The myth of expensive offshore wind: it’s already cheaper than gas-fired and nuclear | RenewEconomy

The myth of expensive offshore wind: it’s already cheaper than gas-fired and nuclear

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Existing offshore wind is already cheaper than gas-fired power plants. Future offshore wind farms will be cheaper still.

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Energy Post

Horns Rev 2 – mounting the platform (Photo: Danish Wind Energy Industry Association)

Analysing public data on offshore wind in Denmark, energy consultant Mike Parr concludes that existing offshore wind is already cheaper than gas-fired power plants. Future offshore wind farms will be cheaper still – and up to 60% less expensive than the proposed nuclear power plant at Hinkley Point C in the UK. This means, writes Parr, that government support for offshore wind can be quickly and substantially reduced. 

Offshore wind is routinely criticized for being too expensive. It is true that some offshore wind farms are getting large subsidies. But that does not mean they are expensive. It rather means that their operators are making a lot of money. In fact subsidies can go down considerably and probably will, as I will show in this article.

In a previous article for Energy Post, I profiled developments in the Danish sectors of the North Sea and the Kattegat. In these two locations there are two modern wind farms: Dong Energy’s Horns Rev 2 (2011) in the North Sea and Anholt (2013), another Dong project, in the Kattegat. I showed that the Kattegat in particular represents a great opportunity for offshore wind, with very high capacity factors.

Just after finishing this article, the Danish Energy Agency announcedthat Dong’s Swedish rival Vattenfall had won the competition to build Horns Rev 3 (400MW) in the North Sea with a bid price of €103/MWh for 10 years. This is the amount that Vattenfall will get from the Danish government for that period. Furthermore there are plans for more farms both in the Kattegat (Saeby – 200MW) and the Baltic proper (Kriegers Flak – 600MW). The Danish offshore wind target is 1350MW by 2020.

Denmark publishes data on the monthly output of every single wind turbine onshore and offshore in the country. It also provides hourly data on the aggregate output of the offshore farms. This data facilitates a financial analysis of existing and future wind farms for Denmark and by extension for developments in the German sector of the North Sea. Note that the UK, which has the largest fleet of offshore wind turbines, does not provide any data on the production of individual wind farms, despite the extensive public support they receive.

Financial (R)Evolutions?

When we analyse the available data, we can draw some interesting conclusions about the evolution of costs in offshore wind. Offshore wind turbines already appear to be cheaper than combined-cycle gas turbines (CCGT’s), although this is not yet reflected in the subsidies that the operators get.

Horns Rev 2 the platform (photo: Danish Wind Energy Industry Assocation)

The table below shows the main results of my analysis. Note that Anholt has been built, Horns Rev 2 is in planning and Saeby will soon be out for tender. The estimate for the capacity factor (CF) for Anholt in a normal year is around 77%, as I have explained in my previous article, but to be conservative I have assumed a CF of 65%.  Horns Rev 3 will be built near Horns Rev 2 which has a known CF of 50%. Saeby will “enjoy” a CF similar to Anholt because of its location in the Kattegat.

Note that the bid price is what the operators get from the government for 10 years. These are guaranteed payments. After that, they can sell the electricity on the wholesale market. I have assumed a wholesale price of €25/MWh for a period of 15 years after the 10-year period is over. This is obviously an estimate, since nobody knows what the market price will be 10 years from now.

I have also assumed a discount rate of 5% (cost of capital/debt) for all projects. This is based on the cost for Dong to raise bonds. Investment costs of the projects are based on statements from the companies. I have made some other assumptions with respect to operation and maintenance costs. The net present value (NPV) represents the total revenues over the 25-year period minus the costs, with a discount factor of 5%. In other words, this is the profit the project makes recalculated as net present value.



As the table shows, Dong invested €1.355 billion in Anholt. With a capacity factor of 65%, a bid price of €140.00/MWh for 10 years, a wholesale price of €25/MWh, net present value comes out at between €763 and €1180 million. This represents an internal rate of return (IRR) of 21-25%. By year 6 the project will go (cumulative discounted) cash positive. By year ten when the €140/MWh finishes it will be €1bn cash positive.

Given these numbers it is not surprising that some Danish pension funds (PKA A/S and PensionDanmark )were keen to take part in the project! This is not to say that the subsidies were unjustified. They were probably necessary to get the offshore wind ball rolling. But the government’s support can be (and is being) reduced substantially for future projects.

