Ørsted Warns Rising Costs Threaten UK Offshore Wind Projects
The UK’s efforts to attract new offshore wind projects face significant hurdles, according to Mads Nipper, CEO of Ørsted, the largest offshore developer in the world. In a recent statement, Nipper expressed concern over the current auction round’s maximum electricity price, warning that it may not be sufficient to cover the burgeoning costs incurred by wind companies.
A concrete example of the industry’s struggles is the recent decision by rival, Vattenfall, to halt its major Norfolk Boreas offshore wind farm development off the English east coast. Citing a 40% increase in costs this year, Vattenfall declared the project financially unviable. The increase has outpaced the inflation-linked fixed price for electricity from Norfolk Boreas that the company had agreed upon with the UK government in July 2022.
The offshore wind industry has been grappling with rising expenses related to turbines, labor, and financing, exacerbated by supply chain issues and high interest rates in the wake of the pandemic and Russia’s invasion of Ukraine.
While Ørsted plans to move forward with its Hornsea 3 project, Nipper doesn’t believe the latest UK offshore wind auction round will spur significant viable investments from developers.
Under the UK system to support renewable energy, developers bid for contracts from the government, which guarantees a fixed price for most of the electricity generated from a renewable energy project. If the wholesale price is lower than that price, developers are paid the difference via a tax on consumer bills. If the wholesale price is higher, developers must pay back the difference.
Under the current auction round, the government has set the maximum guaranteed price at £44 per megawatt-hour, based on 2012 prices, meaning developers will compete for contracts below the guaranteed level. The price, linked to inflation, making it worth almost £60 per megawatt-hour today.
Current wholesale prices are about £90 per megawatt-hour. The UK Department of Energy & Climate Change said the pricing structure was designed “to protect generators against price fluctuations, and compares favourably to other international schemes . . . However, we understand there are supply chain pressures . . . and we are listening to the sectors’ concerns”.
The issues surrounding the development of offshore wind projects, particularly the rising costs and financial viability, have specific implications for the UK’s climate change and energy transition goals, as the country has ambitious targets to reduce greenhouse gas emissions (GHG) and increase the share of renewable energy. Challenges in offshore wind development can slow progress towards these targets, making it harder for the UK to meet its national and international commitments.
Furthermore, offshore wind is seen as a significant area for economic growth and job creation in the UK. Challenges in developing offshore wind might hamper these economic opportunities.
Source: Financial Times
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