Financial appraisal of operational offshore wind energy projects Tyson Weaver n Faculty of Engineering & Natural Sciences, Sogn and Fjordane University College, Postboks 133, Sogndal 6851, Norway article info Article history: Received 5 October 2011 Received in revised form 1 May 2012 Accepted 3 May 2012 Available online 27 June 2012 Keywords: Offshore Wind Economics Generation Performance Valuation abstract This paper investigates the commercial attractiveness of the nascent offshore wind energy industry from an asset owner’s perspective. Two commercial scale operational projects are used as illustrative cases. Based upon historical empirical financial and performance data in conjunction with future spot market price scenarios, a discounted cash flow methodology has been applied to underpin the financial value over each life cycle of plant. The robustness of the results is strengthened by sensitizing key input parameters. The results suggest that project annualized returns range between 8% and 11% above prescribed costs of capital. A key finding is that the cost of capital can be more instrumental in achieving lower costs of energy than site selection itself. & 2012 Elsevier Ltd. All rights reserved. Contents 1. Introduction ..................................................................................................... 5110 2. Offshore wind energy evolution ..................................................................................... 5111 3. Project specific features ............................................................................................ 5113 4. Methodology .................................................................................................... 5113 5. Data collection & analysis .......................................................................................... 5114 6. Performance metrics .............................................................................................. 5115 7. Maximizing value capture: the vertically integrated utility ................................................................ 5117 8. Financial results .................................................................................................. 5117 9. Conclusions & implications ......................................................................................... 5118 References ...................................................................................................... 5119 1. Introduction Currently a paradox exists within the offshore wind energy landscape whereas both development activity and capital costs have been growing simultaneously industry wide. Industry wide stake- holders aspire to see the overall costs of offshore wind energy decline as a result of combining technological learning experience in manufacturing and installation gains, economies of scale, entrance of new market participants intensifying competition, and more efficient industry practices, but historic empirical evidence suggests the opposite has been occurring. Many studies pertaining to market development in offshore wind energy have either focused on either subsidy support framework mechanisms or capital cost structural factors. However little attention has been given in the academic field as to what profitability is when pursuing the deployment of offshore wind. Therefore it is worthy of intensive investigation to seek to understand what the financial merits of offshore wind energy are based upon the analysis of empirical evidence from some of the first commercial scale project sites. The research objective of this paper is to investigate the financial merits of two specific pioneering projects in the United Kingdom’s offshore wind market. This paper argues that by tracing the evolution of financial viability of commercial scale offshore wind energy projects, we can attempt to understand commercial motivations for pursuing this particular emerging energy technol- ogy. Detailed project descriptions also delineate some of the technical challenges that arose during the first few years of both projects’ operations. The sensitivity analysis on the results depicts Contents lists available at SciVerse ScienceDirect journal homepage: www.elsevier.com/locate/rser Renewable and Sustainable Energy Reviews 1364-0321/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.rser.2012.05.003 n Tel: þ47 57 67 60 00. E-mail address: Tyson.weaver@hisf.no Renewable and Sustainable Energy Reviews 16 (2012) 5110–5120