Why It Matters: Wind Developers Face Steep Costs
The failed auction is a major setback for offshore wind, a technology that both European and American governments and utilities are relying on to combat climate change and generate clean electricity. The British government, for example, has set a goal to triple its offshore generating capacity by 2030.
Developers of offshore wind farms are experiencing a surge in costs across all aspects of the projects, from wind turbines to steel and copper. As a result, they are indicating that they need higher revenues to ensure the financial viability of these ventures.
However, governments have been reluctant to amend their terms, leading to a situation where developers are going on strike, causing delays and potentially even cancellations of projects.
The historically declining costs of offshore wind power are also expected to reverse their trend and rise in the future.
Despite the criticism, the auction was not as disastrous as some portray it to be. Analyst Deepa Venkateswaran from research firm Bernstein explains that eligibility criteria and other factors deterred numerous developers from participating in this round.
However, the British auction did attract bidders for onshore wind and solar projects.
Behind the Story: Updating an Investment-Boosting System
The United Kingdom supports renewable energy through a subsidy system called “contracts for difference,” wherein developers are guaranteed a specific price of around £69 per megawatt-hour for the power generated by their projects.
These guarantees aim to provide companies with certainty and incentivize financial institutions to invest the substantial sums, often exceeding billions of dollars, required for constructing large wind farms.
While the British system was previously well-regarded and encouraged significant investments in renewable energy, the government’s recent attempts to lower power prices for consumers by using the scheme have caused developers to withdraw their participation due to soaring inflation.
One major developer, Vattenfall, even delayed a significant project in the North Sea this year, citing a 40% increase in costs.
This problem is not exclusive to Europe. Offshore developers in the United States are also seeking to renegotiate power supply contracts, with some being willing to terminate contracts and bear the financial penalties involved.
Recently, Orsted, the largest offshore wind developer, announced a potential $2 billion write-down on planned projects in the United States and hinted at the possibility of canceling them.
What’s Next: U.K. Government Vows to Collaborate with Industry
Analysts predict that these series of issues faced by the highly promoted offshore wind sector will prompt governments to revise the terms of future auctions. In the case of Britain, the failure of the recent auction “puts pressure on the U.K. government to change auction parameters,” according to Bernstein analyst Ms. Venkateswaran.
The government appears humbled by the tarnished image of an industry widely viewed as a major success in the country. In a news release, the British government pledges to collaborate with industry to ensure the retention of their global leadership in this vital technology.
The setbacks experienced by government support systems may also encourage a shift away from subsidy regimes, say some analysts.
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