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Ørsted cuts IRR target after new data for blockage, wake effects

The Race Bank offshore wind farm. Source: Ørsted (www.orsted.co.uk).

October 29 (Renewables Now) - Ørsted A/S (CPH:ORSTED) today lowered its long-term target for unlevered lifecycle internal rate of return (IRR) related to seven offshore wind projects after taking into consideration some key developments.

The Danish energy major now expects an unlevered lifecycle IRR, capacity-weighted average of 7%-8% for the Borssele 1&2, Hornsea 2, Gode Wind 3, Borkum Riffgrund 3, Greater Changhua 1&2a and 2b&4 and Revolution Wind projects, all of which have been awarded in competitive tenders. A year ago, the company set a return target of 7.5-8.5%.

Ørsted explained in a statement it has identified three factors that put pressure on its long-term targets. First, following advanced analysis of a long list of variables, the company has determined that it has been underestimating the negative impact of the so-called blockage and wake effects.

The blockage effect arises from the wind slowing down as it approaches the turbines. There is an individual blockage effect for every single turbine and a blockage effect for the whole wind farm, which is larger than the sum of the individual effects. Then, there is a wake after each turbine where the wind speeds are reduced again, affecting nearby turbines and even neighbouring wind farms. According to Ørsted, the company, and possibly the whole industry, have previously failed to assess the real impact of such effects.

“As the global offshore wind build-out accelerates, the whole industry will see higher wake effects from neighbouring wind farms,” Ørsted warned.

The other two negative developments to affect long-term targets are the lower feed-in tariff (FiT) in Taiwan, where the company also had to accept a cap on full-load hours, and the increased capital expenditure (CAPEX) estimate for the Deepwater project portfolio in the US, mainly related to transmission assets.

In addition to the unlevered lifecycle IRR, the other long-term target that has been downsized is the lifetime load factor for a defined European offshore wind portfolio and construction and development projects. Instead of 48%-50%, it is now seen at around 48%. This concerns the following projects -- Gode Wind 1&2, Burbo Bank Extension, Race Bank, Walney Extension, Borkum Riffgrund 2, Hornsea 1, Borssele 1&2, Hornsea 2, Gode Wind 3 and Borkum Riffgrund 3.

Meanwhile, the company said it is taking measures to lower its annual overhead cost base by DKK 500 million to DKK 600 million between 2020 and 2022. It noted that about half of the cost reductions will be fall-away costs related to the group structure simplification, while the rest will come from reductions across staff functions.

(DKK 1.0 = USD 0.149/EUR 1.134)

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Ivan is the mergers and acquisitions expert in Renewables Now with a passion for big deals and ambitious capacity plans.

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