Offshore Windfarms Threaten To Pull Out Of Uneconomical Contracts
By Paul Homewood
The wheels are falling off the offshore wind bandwagon:
A string of offshore wind projects meant to power Britain are in jeopardy after the global race to net zero sent costs soaring, casting doubt over the industry’s future as a cheap source of energy.
A surge in supply chain costs has pushed up the price of wind turbines, while increases in global interest rates have raised refinancing costs substantially.
It has made several projects unviable just a year after they won government subsidy contracts – leading to fears from industry insiders that Britain’s future is in jeopardy as the “Saudi Arabia of wind”.
Inch Cape, a 50:50 joint venture between Ireland’s ESB and China’s Red Rock Power to develop a project located 15km off the east coast of Scotland, is understood to be at risk, with the Irish side refusing to proceed with a so-called final investment decision (FID) after balking at the economics of the project.
One source said: “People won’t invest if it doesn’t give you a decent return on equity. And presently, it’s hard to see how it can.”
Schemes developed by Danish company Ørsted and Swedish player Vattenfall are among other projects understood to be at risk, as the industry seeks more government help to ensure projects remain viable.
Senior executives have also described Net Zero Secretary Grant Shapps as a “remote” figure who is reluctant to engage with company bosses.
The struggles faced by some of the biggest offshore wind developers raise fresh questions about whether the Government will achieve its target of 50GW of offshore wind by 2030, from current levels of around 14GW.
So-called contracts for difference (CfDs) are designed to guarantee companies that operate offshore wind projects fixed prices to sell electricity over a 15-year period. If the market price falls below the so-called strike price, the Government makes up the difference.
However, if the reverse is true, the companies must pay money back to the Government.
Last year’s CfD auction was the biggest to date and secured enough capacity to provide more than 10 million homes with clean power.
However, it is understood that the £37.35 strike price secured by Inch Cape is currently “below the waterline” for ESB, meaning they are not satisfied with the level of returns on offer.
“It should be nearer £50 to £55,” a source said.
The Norfolk Boreas offshore wind farm operated by Vattenfall is also understood to be at risk as costs mount.
A spokesman admitted that market conditions were “extremely challenging”, suggesting that a final investment decision was not forthcoming. He warned that the Government must reflect the realities of the market, suggesting Vattenfall was unwilling to proceed without more state help.
Catrin Jung, the company’s head of offshore wind, said: “Vattenfall has not yet taken FID on the Norfolk Boreas offshore wind farm.
“Market conditions are extremely challenging currently, with rising costs and a supply chain crunch as well as increasing costs of capital. We are looking at the best way forward for all three projects which make up the 4.2GW Norfolk Offshore Zone and how we can work with the supply chain, including what opportunities there are for UK businesses.”
Ørsted’s Hornsea 3 in the North Sea is also understood to be at risk, although a spokesman insisted that the company was “increasingly confident that we will be in a position to take a Final Investment Decision during 2023”.
The spokesman added: “The offshore wind sector has delivered huge growth in the UK over the last decade but it has arrived at an inflection point.
“It will require continued focus from stakeholders in Government and across industry to ensure offshore wind delivers on its potential to become the backbone of the UK’s energy system and bring further investment, provide low-cost electricity for consumers and help deliver our net zero ambition.”
Insiders suggested that Red Rock Power, a subsidiary of China’s state-backed SDIC, is willing to proceed with Inch Cape at a loss in order to avoid the embarrassment of abandoning what would be its biggest investment in offshore wind in Europe.
However, it is understood that any decision to proceed would have to involve a project redesign.
A joint statement issued by ESB and Red Rock Power said the companies remained “strategically aligned and committed to the delivery of the Inch Cape Offshore Wind Farm project”.
A Department for Energy Security and Net Zero spokesman insisted that Mr Shapps “regularly engages with the industry”. The spokesman said: “Offshore wind is a vital part of our work to boost energy security and cut emissions.
“Our plans to power up Britain, combined with the annual auction process now in place, gives the industry more confidence to invest.
“We have already attracted £120bn of private investment in renewables since 2010 and expect to attract a further £100 billion of investment which will support up to 480,000 jobs by 2030.
