Peter Tornberg is in charge of Vattenfall's work of finding and developing new wind power projects. He talks fast and enthusiastically, and draws in his green notebook as he explains the company's strategy for renewable wind power.
During the coming years, Vattenfall is to invest around SEK 50 billion in new wind power projects, onshore and offshore, to achieve 4GW by 2020.
How will it work?
"We have a number of resources we can draw on. For a start, we have our existing portfolio of development projects in the pipeline, and we're working actively to get permits for these. But this isn't enough. We also have to extend our portfolio in order to get access to more projects. Here, we're following two routes. The first is auctions for offshore wind power, for example in Denmark and the Netherlands. The other is strengthening the project portfolio by acquiring projects, onshore or offshore, which have been given permits or are in the process of being given them. Then we add them to our portfolio and develop them until they're ready for construction."
Tornberg explains that the greater part of the growth will be in Vattenfall's existing markets.
"But we may also enter new markets. These are mainly our neighbouring markets in Europe. We've looked at Finland, Norway, Poland and France, for example. Beyond this, we're trying to understand and follow where the major development is going to take place from now on. Offshore wind has so far been a northern European phenomenon. But this is going to change in the future. If you look at our competitors in offshore wind, they're going into markets such as the USA, Taiwan and China. They're expanding, which is good, because if offshore wind is to be successful in the long run, it has to grow beyond northern Europe. It's only then that volumes will grow significantly, and this will bring down the cost of generating electricity from offshore wind, which is also essential in order for even more countries to opt for this technology. We can already see with today's cost levels for offshore wind that more and more countries are beginning to see the potential of this technology."
Sweden is challenging
The reason why it does not seem as if Vattenfall will be constructing offshore wind capacity in Sweden at the moment is that the Swedish incentive scheme is technology-neutral.
"There's no separate subsidy for offshore wind. You have to compete on exactly the same terms as onshore wind, biomass or any other renewable generation. And since it's much more expensive to build offshore, it isn't viable at the moment. It remains to be seen whether specific subsidies for offshore wind will be introduced. If it is, Vattenfall has a strong pipeline that can be expanded."
"For onshore wind in Sweden, we currently have a levelized energy cost – in other words, the cost of generating one kWh of electricity, of over 45 öre. At the same time the total income, if we include green certificate, is about 35 öre per kWh generated, so it's hard to make the sums add up," says Tornberg.
“Lowest subsidy wins”
Unlike Sweden, a number of northern European countries use auction-based systems to encourage growth and at the same time reduce the costs of new capacity.
Instead of a wind power project planner seeking a permit to build new capacity in a certain area, as in the traditional procedure, the perspective is the opposite in countries which use an auction-based system.
"In Denmark, Great Britain and Germany, the authorities say they want to have, for example, 400MW in a certain area, with the grid connection ready, with the seabed and wind surveys carried out, with the permit in place, and they want the whole thing to be ready by a certain date. Then we wind power project planners bid for the project. The one who bids and says they want the lowest subsidy wins. There are also auction-based systems in which the developer bids with their own approved project. In this case, too, the winner is the project that needs the lowest subsidy."
Do you think a similar auction-based system should be introduced in Sweden?
"I do, absolutely. The advantage of investing in wind power in the auction-based markets is that, as a company, you're less dependent on the price of electricity. You get a more reliable flow of income with guaranteed subsidies, and it doesn't matter so much how the price of electricity goes up and down."
What are the risks in an auction-based system?
"There aren't so many. What happens in an auction system is that whoever bids and wins knows how much they're going to be paid for a period of maybe 12 years. The price pressure is high, which means that the return is lower. But at the same time it's a stable return with a low risk – a dream scenario for long-term investors."
Variable price after subsidies
As regards Horns Rev 3 in Denmark, Vattenfall won the concession in March 2015, and the 400MW offshore wind farm will be in operation by 1 January 2020 at the latest.
The Danish state will pay Vattenfall 77 Danish öre per kWh of electricity from Horns Rev 3 for about 12 years.
What will happen after those 12 years? The wind farm is expected to be in operation for 25 years.
"Then we'll get a variable price for electricity generation. When the subsidies come to an end, say in 2030 if the farm goes into operation at the end of 2018, we'll have recouped a really large proportion of the investment. Apart from that, we can hope that the price of electricity will be significantly higher than it is today."
At the end of 2014, the insurance company Skandia bought into four of Vattenfall’s onshore wind power projects in Sweden, investing SEK 1 billion in the wind farms with a total capacity of 141MW.
At the end of 2015, Vattenfall sold 49 per cent of its ownership in the Ormonde offshore wind farm in the Irish Sea to the Swedish pension company AMF.
Tornberg believes that further deals of this kind are necessary if the growth target is to be met by 2020.
"Today, Vattenfall can't get by on its own. So we invite partners in. We typically do this when the construction of the farm is complete. We take the risk during the development and design phases. Then we sell the farm, for example to a pension fund, once we've removed the biggest risk, which is in the development and construction, and we get a premium for this."
Neither good nor bad
Investments in various forms of energy generation should always be made for the medium or long term. The same applies to looking at the various markets which are relevant for new wind power generation, according to Tornberg.
"There are probably no bad or good markets in the long run. A market can be a good one to invest in for a certain time. Then it becomes less favourable, and then improves again. This applies to all markets, so you shouldn't focus too much on the current situation."
The biggest challenge for offshore wind power at the moment is to reduce costs. In 2017, Vattenfall will put the Sandbank offshore wind farm – a joint venture with the German power company Stadtwerke München in the German part of the North Sea – into operation. Nearby is the DanTysk wind farm, which is also owned by Vattenfall and its German partner. DanTysk started operating in 2015.
Tornberg thinks that Sandbank and DanTysk are a good example of how Vattenfall works to reduce its costs.
"Offshore wind power is still much more expensive than onshore. But if offshore is to continue to grow, it has to become cheaper. It might be a matter of bigger turbines, bigger rotors, or new construction methods. But it's also a matter of looking at the operations side. One solution is to have bigger wind farms closer to each other, so that the same staff can look after operations and maintenance. Horns Rev 3 is a good example that shows that the trend is going in the right direction, and that we're going to see a significant acceleration in the next few years. It's really exciting."