Horns Rev 3 (HR3)

HR3 will enjoy wind speeds of 10m/sec typical of the west coast of Jutland (source: Dansk Energie). Vattenfall bid €103/MWh for 10 years. The average capital cost of a MW at the Anholt farm was €3.355m. However, the permit granted to Vattenfall is for WTs in the range 6MW to 10MW. These can be expected to reduce project costs and increase CFs due to the need for fewer turbines. Thus one of the financial assumptions for HR3 is that there will be a 15% reduction in costs (to €2.9m) per MW installed. Based on this, in year 9 the project goes cash positive and by year 10 is cumulative cash positive at €125m. The change in capacity factor (50% vs 65%) and the drop from €140 to €100/MWh has made a difference to the IRR and NPV.


Denmark aims to install a further 1GW of offshore wind by 2020. It will soon be tendering for a 200MW offshore wind farm in the Kattegat near Saeby, just north of Anholt. Project costs should be around €580m based on HR3 assumptions. The project should go cash positive by year 7 and have cumulative discounted cash of €238m by year 10.

Cheaper than gas-fired power and nuclear

What is interesting to note, in addition to the high profitability of Anholt in particular, is that the Danish auctioning process seems to be successful at driving prices down (26% reduction over 5 years Anholt vs Horns Rev 3).

Even more importantly perhaps are the actual costs of offshore wind, which are lower than the bid prices. In the column “lifetime costs per MWh” I have calculated the costs for each of the three projects. This is based on the energy produced in the first 10 years of operation multiplied by the bid e.g. €103/MWh for Horns Rev3 plus the energy produced over 15 years at an estimated wholesale price of €25/MWh. This sum is then divided by the total energy produced by a given project over 25 years. Whilst this is crude, it provides some indication of a “lifetime” cost per kWh for the consumer. In the case of Saeby a simple sensitivity analysis was undertaken with the aim of matching Saeby’s internal rate of return to that of Horns Rev3. A bid price of around €90/MWh would lead to a “lifetime” cost of €51/MWh.

Horns Rev 1 (photo Danish Wind Energy Industry Association)

Recent reports such as this one by Ernst & Young on wind in Europe, while positive about offshore wind, still imply that offshore wind is expensive. According to this report, offshore wind power has a price similar to that of CCGTs. Based on the Prognos report for the Bavarian government (published in November 2014) this is around €90/MWh (levellised cost of electricity or LCOE). Anholt turns out to be 14% cheaper and Horns Rev3 around  37% cheaper than CCGT power. If the EU ETS was functioning then the differential would be even greater.

Note that the energy-only component in a Danish electricity bill for 2013 is around €48/MWh. This is close to the €51/MWh from Saeby over 25 years. Furthermore, as more projects are built costs are likely to come down further.

If we compare the offshore wind farms to the cost of the nuclear power project proposed at Hinkley Point, which will get £92.50 (about €125) per MWh for 35 years, Anholt delivers electricity that is 40% cheaper, Horns Rev3 will deliver electricity that is 58% cheaper and Saeby 60% cheaper. Of course the authorities should ensure that they will get competitive bids.

The only uncertainty in this is how wholesale prices in Denmark will evolve in the next 25 – 30 years. What is certain is that once 10 years have elapsed, the owners of Danish wind farms will be at the mercy of the markets and the wind. By contrast, owners of UK nuclear plants seem to have been granted certainty on both price and market access. Whilst the UK talks about energy markets, the socialist Danes seem to have implemented them. Funny that.

Editor’s Note

Mike Parr is Director of energy consultancy PWR. He previously worked for one of the UK’s distribution network operators as a systems engineer running their network Merseyside. He then moved into industrial engineering running the services (and energy saving activities) at Sony’s Bridgend TV plant. In the late 1990s he founded PWR Consultants which undertakes research in the area of climate change and renewables for clients which include a G7 country and global corporations.


Source: Energy Post. Reproduced with permission.

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  1. Calzo 5 years ago

    Well this is certainly a positive analysis although if you apply to the UK sector you’re probably looking at CF’s in the region of 40% not 50% or 65% so that means a long payback time at the prices being quoted here. The offshore wind market beyond ridiculously well resourced Danish sites by no means offers guaranteed strong returns…

  2. vacmancan 5 years ago

    Guys Georgetown, Texas has the answer to 100% renewable wind and solar. Watch how they do it!!!!!