It has been apparent for a long while that the prices agreed under CfDs by offshore wind farms are in no way viable. It is worth noting that the £55/MWh figure quoted as a reasonable price is at 2012 prices, and works out at about £67/MWh at current prices. This certainly does not equate to the “cheapest” claims made by the renewable lobby. Furthermore because CfD prices are inflation linked, these prices will likely be over £80/MWh by the time the wind farms come on stream.
With interest rates now back to proper levels, and supply chain issues pushing up costs, the economics of offshore wind look distinctly unfavourable. If investors in these Round 4 auctions are getting cold feet, despite the fact they can sell on the free market anyway, what chance is there that investors will bother to bid at even lower prices for the next allocation round? And if these investors pull out, the 2030 wind power target is pie in the sky.
Meanwhile the reply by the increasingly absurd DESNZ is the usual stock reply – £100 billion investment, which we will have to repay with interest eventually; and all of those wonderful green jobs, which never actually seem to materialise!
But perhaps the most absurd comment of all is this:
“Senior executives have also described Net Zero Secretary Grant Shapps as a “remote” figure who is reluctant to engage with company bosses.”
Well, I am very sorry, but when you sign a contract, you are expected to fulfil it! You don’t go back moaning a year or two alter saying “I’m sorry, but I got my calculations wrong, can I have some more money?
FOOTNOTE
Yet again we see this silly comment by the Telegraph about a global race to net zero. This is the pathetic nonsense spouted by the increasingly irrelevant Jeremy Warner and Ben Marlow.
There is of course no such race, which implies that there is some sort of reward for those countries jumping off the clifftop first! On the contrary, most of the world is quite happy to let Britain, the EU and US continue with the madness, while they make themselves richer with the help of fossil fuels.
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NOT A LOT OF PEOPLE KNOW THAT 
Flubber is the obvious answer to anti gravity energy source – avoids the pesky 1st and 2nd law of thermodynamics and could be a great diversion for the eco exhibitionists to pose with. Flubber powered cars bikes and planes etc
I notice our wind is producing 5 and a half gigawatts as I write. Pretty good, eh?
24hrs on its producing 7.1GW but the ESO forecast was for 12.2GW only updated as of 23.30 last night so just as well we have enough CCGTs still on the system to be called into action albeit at a tasty price for them and all of us now. How do these idiots think this is going to work we are at max renewables now rather than subsidising more wind use the money to help get fossil fuel generators even more efficient and less polluting.
I make £55/MWh in 2012 prices £73.56/MWh today, quite similar to the ORESS 1 auction price for Eirgrid that was established recently at €86.05/MWh. The inflation factor is 1.3375 according to the EMR Settlement spreadsheet . Some wind farms have seen deductions from straight indexing that take account of the change from being liable to pay a share of balancing costs to having no such liability. In future there will be no such liability unless the rules are changed again.
I think the news about the problems Siemens is facing with unexpectedly high maintenance costs for its recent designs is upsetting for wind economics. It means that the ever cheaper, ever bigger idea is running out of steam. That could cap the optimal turbine size at perhaps 8MW, resulting in the need for more turbines and foundations than planned for in the AR4 bids.
I suspect the comments about aloofness relate to the AR 5 auction round currently in progress. Given that the maximum bid price is just £44/MWh in 2012 money (£58.85/MWh today) for offshore wind it’s likely it has secured no bids at all. Already there have been delaying tactics to allow DESNZ more thinking time. I’ve pointed out to them that they need to recognise the reality that wind costs are a lot higher than their outdated assumptions which go back to 2020 when interest rates were low and manufacturers were desperate for orders with activity curtailed by lockdowns. Also that they should be evaluating whether in the light of higher costs it is right to pursue a Saudi Arabia of wind policy. They are like a rabbit caught in the headlights.
In reality of course they should be cancelling Net Zero altogether.
They still waffle about a future of affordable energy, but it’s meaningless drivel to say the least.
