SUBSIDY-FREE WIND POWER IN SIGHT BY THE END OF THE DECADE

Wind power Business Area Wind had a really successful 2016 including setting a new low-price record for offshore wind. But BA head Gunnar Groebler will not settle for this, he says in this interview, the first in a series of articles with members of Vattenfall’s Executive Group Management.

What are you most proud of?
“I am proud that we have been able to deliver on, or even above, our strategy goals in all areas. The most prominent achievement is that we have been able to work hard on our so-called LEC (levelized energy cost*, see below) and reduced this beyond all expectations. A year ago none of us would have believed that it was possible. Everyone in our organisation made a contribution here. If you look at our BU Generation for instance: the way they have worked on harmonisation and digitisation of processes and ways of working has been very successful. I am also very proud that we have been able to refill our pipeline, especially offshore which is important for the future,” Groebler says.

You won two important Danish projects during the year, but just before Christmas, Dutch Borssele 3-4 went to a competitor?
“That definitely hurt, especially for those who had worked with the tender of course. On the other hand, we know that we will not win every bid, and we shouldn´t. Competition spurs you and the fact that we didn’t win the Borssele auction in July last year created a lot of energy and efforts within BA Wind to further cut our costs for the next projects,” he says.

"We will not win every bid, and we shouldn´t”

2016 was the year when the costs for offshore wind were cut by half. When Vattenfall won Danish Horns Rev3 in early 2015 at 100 euro per megawatt hour it was a sensation. One and a half year later Vattenfall won Kriegers Flak, another Danish offshore project, at a price of mind blowing 50 euros per megawatt hour, the lowest price for offshore wind so far. Similarly, in July 2016 the auction price of Borssele 1-2 was set to 73 euro per megawatt hour while Borssele 3-4 landed at 55 euro.

How has it been possible to cut costs so much?
“The selection of bigger turbines is one strong driver. Today we are still installing 4 MW turbines. But Kriegers Flak and the Danish near-shore projects are already designed for 8 MW turbines. In addition to that, the tendering process for projects is forcing everybody to rethink how to operate a wind farm much more efficiently. Our size as a company is another important factor. We have a certain volume of projects in our pipeline. That means we are able to optimise our projects. And don’t forget that Vattenfall is one of the most experienced wind power developers and operators in our part of the world. We were able to apply this into our bids as well.”

What happens to the margins when the price is cut by half? Are these projects still profitable?
“Tough competition and a more mature market position have definitely an influence on margins. However our margins are still industry standard and healthy. And as margins are defined by revenues and costs, we have put a lot of focus on our cost level and will continue to do so. In addition, we have learned a lot from our recent projects. That’s why our view on the risk is quite different today compared to three or four years ago or even 12 months ago. This has an impact on the risk premium we put on such projects. But the margin we require from our projects is the same as the rest of the industry and well within the corridor that the board of directors and the owner expect us to have.”

How low can the LEC become?
“Continuous cost reduction is our constant companion and during 2017 we will continue to work on the costs. We will not stop and hope that we are safe with a cost line of 50 euro, that would be dangerous. Instead we even intensify our work on our costs to decrease the dependence on support schemes.”

When will wind power do without subsidies?
“Well, there are no subsidies for UK onshore anymore and we are working hard to come up with a viable project in that environment. It’s tough but it unleashes creativity. My belief is that we will be able to find projects in subsidy free conditions. For onshore this may happen towards the end of this decade while for offshore it will take a little longer. However, the time could be shorter if electricity prices have a more positive development than we anticipate today.”

Germany is the next country to go for an auction-based system for wind power. Unlike Denmark or the Netherlands, where the government offers a certain project (such as Kriegers Flak) for bidders, the German rules demand developers to bring their own projects to the auction. For this reason Vattenfall has acquired three North Sea projects, whereof the 73-turbine Atlantis I is the most recent.

How will auctions in Germany be beneficial for Vattenfall?
“Off shore wind power means very complex and capital intensive projects that fit Vattenfall’s DNA very well. Also, we are geared towards cost reduction and towards optimising projects. So auctions fit us nicely compared to other competitors and put us in a position where we believe we can be very successful. We have now filled our pipelines for the upcoming German auctions, the first one in spring 2017, and we strive to be successful. If not, we will have a second chance in 2018.“

Vattenfall says it will double its wind power capacity to around four gigawatts in 2020, are you on track?
“Absolutely. During the past year we have taken two investment decisions, Horns Rev 3 and Aberdeen Bay, roughly 500 MW. We have said that we will build 400 to 600 MW per year so you can say we are on track. The projects in construction are also moving ahead. We will hand over Sandbank to BU Generation this year as well as Pen y Cymmoedd and the smaller Ray, all in all more than 550 MW. So there is quite a lot of growth in terms of projects being completed also this year – quite exciting for our colleagues in Generation. Furthermore we plan to take a number of new investment decisions this year, mainly onshore. That will fill the pipeline.”

”We plan to take a number of new investment decisions this year”

You are growing fast, at this moment you are looking to hire another 130 employees. How do you cope with this growth?
“We want to get people on board in a good way. That’s why we have developed a recurring onboarding package which includes an Induction day where newly hired people participate for two days. They get introduced to the ways of working in Vattenfall and in BA Wind, they get to meet their new colleagues and members of the management team. In this way we help them to get acquainted with Vattenfall and for us it means that they become productive faster. The feedback we receive is extremely positive.”

Footnote: *LEC, Levelized Energy Cost, is the total cost for construction, operation and decommissioning over the whole lifetime of the wind power farm. In the wind power auctions performed in several North European countries, the government guarantees a certain price per generated megawatt hour, usually during a limited number of years or up to a fixed level.

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