UK offshore wind faces “years of pain”

The UK offshore wind industry is likely to be facing several years of difficulties, according to London-based hedge fund Clean Energy Transition LLP.

Project delays, possible cancellations, soaring costs and higher interest rates will combine to make life far harder for what had been seen as a booming sector until recent months, according. to Per Lekander, Clean Energy Transition CEO.

The fund manages $2.6bn in assets in sectors including renewables, utilities, oil and gas.

“The industry needs a complete reset. It’s going to be a very long period with very disappointing growth, where projects might be delayed or not even built”, Lekander warned in an interview.

At the recent IUMI conference in Edinburgh the association’s offshore energy vice-chair Mel Raven told IMN that she expected developments in insured values (from when existing units would have been valued higher) and how replacements would be dealt with, given the rapid progress in technology, would be matters of considerable discussion and contemplation over the next year to 18 months in the London market.

The problems for wind developers are something of a perfect storm/ Turbines are costing more, supply chains are facing bottlenecks, and international competition is increasing. Securing the financing for new projects is harder than it was, and the guaranteed prices offered by countries auctioning off fields are often seen as too low to make the project financially viable.

More than a decade of low interest rates saw investment in UK wind capacity accelerate. Indeed it has surpassed natural gas primary source of power connected to the grid. But sustained inflation and the increased cost of capital has put the brakes on that expansion, and the low guaranteed prices have threatened to bring it to a screeching halt.

Most of the money needed to reach the UK government’s net-zero goal will have to come from the private sector. It is a public sector goal that relies on private sector money. Emma Pinchbeck, CEO of industry group EnergyUK, said that “at a time when other countries are stepping up their efforts to attract green investment, we cannot risk that money going elsewhere”.

Unfortunately, at least some of the (potential) UK offshore wind projects are short on financing.

In the wake of the pandemic costs surged for everything from freight to labour, said Lekander. “The world came out of Covid-19 and suddenly this 15 years of deflationary situation rapidly changed,” he said. Many companies that secured projects during an industry growth spurt in 2019-2021 are “now dramatically out of money”, he claimed.

Swedish state-owned utility Vattenfall AB is in early-stage talks to sell one of the UK’s largest offshore projects, which it halted in July. The company is “evaluating all options to determine the best way forward for the whole Norfolk Offshore Wind Zone,” the company said.

Mads Nipper, chief executive of Denmark’s Orsted A/S, said in a recent interview that a final investment decision on its Hornsea 3 wind project in the North Sea was “not a given”, given higher interest rates.

Orsted had previously said that “ we will only invest in value creating projects on life cycle basis”.

Earlier this month a government auction for offshore wind projects failed to attract a single bid.

Denmark’s Vestas Wind Systems AS has said that it was reconsidering plans to make more turbines in the UK.

In one sense the developers only have themselves to blame. They bid very aggressively in previous auctions, helping to drive government set electricity prices too low.