UK Offshore Wind Industry Risks Cancellations: Hedge Fund Chief - Rigzone News
UK Offshore Wind Industry Risks Cancellations: Hedge Fund Chief | Rigzone
UK Offshore Wind Industry Risks Cancellations: Hedge Fund Chief
The UK’s once-booming offshore wind industry faces years of pain, including project delays and possible cancellations, due to soaring costs and higher interest rates.
That’s the view of Per Lekander, chief executive of Clean Energy Transition LLP, a London-based hedge fund that manages $2.6 billion in assets in sectors including renewables, utilities, oil and gas.
“The industry needs a complete reset,” he said in an interview. “It’s going to be a very long period with very disappointing growth, where projects might be delayed or not even built.”
Across Europe, wind developers are dealing with a toxic mix of challenges including higher costs for turbines, supply-chain bottlenecks and international competition, while facing difficulty securing financing for new projects. In Britain, the situation has been compounded by an auction system that hasn’t guaranteed adequate return on investment, threatening to bring new offshore construction to a halt.
During a prolonged period of low interest rates before the pandemic, investment in UK wind capacity did in fact surge — to the point where it has surpassed natural gas primary source of power connected to the grid. Sustained inflation, and the effort to stop it, now threatens to stop that growth in its tracks.
This should have been wind’s moment in Britain, which is blessed with thousands of miles of coastline and offshore energy potential. Climate change is forcing a shift away from fossil fuels, and the government is seeking to become carbon neutral by mid-century, even as Prime Minister Rish Sunak backtracks on the short-term steps needed to reach that goal.
The difficulties for offshore wind accompany uncertainty over the growth outlook for other clean-energy technologies, from heat pumps to electric vehicles.
Most of the money needed to reach the government’s net-zero goal will need to come from the private sector, said Emma Pinchbeck, chief executive officer of industry group EnergyUK. “At a time when other countries are stepping up their efforts to attract green investment, we cannot risk that money going elsewhere,” she added.
‘Out of Money’
The UK’s wind-energy investment boom came to an abrupt halt in the wake of the pandemic, as costs surged for everything from freight to labor, according to Clean Energy Transition’s 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.”
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,” a spokesperson said by email.
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 is “not a given” due to higher rates. Together, the Vattenfall and Orsted projects could provide power for more than 4.5 million UK homes.
Orsted previously “stressed that we will only invest in value creating projects on life cycle basis,” a spokesperson said. “We will confirm that if/when we take final investment decision.”
Earlier this month a government auction for offshore wind projects failed to attract a single bid, underscoring the industry’s challenges. Denmark’s Vestas Wind Systems A/S is now reconsidering plans to make more turbines in the UK as a result.
Part of the problem is that developers bid too aggressively in previous auctions, helping to drive government-set electricity prices too low to make building new projects worth the effort, according to Lekander.
“It’s clearly going to be a painful situation from here,” he added.
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Related Knowledge Center: Offshore wind energy
Over the next decade, U.S. offshore wind power is expected to grow from a single 30-megawatt wind farm off Rhode Island to more than 2,000 MW of capacity along the Atlantic Seaboard. There are contracts for wind power off the coasts of Massachusetts, Connecticut, New York, Maryland, New Jersey, Rhode Island, and Virginia.
The National Renewable Energy Laboratory has estimated the United States has over 4,000 gigawatts (GW) of offshore wind potential, enough to power the country four times over.
The growth in part being spurred by state solicitations, including in New York, where then-Gov. Andrew Cuomo (D) set a commitment of 9,000 MW of offshore wind by 2035, and in Connecticut, where in June 2021, Gov. Ned Lamont (D) signed legislation authorizing the construction of 2,000 MW of offshore wind by 2030.
The offshore development is also being driven by an investment tax credit set to end in December 2019 and is equal to 12 percent of expenditures. U.S. Sens. