An accounting-based profitability analysis of deploying offshore wind at Sørlige Nordsjø II: A new North Sea adventure or a renewable energy fallacy?

Abstract

Offshore wind has received a great amount of attention the last decade, with industry initiatives underpinning development across nations. European offshore wind auction strike prices have decreased drastically, indicating falling costs in the industry. Additionally, cost figures in the literature are often based on public domain sources rather than actual costs from financial statements. The former is prone to distortion, yielding uncertainty regarding its reliability. Thus, this thesis reviews historic project costs in the North Sea using audited accounts from 38 UK offshore wind farms’ special purpose vehicles (SPV). A profitability analysis of deploying 1400 MW capacity at Sørlige Nordsjø II (SNII) in 2030 has been conducted, assuming a radial connection to the Norwegian mainline grid NO2. Doing so, a discounted cash flow model (DCF) combined with Monte Carlo Simulation (MCS) has been applied. Additionally, a Levelized Cost of Energy (LCOE) for SNII has been computed and compared against literature estimates. This paper shows that offshore wind development for the first phase of Sørlige Nordsjø II is unprofitable. With certain optimistic assumptions, our good case scenario barely obtained a positive net present value (NPV). LCOE was to some degree in line with other literature estimates. Higher costs in audited accounts compared to reported figures in addition to complicated site characteristics contributed to the negative results. Consequently, significant technological cost developments, more efficient supply chain operations as well as a substantial growth in electricity price are needed to overcome profitability obstacles. As of this, developing SNII is unattractive for investors under current assumptions. Subsidies are likely needed, albeit at a cost for the government. On the other hand, this paper provides concluding recommendations to seek other project solutions, namely hybrid cables to trade partners. Not being profitable with a radial connection to Norway, potential higher electricity prices across borders might increase the likelihood of profitability.