Not sure how keen the Chinese are on offshore wind farms. Our Victorian Premier has returned from an unexplained & unpublicised** trip to China without any comment. It is thought that he was after finance for his dream of The Star of the South offshore wind farm in Gippsland. His policies have nearly bankrupted the State (now with the lowest S & P rating in Australia after 2 downgrades) and unlikely to get finance from banks etc owing to the enormous cost over-runs of previous projects. And Victoria has the cheapest electricity from its huge reserves of brown coal (which he wants to shut down) and readily available gas which he won’t allow to be exploited.
** So unusual about his lack of publicity that it attracted much interest.
Net Zero has infinite costs, because the closer you get to Zet Zero the higher the costs of doing net Zero become and there is no limit.
Not a problem, sometime in the next few weeks Khunt will effectively nationalise all the independent pension funds to use them to finance dodgy schemes.
Hunt to unveil pension reforms next month
Jeremy Hunt is poised to reveal broad plans to overhaul the UK’s pensions regime to unlock billions of pounds of investment into high growth British companies.
The Chancellor is expected to outline the highly anticipated pension reforms at the annual Mansion House speech in the City of London next month, the Financial Times reported.
The proposals include new rules to encourage UK pension schemes to invest in lucrative, but potentially riskier British assets, such as equities, early stage companies and infrastructure.
The announcement is also expected to contain proposals to consolidate the fragmented UK pensions regime, following the likes of Australia and Canada.
Mr Hunt is said to be “closely examining” calls from the Tony Blair Institute to merge thousands of defined benefit pension schemes to create super funds able to invest hundreds of billions.
https://www.telegraph.co.uk/business/2023/06/23/hunt-to-unveil-pension-reforms-next-month/
What could possibly go wrong.
Forcing pension funds to invest in what Blair thinks are great investments but professional investors won’t touch – with the fallacious claim there’s not enough capital around – really ought to make anybody realise how bad an idea it is.
“…potentially riskier…”
Just ‘riskier.’ In fact, every thing labelled ‘financial’ in the UK will eventually evaporate into worthlessness. The UK is not a country alone in this. The little people everywhere are invited to be rentiers. To join the big boys of Crony Capitalism and the Public Sector and garner a few crumbs.
The people were warned. Keynes gleefully coined the phrase ‘euthanasia of the rentier’ nearly a century ago.
” Tony Blair Institute ”
Just say no.
The UK pensions sector is shambolic, but involving anything associated with Blair should be avoided like the plague.
I often thought that Blair should be in an institution…
The idea that reducing diversity of investment improves investment is so clearly wrong it really only could be pushed by that Grand Architect of so much of our miserly, Tony Blair. He really does have tge largest ego I’ve ever seen. He knows nothing about anything yet considers himself a god-like expert on everything.
Brown was first with the idea when he made investment of a significant proportion of pension funds in gilts compulsory. That also supported government dictated spending. Labour would probably return to that model via nationalisation.
Oh yes, Old Gordie and his sidekick Balls. Noted for destroying the best pension schemes in the world with their tax grab that they thought would not be noticed failing to allow for the rise and fall of companies being able to keep funding the schemes. And Brown sold our gold reserves at the bottom of the market. He got credit for making the Bank of England independent – although it helps not to appoint morons like Carney and Bailey – but recall that joining the Euro requires an independent central bank so while Brown set out impossible conditions to be met before allowing Blair to take the UK in it is hard not to think that the bank independence was not a sop to Blair.
That’s a nailed-on future government miss-selling scandal right there.
Liability will be unavoidable and run into hundreds of billions.
We shouldn’t be touching mandatory government-dictated pension ‘investments’ with a bargepole.
Rishi Sunak to hit households with £170 net zero green levy
The two-year suspension of green levies announced last autumn is to end from the beginning of July, The Telegraph has learned
Households will pay a £170-a-year green levy on energy bills in the coming days, with Rishi Sunak and Jeremy Hunt accused of “slyly” shifting costs back to consumers.
The Telegraph has learned that the two-year suspension of green levies announced last autumn is to end from the beginning of July, after just nine months.
https://www.telegraph.co.uk/politics/2023/06/24/levy-net-zero-green-tory-rishi-sunak-this-week-170-pounds/
So I can expect new emails from my suppliers to say that while the unit costs have reduced, the standing charges will be going up even more?
Yep.
