An engineering asset analysis of offshore wind for policy and market purposes

Global offshore wind power is expected to grow significantly. For example, by 2050, offshore wind energy capacity in Ireland is projected to increase from 25 MW currently, to 30 GW. Similarly, the UK is targeting 50 GW by 2030; this will require substantial investment of which a significant proportion will be from investors seeking a return on investment. Cost estimations and economic projections will be essential to secure investment of this scale and show potential returns. Therefore, this research undertook an analysis of the potential economic impact of the introduction of offshore wind, from three perspectives: 1) generation costs, 2) factors influencing overall generation portfolio costs, and 3) how this may influence marginal costs in the context of an engineering asset analysis for policy and market purposes. In this research, the analysis focused on the island of Ireland as a case study considering its large targets. The analysis has been informed by experience and datasets in the Great Britain energy market because they are a global market leader and much of the information is in the public domain. This case study will also support techno-economic decision making in other countries, such as France, the Netherlands, Germany, and the USA which have similar offshore wind energy targets. This research had four objectives, one literature review and three types of engineering financial analysis, which are used to advise different stake holders in the offshore wind sector. In objective one, a literature review was conducted to (i) identify gaps in knowledge on how the economic viability of offshore wind energy is assessed, (ii) to introduce the benefits and limitations of Levelised Cost of Energy (LCOE) as a tool to conduct these economic assessments, and (iii) to detail the parameters used to calculate LCOE. The findings from this review informed subsequent cost analyses in objective two, which sought to determine the value and range of LCOE for the island of Ireland, with special reference to the interactions between input costs and the unit cost of generation from offshore wind energy. A sensitivity analysis showed the degree to which variability in input costs will influence generation costs. The results of objective two provide decision-makers and the research field with a range of levelised costs for different site conditions under different scenarios. For example, this analysis estimates a generation cost of 90 €/MWh for offshore wind in the baseline scenario, with ± σ ranging from 79 to 101 €/MWh in the Republic of Ireland. In objective three, the cost of generation on a per unit basis for different renewable energy technologies and fossil fuels including offshore wind in Northern Ireland was undertaken by creating cost projections and then comparing the cost of generation to wholesale electricity market prices from 2020 to 2050. This work was undertaken in collaboration with the Department for the Economy in Northern Ireland, to model future costs for renewable energy for the region. Different technologies were compared to benchmark the levelised costs of offshore wind against other technologies and the wholesale market price. This benchmarking exercise is very important for decision makers as it identifies optimal technologies, market entry and exits of technologies and enables them to look at the headroom between the technology cost of energy and the wholesale electricity market price. The results of this analysis can be used to 1) determine the cost of generation portfolio mixes, and 2) establish the potential economic burden of the energy transition to electricity consumers. For example, the approach used in this analysis estimated generation costs for offshore wind in Northern Ireland at 67 £/MWh. When compared to the wholesale electricity pricing, this generation cost varied from 165.27 £/MWh below the wholesale price to 51.59 £/MWh above between January 2019 and August 2021. Finally, in objective four, the impact of increasing levels of offshore wind capacity on the marginal cost of electricity using PLEXOS software was investigated. This was done using a least cost economic dispatch unit commitment model in order to determine the change in the marginal cost of generation from 2025 to 2030. Establishing the marginal costs is critical to calculating support mechanism payments. The results of the study indicate that increasing offshore wind capacity from 3.2 GW to 4.9 GW will decrease marginal cost by 4.10 €/MWh and reduce CO2 intensity by approximately 6 gCO2/MWh from 2025 to 2030 respectively. Overall, the research shows that 1) although there is risk currently associated with estimating the lifecycle cost analysis this is decreasing, 2) the long term LCOE is decreasing as fossil fuel costs are removed and the renewable energy technology costs become better understood, and 3) the marginal costs in the wholesale electricity market are decreasing. The understanding of the future cost direction provided in these analyses highlights that the electricity market and regulatory structures will need to be adapted for zero fuel cost power systems and the fixed costs associated with the contracts in the various support mechanisms. This will ensure that the wholesale to retail market price is correct and fair.