How the UK offshore wind industry ran out of puff

The UK’s offshore wind industry has traditionally been lauded as the prime example of the nation’s foray into renewable energy.

Offshore wind has been advocated by politicians as a hassle-free solution in contrast to onshore wind and solar farms, with the government aiming to elevate offshore wind capacity from its present 13 gigawatts to an ambitious 50 gigawatts by the year 2030.

Grant Shapps, the Secretary of Energy Security, assured MPs just last month, “Offshore wind represents a stable and robust energy source, and we are already global frontrunners.”

However, the actual scenario behind closed doors appears less promising.

Numerous significant projects are on shaky grounds due to escalating costs, sluggish planning regulations, and dwindling subsidies. Industry insiders have cautioned about the possibility of these factors pushing the financial dynamics into the red. “The current situation is extremely challenging,” reveals one source.

Projects under the auspices of companies such as Ørsted, Vattenfall, and Red Rock Power are believed to be in the most jeopardy, notwithstanding the fact that they secured subsidy contracts just the previous year.

Another worrying element is the perceived aloofness of ministers to the industry’s alerts. More than one high-ranking individual has depicted Shapps as a “distant” entity who scarcely interacts with them.

“One insider remarks, “It’s not as if he’s eagerly reaching out to the industry, to put it mildly.”

This state of affairs is sparking new inquiries regarding the feasibility of the Government’s target for 2030, and questioning the widely accepted belief that the costs of offshore wind will continue on a downward trajectory.

“The current situation can be described as a perfect storm for the industry,” comments Ana Musat, the Executive Director for Policy at the RenewableUK industry group.

Over the last decade, the UK’s offshore wind industry experienced substantial growth, with most expansion focused off the eastern coasts of Scotland and England. Capacity has multiplied by ten since 2010, from a mere 1.3 gigawatts, propelled by increasingly more giant turbines.

A case in point is the Dogger Bank, a phased North Sea project that will eventually produce enough energy to power 6 million homes. The project, featuring turbines over twice the height of Big Ben, is set to be the world’s largest offshore wind farm.

However, a rise in global supply chain costs – spurred by energy price hikes following the Ukraine war – has significantly impeded this progress. Inflation has compelled manufacturers of components, such as turbine blades and nacelles, to ask for higher prices, while increasing interest rates are making project financing more expensive.

General Electric’s renewables division, responsible for manufacturing the 260-meter-tall Haliade X turbines used at Dogger Bank, reported a $2.2bn (£1.7bn) loss in 2022. The branch has been running at a loss for eight consecutive quarters.

Further, competitor manufacturers Siemens Gamesa, Vestas, and Nordex also reported combined losses of €3bn in the same year, according to Kathryn Porter, an independent analyst at Watt Logic energy consultancy.

“There’s been a narrative that wind farm costs are decreasing and will continue to do so, but the reality is these prices are unsustainably low. Turbine manufacturers have essentially been selling at a loss, and these losses are now mounting,” Porter explains.

Moreover, other factors are exacerbating the situation. The ‘bigger is better’ mentality regarding turbines is resulting in more failures and consequently more warranty claims, which adds to the manufacturers’ costs, Porter adds.

An industry leader with experience managing various energy initiatives warns about the potential for financial losses due to so-called “liquidated damages” contract clauses. These clauses entail a predetermined monetary compensation if there’s a violation of contract terms or deadlines, regardless of the reasons behind the violation, such as delayed delivery of turbines or unavailable ships.

To curb expenses, the executive notes that some project developers are employing cost-effective foundations on the seabed to mount turbines.

The executive argues, “Offshore wind energy isn’t the panacea that most perceive it to be. The risks are tremendous and the returns are modest.

“Most are opting for larger turbines, inexpensive foundations, and cable systems that pose a risk of complete wind farm failure in the event of a malfunction.”

Many of these challenges aren’t exclusive to the UK but are exacerbated by domestic issues, such as a sluggish planning system and declining British subsidies. These issues are made more evident when compared to the generous financial assistance provided to companies in the US under Joe Biden’s Inflation Reduction Act.