This is one of many stories about Siemens Gamesa I’ve seen in the last few weeks
MUNICH, June 23 (Reuters) – Siemens AG (SIEGn.DE) is facing a writedown of more than 1 billion euros ($1.1 billion) on its stake in Siemens Energy (ENR1n.DE), shares of which plunged on Friday after the group unveiled deeper than expected problems at its wind division.
https://www.reuters.com/business/energy/siemens-faces-writedown-siemens-energy-stake-after-fridays-sell-off-2023-06-23/
But, but, but – coal to the rescue! ‘Rishi Sunak scraps net zero pledge to legally ban coal. Government says legislation ‘not necessary’ because plants are closing anyway’. Why are coal plants closing anyway? Could it be because of Government policy?
https://www.telegraph.co.uk/business/2023/06/24/rishi-sunak-scraps-net-zero-pledge-law-ban-coal/
As for the claims that wind power is “nine times cheaper than gas”, which were largely based on a temporary spike in gas prices and the then low CfD prices, it was never true when made, and certainly isn’t true now. That didn’t stop numerous politicians who should (but apparently don’t) know better – e.g. Caroline Lucas and Ed Miliband – from spouting it:
At the time gas was 9 times cheaper than gas, comparing Henry Hub in the Southern US with NBP and TTF prices in Europe. Completely destroying another of Miliband’s silly claims about a world market price for gas. Recently we saw gas prices fall below £20/MWh while some CFDs were paying out £209/MWh for offshore wind. For someone with double maths A level, Miliband is extraordinarily innumerate.
As I’ve said repeatedly, if prices of stuff for Net Zero are going to fall significantly over the next few years, as promised by the CCC, it makes no sense to invest now. Far better to wait until prices fall. Some politicians and pundits understand this, which is why we get these absurd claims about “races” and becoming a “superpower” just by supplying sufficient electricity for our needs.
“Two swindlers arrive at the capital city of an emperor who spends lavishly on clothing at the expense of state matters. Posing as weavers, they offer to supply him with magnificent clothes that are invisible to those who are stupid or incompetent. The emperor hires them, and they set up looms and go to work. A succession of officials, and then the emperor himself, visit them to check their progress. Each sees that the looms are empty but pretends otherwise to avoid being thought a fool.
Finally, the weavers report that the emperor’s suit is finished. They mime dressing him and he sets off in a procession before the whole city. The townsfolk uncomfortably go along with the pretense, not wanting to appear inept or stupid, until a child blurts out that the emperor is wearing nothing at all. The people then realize that everyone has been fooled. Although startled, the emperor continues the procession, walking more proudly than ever.”
Its happening NET ZERO is falling apart and more of my friends now agree with me that it is mad, 3 years ago they all thought I was nuts when I banged on about the impossible elimination of fossil fuels.
In a nutshell, brilliant !
NetZeroWatch have reposted a classic Emily Gosden tweet about this exact eventuality!
With bullseye predictions like that Gordon will be making a lot of enemies. He should get a food-taster in immediately!
Why should wind power need any further subsidies when they are 9 times cheaper than fossil fuels (Keir Starmer’s Christmas 2022 speech)?
Or the necessity for any carbon pricing or CBAM?
On P19 of the Net Zero Strategy – Build Back Greener is written :
“Our power system will consist of abundant, cheap British renewables, cutting edge new nuclear power stations, and be underpinned by flexibility including storage, gas with CCS, hydrogen and ensure reliable power is always there at the flick of a switch.”
Surely as the ‘Saudi Arabia’ of wind we should be starting to see our electricity prices dropping, not wind estates looking for more subsidies?
On climate I would add AEP from the Telegraph to that pair.
What’s happened to the post “Wind isn’t working”?
I get the 404 error message: “We are terribly sorry, but the URL you typed no longer exists.”
Also it no longer appears in the list of recent topics on the RH side of the screen.
No one here has mentioned ‘force majeure’. Is this not the way to deal with unexpected circumstances that take place after contracts are signed?
The supplier / contractor should always be in fear of the customer (who pays for everything). With a competent procurement process which places the customer in full control – typically by letting services / works as manageable packages – the customer response to a supplier / contractor threatening to flounce should be “off you go then, don’t come back” , but perhaps abbreviated to two simple words.