  3. Max Vittrup Jensen 5 years ago

    Mike Par; I found the following information about the foundations
    …And it made me wonder if you (or anyone else) have done any calculations on the amount of embodied energy of each foundation? -I’ve always been curious about this issue…

    • Jens Stubbe 5 years ago

      Hi Max

      These studies has been done many times over the years but the hasty development of wind turbines makes these report outdated very soon.

      All these studies are for instance outdated because the capacity factor, the lifetime, the amount of materials, the service needed etc. constantly change to the advantage of the more modern designs.

      As a rule of thumb the entire amount of energy gone into producing a modern wind turbine is usually returned in less than three month and when the wind turbine is decommissioned most of the energy is recovered as scrap materials and you can quite often reuse some of the parts as for instance the foundation.

      No other form of CO2 lean energy source is leaner than wind but solar could potentially approach and if Gen4. nuclear ever surfaces after the billions of dollars that has been poured into it or if nuclear fusion ever happens then they might come close to wind in terms of CO2 lean electricity generation.

      But it will be a very tough target to pursue to return the energy used for construction and through the entire service life more than 100 times as modern wind turbines do.

      • Max Vittrup Jensen 5 years ago

        Hi there,
        Thank you heaps for your clarification. Thing is I now live in Norway which only have a fraction of the on-shore windmills as Denmark, despite the extreme size difference of the countries. I’m convinced this is due to the strong cottage culture of Norwegians along with the “Not in my back yard” approach, which makes it politically unpopular to advocate on-shore solutions, despite the fact that it’s significantly easier to mount them on the rocky surface of Norway and I suppose maintenance much be easier as compared to off-shore mills.
        -I am aware that transporting them to site may be easier off-shore, considering the road conditions in Norway. Anyhow, glad to learn the return of energy is that low, although I’d rather the on-shore option were chosen as it’s bound to be even lower.

  4. Jens Stubbe 5 years ago

    Jens Stubbe

    I am afraid we have not seen any capacity factors above 50% in Denmark as of yet. When Hornsrev 3 commences we could see capacity factors approaching 60% provided the new Vestas 8 MW turbine is used.

    Capacity factors approaching 65% will most likely be standard 10-15 years from now due to more advanced coatings and Induflap technology where the trailing edge acts much like the feathers of birds of prey so disrupting turbulent flow is avoided.

    World record capacity factor for wind turbines over one year is 84% but despite the good wind resource here in Denmark we cannot match the best wind resources around the globe where you can achieve that kind of performance.

    Wind power is fast approaching a price point where it will be cheaper to use electricity from wind to extract CO2 and hydrogen from seawater and synthesize it into Synfuel than exploring even the cheapest oilfields in Saudia Arabia.

    With current wind power technology less than half of Australias land is needed to meet the entire global need for electricity.

    As for the cost calculation I think it is very conservative indeed. There is no way you will be able to obtain an average spot price from 2025 to 2040 at €25 per MW. Further the government guaranteed strike price for a given number of full load hours which will be reached sooner than the articles 10 year guesstimate.

    The recent Fullenkamp report assumes 30-50% component cost reduction over the next few years and in the last five years wind power price point has dropped 58%. The quality of the components is also skyrocketing fast and the cost of maintenance is dropping fast too because there are fewer components and fewer points of service wind the bigger wind turbines.

    The best comparable market for Australia would probably be US interior and the average PPA contract over 20 years was in 2013 2,1 US cent per kWh. The numbers for 2014 are due soon and most likely below the 2 US cent threshold.

    When you go below 1 US cent you can produce Synfuel cheaper than any refinery can based on oil from any oil field.

    • cosmicomics 5 years ago

      Apparantly, in 2014 Anholt had a capacity factor of 50.9%.

      “The Anholt 1 windfarm, which only opened in 2013, hit an average capacity factor of 50.9% for the full year 2014.”

      You’ve provided us with a lot of interesting information. I was wondering if you also could provide us with some links (gerne på dansk), so we could learn more.

      The figures I’ve seen regarding wind EROI are not based on the latest wind technology, and don’t come near the figure you’ve mentioned. Your figure is 4 to 5 times higher than what I’ve seen, and represents a learning curve beyond anything I’ve read about. Where does your figure come from?

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