Orsted has backtracked on long term financial targets this week, following concerns about wind dynamics which look likely to propagate throughout the entire global offshore wind industry.
On Wednesday, along with its 2019 Q3 interim report, the Danish power company released a statement, reducing its long-term financial targets to account for three factors which have added pressure to the company’s revenue, including offshore production forecasts.
Essentially its procedure for calculating how much wind energy a given platform produces given a particular wind profile, were out by a fraction, regardless which turbine platform it used.
Following a comprehensive project, the company claims that advanced analysis had investigated the impact of a “long list of variables impacting production”, which have led to revisions of the forecast production from offshore wind. In a press release, Orsted concluded that “current production forecasts underestimate the negative impact of two effects across our asset portfolio, i.e. the blockage effect and the wake effect.”
The blockage effect addresses the fact that wind slows down when it passes through a turbine, after forcing a blade to rotate. With a volume of air slowing down, this essentially causes a traffic jam, with the air behind it slowing in turn, causing a ‘blockage’ where windspeeds approaching the turbine are slower than predicted. This blockage impacts individual turbines, as well as wind farms as a full system, with new simulations showing that Orsted has historically underestimated the effects on power production.
Recent DNV GL research has shown that this is broadly the case within the offshore wind industry, with a slowdown in windspeed of 3.4% at an equivalent distance of two rotor diameters upstream of the turbine.
The wake effect is similar to blockage, but considers the impact of this reduced wind speed downstream of the turbine. While difficult to model accurately, with upstream turbines sheltering those further into the windfarm, Orsted believes that the impact of wake effects has also been underestimated.
Orsted also indicated in its statement that underestimation of blockage and wake effects is likely to be an industry-wide issue, having benchmarked internal production estimates against more positive third-party views.
Among other impacts effecting financial targets is the 6% reduction in the feed-in-tariff for projects in Tawian and the increase in Capex for deepwater development in the US, related to transmission assets. The combined influence of these factors has led to the unlevered lifecycle IRR, capacity-weighted average for 7 projects to fall by 0.5%, and the lifetime load factor to sit at the bottom end of the 48% to 50% range previously specified.
The Danish power company released its 2019 Q3 interim report, showing earnings from offshore wind to be up by 23% year-on-year, with strong winds driving profits. To build on this, in spite of changing forecasts, Orsted
has stated intentions of cutting annual overheads by $89 million, through simplifying company structure and reducing staff functions, suggesting job cuts may be on the horizon.
Orsted’s stock plunged by 8% following the announcement on Tuesday, but has already started to bounce back. While there is uncertainty around this research, pockets may be squeezed as other power companies realize that their production and income will be less than they hoped. Orsted, the world’s largest operator of offshore wind, most likely has the facility to accommodate this. However, it is possible that smaller developers, operating on tighter margins, may struggle to make up the funds elsewhere, making it difficult to make competitive bids for large projects, which may ironically be good news for Orsted.