Blockage and wake effects won’t undermine offshore wind’s investment case

Presenting an update on its long-term targets on 28 October 2019, wind industry leader Ørsted admitted it has probably been over-estimating energy produced by its windfarms.

It knows this because it has been running a project to upgrade the models and processes it uses to forecast energy production from offshore wind, a project that involved advanced analysis of variables affecting production.

New models to forecast production have been developed by the company, and those models suggest its production forecasts underestimate the adverse effect of blockage and the wake effect. It says the issue is almost certainly and industry-wide one, so what might that mean for the investment case for offshore wind?

The blockage effect is only now beginning to be understood and Ørsted admits it needs to do more work on it and on potential solutions. It arises from wind slowing down as it approaches wind turbines. There is an individual blockage effect for every turbine and a global effect for the whole windfarm, which is larger than the sum of the individual effects. The company’s new simulation models show it has historically underestimated blockage effects, a finding also supported by DNV GL’s recent report on blockage.

Greater insight into the wake effect also played a part in the company’s decision to downgrade production. This particular phenomenon occurs within windfarms and between neighbouring windfarms. There is a wake after each wind turbine where the wind slows down. As the wind flow continues, the wake spreads and the wind speed recovers. This effect, with wind turbines shielding and impacting each other, has been subject to extensive modelling by the industry for many years, but work the developer has carried out recently suggests wake effects have a greater negative effect on production than earlier models implied.

“Over the years, we have benchmarked our internal production estimates against third-party views from industry experts. In comparison, most third-party production estimates have been trending towards a more positive view than ours. Therefore, we believe that underestimation of blockage and wake effects is likely to be an industry-wide issue,” the company says. “While there is still uncertainty involved, it is clear the production forecast adjustment arising out of our analysis has a negative effect on our financial estimates. The higher-than-forecast blockage and wake effects have also been embedded in our historical production numbers.

“Until now, we have not had the data and the advanced analytic models to do a more granular breakdown of the production deviation. The new tools leveraging all our production data, including large new assets built over the past couple of years, have given us more detailed insight into the blockage and wake effects and other underlying production impacts. It is this analysis that has led us to conclude the blockage and wake effects have been underestimated.”

The company says that although the production adjustment is negative, it is convinced its access to data and advanced analytics will be a driver of long-term competitive advantage. It plans to explore how the recent findings might translate into improvements to the design and layout of future windfarms.

Asked what the effect of Ørsted’s disclosure about blockage and wake effects might be, industry analysts were broadly in agreement that it is important but in no way makes offshore wind less attractive to investors.

Offshore Wind Consultants consultant Juan Frías tells OWJ he does not believe it would adversely affect investment, but the effect would not be marginal either. “Ørsted has given a very limited explanation of the issue, not really splitting the impact of blockage from wakes.

“We should not forget that offshore wind is still a relatively new industry, there are still uncertainties modelling aerodynamic effects in windfarms. Moreover, the complexity of this increases as larger wind turbine generators are introduced, as windfarms grow in size and as clusters of sites develop.

“Might Ørsted’s revelation have implications for the future? That will depend on the outcome of their analysis and how significant previous overestimations are,” he says. “From a project acquisition perspective, deals for windfarms will be scrutinised more closely by equity and debt providers, and the technical and legal aspects of issues such as wake loss compensation schemes will be more important for the acquisition of assets.

“From a strategic and commercial perspective, it will also be interesting to see how wake effects from neighbouring windfarms are managed. Developers could try to separate their projects and new third-party sites, but that might have implications for marine spatial planning and leave less space for other uses of the seabed. This will even be more important with the massive build-out expected in the coming decades.”

BVG Associates director Neil Douglas says the physics of the blockage effect has manifested itself as projects and turbines, both onshore and offshore, have grown larger and more advanced research has been conducted. “There will undoubtedly be some pain to endure for windfarm owners where blockage was not adequately accounted for in preconstruction energy yield estimates and financial models,” he says.

“The impact stated by Orsted is 0.5 percentage points of internal rate of return (IRR). Up to 2 percentage points in terms of capacity factor are not inconsiderable numbers, albeit within the bounds uncertainty about long-term yield, but the issue has not come completely out of the blue.

“In calculating the uncertainty of offshore windfarm yield predictions, modelling wakes and turbine interactions with wind flow has long been a major challenge for the industry, so has been dealt with by applying a high level of uncertainty to this part of modelling. There is no reason this issue should impact future investment in new projects, if anything, being able to better account for these effects should improve confidence in energy yield predictions for offshore projects.”

Aurora Energy Research project leader Weijie Mak tells OWJ the statement by the developer “highlights the importance of accurate forecasting of operational parameters, and the potential ramifications of wrongly estimating values.”

“However,” he says, “this is unlikely to have a significant impact on the investment in offshore wind in the UK. Like Mr Douglas, he notes that Ørsted has indicated a downward revision of 0.5 percentage points in IRR for its global offshore windfarms, down to 7- 8%. “In the UK context, this is still broadly in line with Aurora’s forecast of expected IRRs of 6-8% in the recent contract for difference auction,” Mr Mak says. “Nonetheless, this could translate into higher clearing prices in future auctions should other developers make similar adjustments to expected load factors.”

Cornwall Insight senior modeller Tom Musker says the revised revenue projections would have a material impact on Ørsted, particularly for the existing sites where support rates have been fixed in anticipation of higher load factors. “Expected load factors do impact the levelised cost of energy and it may potentially affect the relative competitiveness of new developments,” Mr Musker tells OWJ, “but it’s difficult to say whether it makes projects more or less competitive than alternative technologies. It might affect which sites get developed, but it is very difficult to gauge whether it would be significant enough to favour particular sites ahead of others.”