Offshore wind farms are falling victim to the global inflationary war Ship’s crew

By Josh Saul, Will Mathis and Rachel Morison (Bloomberg) –

Winds whip across the frigid Atlantic Ocean off the coast of New England, creating perfect conditions for giant offshore turbines. While plans exist to harness this natural energy to generate electricity, progress—here and around the world—is being held back by rising inflation.

As investment fundamentals crumble due to rising interest rates and higher material costs, U.S. developers are delaying clean power projects like Commonwealth Wind’s 1.2-gigawatt development near Massachusetts, which would be one of the country’s largest wind farms and capable of doing so Supply 700,000 households with electricity.

The problem is even worse in Europe, where authorities have complicated the situation in some cases. Around 6 gigawatts of wind farms planned off Germany’s coast will not progress as planned. The setbacks mean that valuable time is lost in reducing the use of fossil fuels to combat the climate crisis.

“Governments need to face the reality that investments in offshore wind are not being made,” said Giles Dickson, head of industry group WindEurope. “There’s a lot at stake here.”

To get on track to net zero by 2050, the world needs to more than double the rate of investment in renewable energy to around $1 trillion a year, according to BloombergNEF. This level of spending needs to happen as quickly as possible and continue into the 2040s to prevent the worst effects of global warming.

Unlike traditional power plants that require fuel throughout their lifetime, the vast majority of the cost of renewable energy comes upfront. This makes the industry particularly sensitive to changes in financing and construction costs.

This is especially true for huge offshore wind farms that use skyscraper-sized turbines, specialized installation vessels and miles of copper cable to connect them to onshore grids. But they offer tremendous generation potential and there’s less resistance that’s not in my backyard compared to land-based wind farms and solar arrays.

“The offshore wind business is in a perfect storm,” said Thomas Arentsen, partner at Bain & Co. “Profitability is being severely impacted across the value chain from developers to the supply chain and everyone.”

It is not only the offshore wind that suffers from this. Battery and solar developers in the US are trying to keep up with higher equipment costs. According to BloombergNEF, the investment required to develop onshore wind farms in the US has increased by more than 16% between 2020 and last year.

It’s similar in other markets. Supply chain issues are stalling once-promising efforts in Japan, where the weaker yen is compounding the pain. In Taiwan, developers are resisting government efforts to localize manufacturing to create jobs, which would increase the cost of turbines.

“We are still miles away from a deployment rate that would put the energy system on the path to net zero,” said Seb Henbest, head of climate transition at HSBC Holdings Plc. “When projects are under stress and not bankable, something has to move.”

A rare bright spot is China, where installations are expected to pick up again this year after falling sharply after being subsidized in 2022. The country has also managed to better control energy and material costs. BloombergNEF expects the country to nearly double offshore wind installations this year, accounting for more than half of the global total.

Long-term agreements to purchase the electricity are key to the profitability of large renewable energy investments. Whether backed by governments or private companies, these contracts ensure manufacturers can recoup billions in upfront costs in the end.

For projects to work, electricity prices need to keep up with construction costs, but that’s not happening. In Europe, governments have allocated 768 billion euros ($811 billion) to protect businesses and consumers from price hikes. In the US, authorities are holding developers to electricity tariffs that were set before inflation rose.

In the case of Commonwealth Wind off the coast of Martha’s Vineyard, regulators refused to let New England utility Avangrid Inc. tear up the $4 billion project’s power contracts.

“Bidders assume these risks and cannot, in good faith, expect that rate payers will assume higher costs if macroeconomic conditions change,” Massachusetts officials said late last month in a letter to Avangrid, which is majority-owned by the Spanish company energy company Iberdrola SA. Even a state legislature called that if Avangrid terminates the power contracts, the company should not be allowed to bid for future projects in the state.

Commonwealth Wind and its sister development Park City Wind – with enough combined capacity to power over a million homes – are now delayed by at least a year.

“Unfortunately, the impact of historical inflation, sharp hikes in interest rates, supply chain congestion and the existence of a price cap are preventing us from moving forward with Commonwealth Wind,” said Pedro Azagra Blázquez, Avangrid’s chief executive, last month. The company says it remains committed to completing development.

Mayflower Wind, a nearby project, faces similar challenges. Regulators ordered the project to go ahead and denied a request from developers – Shell New Energies, EDP Renewables and Engie SA – to delay approval of power contracts because rising inflation presented “significant challenges”.

The U.S. Inflation Reduction Act is an overall boon for the clean energy industry, but its longer tax credit deadline may actually contribute to delays, as developers know they can still claim benefits years later.

For early-stage wind farms, the benefits of the bill quickly became basic assumptions, leaving uncertainty about how long headwinds from inflation and supply chain kinks will last, said Timothy Fox, an analyst at ClearView Energy Partners.

“Anyone who thought offshore construction was going to be a breeze in the US might not have been paying close attention,” he said.

In Europe, conditions are even grimmer. To deal with an energy crisis triggered by the war in Ukraine, politicians have levied windfall taxes on renewable energy producers – in Germany the government has siphoned off up to 90% of revenues. In the UK, industry group Energy UK warned the measures would stifle development.

The pressure on the renewable sector is not expected to ease. Eurozone core inflation – a measure that excludes energy and food – hit a record in February, as did German inflation accelerated unexpectedly. US rate hikes, while lower than Europe, are more than three times the US Federal Reserve’s target of 2% and Chair Jerome Powell signaled US Federal Reserve officials could raise interest rates higher and faster than previously expected.

According to Daniel Sinaiko, an attorney representing clients in the renewable energy space for the law firm Allen & Overy, some developers are having to wait in hopes that commodity costs or interest rates will fall. “There might be some projects where starting earlier is a disadvantage,” he said.

The Biden administration wants to build 30 gigawatts of offshore wind by 2030. But some of the biggest projects are in turmoil. Aside from Avangrid’s delayed projects off Massachusetts, Denmark-based Orsted A/S said it was about $365 million in damage due to higher costs from the 924-megawatt Sunrise wind — one of the largest off the coast of New York. dollars would accept.

Europe’s goals are even higher. The EU and UK are targeting a combined 110 gigawatts of offshore wind capacity by 2030, more than triple current levels. But last year almost no new investments were made, and all tenders for funding in Germany were signed, according to think tank Agora Energiewende.

The only decision on a new project came in December from a joint venture between Shell Plc and Dutch utility Eneco to build a 760MW wind farm in the North Sea.

Ultimately, freeing up investments in renewable energy means increasing subsidies or increasing monthly bills for households and businesses. Neither is palatable to executives in the US and Europe.

“There are a lot of concerned developers out there because the economics are a challenge,” Phil Grant, renewable energy consultant at Baringa Partners. Governments and investors are both in a bind, and “there may be a question of who blinks first.”

–With support from Josefine Fokuhl, Petra Sorge, David R. Baker, Brian Eckhouse, Alexander Weber, Hayley Warren, Luz Ding and Dan Murtaugh.

© 2023 Bloomberg LP

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