Orsted has revised down the expected internal rate of return (IRR) of seven of its offshore wind farms after it found the projected output will be lower than forecast previously.
The Danish developer said the unlevered lifecycle IRR (capacity-weighted average) has been reduced to 7-8% from 7.5-8.5% for Borssele 1&2, Hornsea 2, German Cluster 1, Gode Wind 3&4, Greater Changhua 1&2a, Greater Changhua 2b&4 and Revolution Wind.
The lifetime load factor for its European offshore wind portfolio and construction and development projects is reduced to around 48% due to the adjustment of production forecasts from 48-50% previously.
Orsted said that three factors have added pressure on its long-term targets.
The first factor relates to its offshore production forecasts based on new upgraded modelling finalised and presented to the company’s board of directors today.
“This has led us to conclude that our current production forecasts underestimate the negative impact of two effects across our asset portfolio, ie, the blockage effect and the wake effect,” the company said.
The blockage effect arises from the wind slowing down as it approaches the wind turbines, it said.
There is an individual blockage effect for every turbine position and a global effect for the whole wind farm, which is larger than the sum of the individual effects.
“Our new wind simulation models show that we have historically underestimated these blockage effects,” Orsted said.
It added that the finding is also supported by industry consultant DNV GL’s recent report on blockage, which indicates that this effect is more broadly underestimated.
The second effect is the wake within wind farms and between neighbouring wind farms, Orsted said.
There is a wake after each wind turbine where the wind slows down and then as the wind flow continues, the wake spreads and the wind speed recovers.
“Our results point to a higher negative effect on production than earlier models have predicted,” the Danish energy company said.
It added that with respect to wake effects between neighbouring wind farms, “we are in the process of developing a new model capable of more accurately predicting wake effects over longer distances”.
The new model, which is still being refined, suggests a slower wind speed recovery and higher wake effects, Orsted said.
The company added: “At the same time, we have now factored in a more extensive offshore wind build-out in the different basins, which will increase the wake effect from neighbouring wind farms.
“As the global offshore wind build-out accelerates, the whole industry will see higher wake effects from neighbouring wind farms.”
Orsted said that it believes that underestimation of blockage and wake effects is likely to be an industry-wide issue.
The company said that the higher-than-forecasted blockage and wake effects have also been embedded in its actual historical production numbers, but “they have been captured in more broadly defined deviation buckets, such as wind contents, availability, curtailments and effects of ramp-up of new capacity being either behind or ahead of schedule”.
Orsted said that until now the company did not have the data and the advanced analytics models to do a more granular breakdown of the production deviation.
“New tools leveraging all our production data, including large new assets built over the past couple of years, have given us more detailed insight into the blockage and wake effects and other underlying production impacts.”
A second negative impact is the lower feed-in tariff in Taiwan, where Orsted has had to accept a 6% reduction and a cap on full-load hours for the Changhua 1&2a projects.
Thirdly, Orsted has raised the Capex estimate for its Deepwater development portfolio in the US, related to the transmission assets.
The company however expects slightly lower capital expenses on some of its construction projects.
In addition, lower interest rates have led to lower return requirements on Orsted’s offshore transmissions assets in the UK, which leads to lower transmission charges.
Higher-than-budgeted availability on some of its newer wind turbine platforms will also have positive impacts some of its assets, the company said.
Orsted is also taking measures to reduce its annual overhead cost base by Dkr500-600m between 2020 and 2022.
As a result of the downward revisions, Orsted brought forward the release of its third quarter results to today.
Orsted’s board of directors approved the interim report for the first nine months of 2019, achieving an operating profit of Dkr12.9bn (€1.7bn), up 19% compared to the same period last year.
The company said it is “on track” to deliver on its full-year guidance.
Earnings from Orsted’s operational offshore wind farms increased by 23%, driven by ramp-up of generation from new wind farms.
The company said its onshore wind business also “contributed positively” to the year-on-year development as did higher earnings from trading activities.
On 25 September, Orsted increased its EBITDA guidance from Dkr15.5-16.5bn to Dkr16-17bn.
Chief executive Henrik Poulsen said: “We had a very strong third quarter with high wind speeds and ramp-up generation from new wind farms.
“Operating profit for the first nine months of the year amounted to Dkr12.9bn, which was in line with our expectations and keeps us well on track to deliver on the full-year guidance of Dkr16-17bn.”
In September, Orsted signed an agreement to divest its Danish power distribution residential customer and city light businesses to SEAS-NVE.
Poulsen said the deal ensures an “attractive transaction for Orsted’s shareholders”.