The sector’s challenges are predicted to come to the forefront during the Government’s fifth allocation round (AR5) for the “contracts for difference” (CfD) scheme in the summer.

CfDs are 15-year subsidy agreements between the government and power generation companies, intended to ensure steady revenue streams for energy projects.

In these auctions, companies suggest a “strike price” for their electricity, and the most competitive bids result in subsidy agreements with the Government. When the market price for power falls below the strike price, the company’s revenues are supplemented, and when it exceeds, they remit payments to the Government. Consumer bills fund these CfDs.

However, during this summer’s allocation round, offshore wind faces competition from solar and onshore wind, which are less expensive to construct. Additionally, the maximum strike price for offshore wind has been set at £44 per megawatt hour, a figure that developers argue is impracticably low.

Alistair Phillips-Davies, the CEO of SSE, a company participating in the development of Dogger Bank, warned in May that after years of declining CfD costs, it’s crucial for politicians to reassess pricing, particularly in light of inflation affecting the supply chain.

The challenging business environment is posing additional risks to offshore wind projects that secured contracts in last year’s round, AR4.

Duncan Clark, the leader of Ørsted UK and Ireland, which obtained a CfD for its 2.8 gigawatts Hornsea 3 development off the coast of Yorkshire, described the AR4 contracts as “excellent value” for taxpayers. However, he also cautioned that the company has been facing significantly higher costs since then due to an “extraordinary combination” of factors.

Clark expressed growing concern over the potential for projects to be postponed or even abandoned. Ørsted is set to make a final investment decision on its project by the end of this year and has called on the Government to offer “targeted support” for the sector, potentially in the form of tax incentives.

A company spokesperson stated that the UK’s offshore wind industry has reached a pivotal juncture and emphasized the need for ongoing focus to ensure offshore wind realizes its potential to become the cornerstone of the UK’s energy system.

Vattenfall, a company that secured an AR4 contract for its Boreas wind farm in the Norfolk zone, where it has plans for three projects producing a total of 4.2 gigawatts of power, has also highlighted that the market conditions are exceptionally challenging.

Catrin Jung, the company’s head of offshore wind, states, “We still aim to develop the Norfolk Zone fully. However, governmental frameworks, including contracts for difference, must reflect market realities.”

One project that seems particularly precarious is Inch Cape Phase One, a 1.1-gigawatt development off the coast of Scotland. The project is equally owned by Red Rock Power, a state-owned Chinese energy company, and ESB Group, under the control of the Irish Government.

Over recent months, the project has seen the departure of its chief executive. The company had previously planned to make a final investment decision by mid-year.

Several offshore wind companies are currently hoping for support from Jeremy Hunt, the Chancellor, although considering the current strain on the Government’s finances, this appears to be an increasingly daunting task.

According to Muscat from RenewableUK, there’s still room for adjustments to the AR5 strike price, which she contends should be twice its current rate for offshore wind.

“Developers need the assurance that prices can increase if necessary to reflect economic circumstances,” she adds.

“If the Government’s indicators are that prices can only decrease, then I believe this will diminish confidence in the long run.”

However, for some, these issues lead to broader questions regarding offshore wind subsidies in general.

Porter from Watt Logic points out, “We are 20 years into subsidising offshore wind, yet we still need to do so.

“If the goal is to support an emerging technology until it matures, then subsidies should gradually diminish to nothing over time. If that isn’t the aim, then what is the current purpose of these subsidies?”

For the time being, ministers remain optimistic about the industry’s future, with Shapps dismissing concerns over competition from the US earlier this year.

Shapps addressed MPs in May, stating, “The fact is that the US does not have the world’s largest, second largest, third largest, or fourth-largest offshore wind farm. Do you know why? They are all being constructed here in the UK, where we are decades ahead.”

Experts warn, however, that maintaining this lead should not be assumed. While Britain may have an initial advantage, various factors could potentially derail the country’s progress.

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