Estimating the Revenue Stream of Aflandshage

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.

77 / 130 incorporates geographical elements like the wind speed, it also incorporates downtime of the turbines.

Downtime can typically occur when the wind speed is either too high or low, or when the turbines need to be shut off due to service and maintenance. In figure 30, it is seen how the turbines only generate electricity in a certain interval of wind speed of 8 – 55 miles per hours:

Figure 30. Source: Office of Energy Efficiency & Renewable Energy, 2017

The capacity factor captures all these elements and is the factor which must be multiplied by the maximum capacity. In table 10, estimated capacity factors for offshore wind turbines can be found:

Table 10. Own contribution. Sources: IEA, 2019

The average estimate of 43.76% is based upon actual capacity factors of the wind farms mentioned in table 10. The table only consists of Danish wind farms with a capacity of above 150 MW since these wind farms are more likely to be comparable to Aflandshage. Table 10 shows how the capacity factor has changed over the last years and displays a positive correlation between age and the capacity factor. While the average of 43.76% seem like a plausible estimate for the wind factor, WindEurope (2018) estimates an offshore capacity factor of only 37%. However, IEA (2019) finds that modern farms might have a capacity factor of up to 50%, but states this number only applies to the largest turbines available. While the capacity factor used in the calculation of the production has been determined by using wind projects of similar size, it cannot be rejected that the capacity factor also depends on other factors, which has not been accounted for.

78 / 130 Other, significant parameters when determining the capacity factor could be the wind speed on the site, the type of turbines, the pattern of how the wind turbines are placed, and the degree of maintenance. Based on the positive correlation between age and capacity factor, and the estimates of WindEurope (2018) and IEA (2019), a capacity factor of 50% has been chosen.

The actual production of Aflandshage will then be:

Production = Capacity ∗ Capacity Factor

Production = 2,190,000,000 ∗KWh

year ∗ 0,50 = 1,095,000 KWh

Thus, the expected, average, annual production will be 1,095,000 kWh.

3.2.2.2 The Price of Electricity

The price of electricity generated by wind power is not the same as the spot price of electricity found on Nord Pool Spot, due to the need of backup from other power sources. As such, it is not possible to just use the spot price of electricity when calculating the revenue (Dansk Energi, 2019). Dansk Energi (2019) estimates the price of electricity generated by wind power will be 29 øre/KWh in 2023 and an average of 31 øre/KWh from 2020 to 2039. It is not relevant to estimate prices further than 2039, as the uncertainty will be too high for a useful estimate (Dansk Energi, 2019). In figure 31, the different estimates for the price of electricity from different power sources are shown:

Figure 31. Own contribution. Source: Dansk Energi, 2019

The green scenario is if policies and renewable energy support rises and assumes a rapid evolution in the technology. The black scenario is if policies are made to counter renewable energy transition and shift the focus to eg. fossil fuels. The blue is an in-between-scenario and will be used as the estimate for the price, as it is a moderate estimate that does not assume significant changes to neither policies nor technology.

0 5 10 15 20 25 30 35 40

Offshore Onshore Solar

Øre/kWh

Average Price - 2020-2039

Dark Blue Green

79 / 130 An estimated price of electricity generated by offshore wind power of 31 øre/KWh will be used, as it is found to be the best estimate for the operational stage of Aflandshage.

3.2.2.3 Subsidies

As discussed in section 1.3.1, there are no longer paid any subsidies for offshore projects offered through the open-door procedure. However, there are still balancing compensations granted from the government as shown in section 1.3.6. The current balancing compensation is 0.9 øre/kWh and will be added to the price.

The grant only lasts for the first 20 years of the wind farm and will be removed entirely afterwards. Thus, the revenue for Aflandshage will be determined by the production, the price of electricity, and the balancing compensation.

3.2.2.4 Final Revenue and Costs

To summarize the section, a brief table is provided to give an overview of final income and costs. The following estimate are calculated on a basis of 250 MW maximum capacity and an operational stage of 25 years.

Table 11. Own contribution.

The numbers in table 11 are not discounting and therefore does not incorporate time value of money. It is simply meant as a quick measure to provide a brief overview at this stage. The estimates can also be expressed as figure 32, where the numbers are shown over total park life:

80 / 130

Figure 32. Own contribution.

3.2.2.5 Depreciations

As wind farms are assets with a long period of operations, their value and performance depreciate over time.

Thus, the reducing balance principle can be used to depreciate the value of the wind farm over its life. Assets used for the production of either heat or electricity, with a capacity of over 1 MW, can, according to the Danish Depreciation Act §5C pt. 1 no. 4, be depreciated by a maximum of 15% of its depreciable value (The Danish Depreciation Act, 2016). The annual depreciations are hereby calculated from the initial value of the total Capital Expenditures, which were found to be 459.00 EURm.

3.2.2.6 Taxes

As Hofor Vind A/S is a Danish corporation, a tax rate of 22% is applied consistent with regulations in the Danish Corporate Tax Act’s §2h, pcs. 3 (The Corporate Tax Act, 2016). The taxable income from Aflandshage’s operational stage begins in 2025 and assuming no changes in the corporate tax rate, the current rate of 22%

is applied.

DCF valuation often assumes that taxable income is always realized annually and is either deducted or added to the EBIT for simplicity reasons. In practice however, a deficit is deferred to later years and deducted the taxable income then cf. CTA. §12. The unrealized deferred tax asset hereafter occurs on the balance sheet for later use, due to the asset classification in the Financial Statement Act’s §33 (The Financial Statement Act, 2019).

Aflandshage is expected to have a taxable income deficit through the first 6 years of operations (2025 – 2030), because of depreciations, which declines over time due to the degressive method cf. The Depreciation Act,

81 / 130

§5c, pcs. 4. These deficits will be utilized in the period from 2031 - 2039, as the deferred tax assets are reduced to 0. The year 2040 is therefore the first year that Aflandshages tax payments equals 22% of EBIT.

For a given year, the deferred tax asset is only 100% deductible, when the annual deficit is under 8.573 mio.

DKK/1,12 mio⁶. EUR. Deficits greater than this limit is only 60% deductible each year. The remaining tax asset is deferred to later years. Appendix 4 contains the tax payments from the Aflandshage project in the DCF model.

However, the adjustment of deferring tax assets to later use is not applied to the pre-operational stages later in the real option valuation, due to simplicity. This assumption is made considering the large deficits in the construction stage would have a major effect on tax payments in the operational stage, which would distort the size of the free cash flows in the DCF valuation. It is determined that keeping the taxation separately across different models will increase the user value of both. In the ROV model a tax rate of 22% is therefore deducted every year a deficit is realized.