Inflation brings summer storms to UK offshore wind

Rising costs are forcing UK offshore wind developers to make tough choices about their projects, as Vattenfall's decision to put its 1.4GW Norfolk Boreas on hold shows. We consider what this means for offshore wind companies in UK and other European countries.

  • Vattenfall has put its 1.4GW Norfolk Boreas on hold due to rising costs
  • Inflation will harm the UK's bid to achieve 50GW offshore wind by 2030
  • This should be a warning to policymakers in the UK and elsewhere in Europe

Rising costs are doing what celebrities can’t.

The UK’s High Court last month dismissed a legal challenge by the campaign group Suffolk Energy Action Solutions against the UK government’s approval of the 1.7GW East Anglia 1 North and 2 projects. SEAS is backed by celebrities including the actor Ralph Fiennes, and said the substations and other onshore grid infrastructure for the Iberdrola project would have a “catastrophic” impact on the landscape.

The group said it was not opposed to offshore wind in principle, but was challenging the consultation process and said that much of the transmission infrastructure could be installed offshore. The group said it will continue its court battle, while Iberdrola subsidiary Scottish Power Renewables said it remained committed to the scheme.

However, one project where onshore transmission will not be needed is Vattenfall’s 1.4GW Norfolk Boreas. On 20th July, the Swedish utility put the project in the North Sea on hold because it said it no longer made financial sense; and the decision will call into question the future of the 1.8GW Norfolk Vanguard complex too.

Vattenfall won a Contract for Difference for Norfolk Boreas last year at £37.35/MWh (in 2012 prices), but Vattenfall has decided that is not enough as it grapples with the effects of inflation. The difficult market is doing damage where well-known NIMBYs can’t. Its decision raises questions for offshore wind in UK and the rest of Europe.

UK: 50GW goal unlikely

The Norfolk Boreas decision has been a while in the making. Vattenfall and Ørsted have warned about the impact of rising costs for the last year, and their demand for more support from the UK government was loudest ahead of the Budget in March. But the fact one has stopped a project will send shockwaves through the sector.

The immediate question for the UK government is whether it needs to accelerate the proposed reforms of the CfD regime. It started a review of the system in April to take into account ‘non-price’ factors in bids, so that it does not only pick winners based on who bids the lowest strike prices. But changes will only come into force after the fifth round of CfD bidding concludes, with results due in the next few months.

Norfolk Boreas shows the weakness of this system in an inflationary market, because winning bidders have to commit to CfD strike prices years before buying turbines and other services. We discussed potential changes to CfDs in April, and the clamour for change has only got louder as developers have argued that the maximum round five CfD price of £44/MWh in 2012 prices is too low. 

The government said it is listening to the wind industry, and it will have to if it wants to stand any chance of reaching its target of 50GW offshore wind by 2030. That will only happen if companies in the supply chain can build profitably. If they can’t then the UK offshore wind project pipeline, which is now over 100GW according to RenewableUK, will remain as what is dismissively known as ‘bragawatts’. Vanity not sanity.

Another potential knock-on effect is on the onshore wind sector. In mid-July, the UK’s Conservative government faced calls from 21 of its own MPs to end the country’s de facto ban on onshore wind, which has been in place since 2015. The UK’s renewable energy plans for the last eight years have focused on fast growth in the offshore wind sector, but Norfolk Boreas shows that the UK cannot now rely on offshore wind alone. This could push the government to loosen the shackles for onshore wind developers.

Norfolk Boreas is only one project, but Vattenfall’s decision clearly shows the system isn’t working. The UK’s ‘race to the bottom’ cannot continue indefinitely.

Germany’s alarming auction

Supply chain pressure is not solely a UK issue. That is why the result of Germany’s 7GW offshore wind tender last month, where the government secured winning bids totalling €12.6bn for the four sites, has caused consternation in the industry.

Groups led by oil giants BP and Total Energies won two sites each, but the process has attracted criticism because of ‘uncapped negative bidding’. In other words, the winning bidders have to pay for the right to build offshore wind farms, and the high prices they had to bid to win sites will be passed on. This means higher energy bills for consumers, and increased pressure on companies in the offshore supply chain that have already been grappling with slimmer profit margins as more governments have turned to competitive auctions. Inflation will only worsen that.

The effects of inflation and over-ambitious tender bids will not be immediate. We do not expect a host of projects to follow Norfolk Boreas and be put on ice over summer. Nevertheless, Vattenfall’s decision should show governments that competition has its limits, and they will need to adapt if they want to see new offshore wind farms built.

Otherwise, just like celebrity actors, we may see more projects face their curtain call.

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