TIDM44ZX
Orsted A/S
29 October 2019
Ørsted presents update on its long-term financial targets
At our Capital Markets Day on 28 November 2018, Ørsted presented
a number of long-term financial targets. These targets are based on
estimates of capital and operational expenses, production
forecasts, outcome of offshore auctions, expected long term power
prices, interest rates and other factors that are all inherently
dynamic and subject to uncertainty. Given the combined impact of an
adjustment of our offshore wind production forecasts and certain
key positive and negative developments since the Capital Markets
Day, as described below, we will give an update on the long-term
targets.
On the negative side, three factors have added pressure on our
long-term targets. The first factor relates to our offshore
production forecasts.
We have been running a comprehensive project, which was
finalised and presented to our Board of Directors today, to upgrade
the models and processes we use to forecast the energy production
from our offshore wind farms based on our access to extensive
production data from our asset portfolio. The project has involved
advanced analysis of a long list of variables impacting our
production, and we have developed new proprietary models to
forecast our expected energy production.
The project has led us to conclude that our current production
forecasts underestimate the negative impact of two effects across
our asset portfolio, i.e. the blockage effect and the wake
effect.
The blockage effect arises from the wind slowing down as it
approaches the wind turbines. There is an individual blockage
effect for every turbine position and a global effect for the whole
wind farm, which is larger than the sum of the individual effects.
Our new wind simulation models show that we have historically
underestimated these blockage effects. This finding is also
supported by industry consultant DNV GL's recent report on
blockage, which indicates that this effect is more broadly
underestimated.
The second effect is the wake within wind farms and between
neighbouring wind farms. 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, and it is still
a highly complex dynamic to model. Our results point to a higher
negative effect on production than earlier models have
predicted.
With respect to wake effects between neighbouring wind farms, we
are in the process of developing a new model capable of more
accurately predicting wake effects over longer distances. We have,
among other things, leveraged a first-of-its-kind advanced radar
system collecting three-dimensional data on the wind flow. The new
model, which is still being refined, suggests a slower wind speed
recovery and higher wake effects. At the same time, we have now
factored in a more extensive offshore wind build-out in the
different basins, which will increase the wake effect from
neighbouring wind farms. As the global offshore wind build-out
accelerates, the whole industry will see higher wake effects from
neighbouring wind farms.
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.
While there is still uncertainty involved, it is clear that the
production forecast adjustment arising out of our analysis has a
negative effect on our financial estimates (see status below).
The higher-than-forecasted blockage and wake effects have also
been embedded in our actual historical production numbers, but they
have been captured in more broadly defined deviation buckets, such
as wind contents, availability, curtailments and effects of ramp-up
of new capacity being either behind or ahead of schedule. We have
until now not had the data and the advanced analytics 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 that the blockage and wake effects have been
underestimated.
While the production adjustment is negative we are convinced
that Ørsted's access to data and advanced analytics will be a
driver of our long-term competitive advantage. We will, of course
explore how the recent findings may translate into improvements to
our design and lay-out of future wind farms.
The second key negative development since the Capital Markets
Day is the lower feed-in tariff in Taiwan, where we had to accept a
6% reduction and a cap on full-load hours for our Changhua 1
&2a projects. Thirdly, we have raised the CAPEX estimate for
the Deepwater development portfolio in the US, mostly related to
the transmission assets.
In terms of positive developments since the Capital Markets Day,
we now expect slightly lower capital expenses on some of our
construction projects. Secondly, lower interest rates have led to
lower return requirements on our offshore transmissions assets in
the UK, which leads to lower transmission charges. Thirdly, we have
seen higher than budgeted availability on one of our newer wind
turbine platforms, which positively impacts some of our assets.
Fourth and finally, in addition to the ongoing optimisation of
our projects, we are taking measures to reduce our annual overhead
cost base by DKK 500-600 million between 2020 and 2022, recognising
that tight cost control remains an imperative in a competitive
market environment. Roughly half of the cost reductions will be
fall-away costs relating to the simplification of our structure
following the divestment of our Danish downstream assets, and half
will come from reductions across our staff functions, both internal
and external spend.
The combined impact of these key developments since the Capital
Markets Day leads to the following status on the long-term
financial targets:
-- Average growth in site EBITDA: 20% for 2017-2023. Unchanged
-- Average return on capital employed (ROCE): 10% for the period 2019-2025. Unchanged
-- Unlevered lifecycle IRR, capacity-weighted average for seven
named offshore wind projects won in competitive tenders (Borssele 1
& 2, Hornsea 2, German Cluster 1, Gode Wind 3 & 4, Greater
Changhua 1 & 2a, Greater Changhua 2b & 4 and Revolution
Wind). The target is reduced from 7.5-8.5% to 7.0-8.0%
-- Share of contracted and regulated EBITDA, average 2019-2025 of 90%. Unchanged.
Lifetime load factor of 48-50% for a defined European offshore
wind portfolio and construction and development projects is reduced
to around 48% due to the adjustment of production forecasts.
The CAPEX and OPEX multiples communicated at the Capital Markets
Day remain unchanged.
The information provided in this announcement does not change
Ørsted's previously announced financial outlook for the 2019
financial year or the expected investment level announced for
2019.
For further information, please contact:
Media Relations
Martin Barlebo
+45 99 55 95 52
Investor Relations
Allan Bødskov Andersen
+45 99 55 79 96
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END
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