OFFSHORE WIND ENERGY IS GETTING CHEAPER

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1 OFFSHORE WIND ENERGY IS GETTING CHEAPER Market foresight and scale drive the cost down Dansk Energi, January 14, 2016 Sune Strøm, Manager, Regulatory Affairs Wind Power

2 Offshore wind is closing in on the other main technologies Levelised cost of electricity for plants commissioned in North Western Europe in 2023 (FiD 2020 for offshore wind) /MWh (2012-prices) CO 2 emission permits Fuel Tax Operating costs Investment costs Onshore Wind 1 Coal Gas Biomass Conversion CHP PV 1 Utility scale Biomass Conversion Offshore Wind Nuclear Coal CCS 1 PV and Onshore Wind is due to present low political and market risks presented as low risk investments with a discount rate of 8% versus 10% for other technologies. Note: Base case - CO 2 price trend of 19 in 2023 and 27 in

3 The needed revenue for offshore wind has already declined resulting in a sharp drop of the subsidy level Levelised revenue of electricity /MWh 2012-prices Subsidy Electricity price Year of subsidy agreement West of Duddon Sands Race Bank -32% East Anglia 68 Neart na Gaoithe The subsidy level has decreased with more than 43 pct. from 2011 to 2015 even though the market price forecast have dropped more than 20 pct. since The subsidy level will drop even more if the market price increases due to e.g.: - Higher CO 2 -price - Higher demand through electrification - More interconnectors to demand centres Revenue includes subsidy and market price at the time of subsidy agreement discounted with 4% and adjusted to inflation. Scope of UK offshore wind projects include transmission and substations. Sources: DECC 3

4 The pipeline creates the opportunities to lower cost through technological improvement, experience and careful site selection European offshore wind energy capacity Source: EWEA 23.5 GW Main potentials for reducing Cost of Energy UK setting /MWh 2012-prices Market until DONG Energy pipeline towards 2020 GW Under construction 2018 Secured pipeline 2020 * / ** UK reference plant and 2020 target is based on average UK Round 2 & 3 parks FiD in Incl. transmission costs. All prices are in 2012-prices and including substations and offshore power cables 4

5 Competitiveness will be reached during the next decade with sufficient market volume LCOE for gas and offshore wind dependent on annual market size of offshore wind and CO 2 price development EUR/MWh (real 2012) Gas 1 Offshore 2 High CO 2 price scneario Medium CO 2 price scneario 15% + 3 GW/y build out 17% + 7 GW/y build out FID year 5 1 Plants running at technical maximum (93% capacity factor). Lower limit represents costs with WEO NPS CO 2 prices ( 21 in 2025, 27 in 2030, 36 in 2040), upper limits uses BNEF CO 2 prices ( 31 in 2025, 40 in 2030, 54 in Costs based on FID 2020 / CoD 2023, learning rate pct., based on DONG Energy target and EWEA s central scenario, Lower limit represents scenario with annual build out of 7 GW, upper limit has a build out of 3 GW Source: DONG Energy, EWEA, IEA World Energy Outlook and Bloomberg NEF

6 By increasing developer s scope competitive pressure is applied to all parts of the project Managed outside tender Competitive tenders enforce price pressure Offshore Managed outside tender Competitive tenders enforce price pressure Nearshore 6

7 Tender is a reality for the offshore wind, careful tender design ensures competitive pressure, capable developers and efficiency Offshore wind energy will need the option of technology specific tenders in the State Aid Guidelines to continue its cost reducing path Increase competitive pressure by letting the developer get the responsibility from the offshore wind farm to the onshore connection point Pre-qualification criteria will ensure capable bidders in the competition Authorities to define suitable areas with both the conditions for effective offshore wind energy production and high probability for consent The developers to select the sites to develop either through an open-door approach or multi-site tender Flexibility regarding the consent in order for the developer to optimise the site park layout and turbine selection One-stop shop and industry dialogue 7

8 Offshore wind is closing the gap to onshore wind Average subsidy øre/kwh over the lifetime Offshore wind will continue getting closer to onshore wind 33 /MWh 16 LCOE - offshore Market price 9 LCOE - onshore Anholt Reduced subsidy need Horns Rev 3 Onshore Time Source: Ministry of Energy, Utilities and Climate and Danish Energy Agency 8