transporting materials, salaries, machines for building the wind turbines, etc. As seen from figure 28, the blue lines (CAPEX + DEVEX) grow significantly in size as the farm enters year 4 and 5 of the process, which is because the wind farm is constructed in these years. Especially for offshore projects, CAPEX are significant (relative to those onshore), as costs of transporting materials and constructing the underwater foundations are high.

3.2.1.3 Operating Expenditures

While both CAPEX and DEVEX are expenditures which happen before the operational stage, OPEX is the costs that relates to operating and maintaining (O&M) the wind turbines. As seen from figure 28, OPEX are only relevant later in the process, and not part of the initial investment of the project. The purpose of the resources spent on O&M are to keep the wind turbines efficient throughout the park life. However, while there may be significant spikes in OPEX, as new software is launched or the turbines suffer unexpected damage, the owners of wind farms, pay a fixed fee for other companies to service the wind turbines.

Resultingly, the OPEX of Aflandshage will be assumed to be covered by such a service agreement, and thus the OPEX, as seen from Hofor’s point of view, will be constant throughout the lifetime of the wind farm.

3.2.1.4 Abandonment Expenditures

ABEX relates to the decommissioning of a wind farm and includes costs of taking down the turbines and clearing the area. In figure 28, APEX and OPEX are shown as one column, but due to how the costs structure is changing, the last year, there are no OPEX. This would mean that for year 30 in figure 28, all the project costs relate to the abandonment of the wind farm. However, due to the insubstantial cost of abandonment, and the given a minor scrap value, it is assumed that these two factors evens out, so that the ABEX are 0 when calculating the models.

3.2.1.5 Industry Numbers for Each Type of Cost

The easiest and most trustworthy method of estimating costs related to developing, constructing, and maintaining a wind farm would be to consult its operators. However, there are no publicly available information regarding Aflandshage, thus the estimates of the costs will be determined based on an analysis of similar wind projects. While this method provides more difficult and less concise, it has the upside of estimating costs derived from actual data for comparable project. Wind farms are often subject to significant external risks, which means the estimation of costs prior to the actual construction of the wind farm might be imprecise, as unforeseen circumstances could occur.

74 / 130 The following estimation of costs have been chosen based upon farms almost equal in size to Aflandshage and consist of turbines of similar capacity and technology. The data of table 6 has been determined based upon findings from Deloitte (2014) and Energinet (2018).

Table 6: Own Contribution. Source: Energinet, 2018

While the data in table 6 has been found from similar farms, Deloitte (2014) has also estimated the costs of CAPEX and OPEX. Deloitte’s (2014) estimate of CAPEX does not take the Learning Rate (LR) into account.

Resultingly the report estimates costs representative for 2014, but are less precise given an FID of 2023, as productions costs has been lowered significantly.

The Learning Rate of the wind turbine industry is a determinant for how costs decrease, as technology and efficiency increase. The Learning Rate is presented as how many % the costs decrease when the total installed capacity has doubled. It is estimated that the LR from 2015 to 2030 is 13.8% for CAPEX and 14% for OPEX (Energinet, 2018). The Danish Energy Agency, which also conducted the analysis of table 6, has predicted the following changes for CAPEX and OPEX:

Figure 29. Source: Energinet, 2018

As observed in figure 29, the trendlines are rough estimates, and resultingly they appear linear over a period and then suddenly change to a lower slope. The blue and red curves in figure 29 are the expectations to the advancement in technology, where the new technology catalogue (red line) provides a cheaper estimate than the old technologic catalogue (blue line). Furthermore, Energinet (2018) estimates the following costs:

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Table 7. Source: Energinet, 2018

As seen from figure 27, the decrease in costs from 2020 to 2030 are roughly linear. By assuming linearity, and using the data provided in table 7, it has been possible to estimate CAPEX and OPEX for a wind farm with FID in 2023 using simple regression. The numbers from 2020 and 2030 would suggest an annual reduction in CAPEX by 0.028 EURm/MW and 0.00087 EURm/MW/year for OPEX. Based on this, the final estimation for a wind farm with an FID in 2023 can be found in table 8:

Table 8. Own Contribution. Source: Energinet, 2018

Using the data from The Danish Energy Agency and assuming a linear decrease in costs from 2020 to 2030, CAPEX will be 1.836 EURm / MW and OPEX will be 0.0565 EURm / MW / Year, given an FID of 2023.

Regarding DEVEX and ABEX, Stiesdal, Bindslev & Hansen (2017) estimate in 2025, the total costs from a wind park will be divided into 64% CAPEX, 32% OPEX, 3% DEVEX and 1% ABEX.

3.2.1.6 Total costs for Aflandshage

In section 3.1, it was stated that Aflandshage will have a capacity of 250 MW, but the size of the wind turbines will vary between 4 MW to 10 MW. It is assumed that the wind turbines will have a size of 8 MW, based on today’s market standards for comparable projects. The FID for Aflandshage is 2023, as that is the year in which construction is expected to begin.

76 / 130 With a capacity of 250 MW, 2 years of construction, and 25 years of operations, the total CAPEX for Aflandshage will be 459.00 EURm and total OPEX will be 353.06 EURm. Assuming DEVEX equal to 3% and ABEX of 1% of the total costs, the costs will be as follows:

Table 9. Own contribution.

For use in Real Options Valuation later, the Development Expenditures are split into two periods. As stated in the outline, DEVEX spanned across 4 years and are split into two categories: The Environmental Impact Assessment and Other Allowances.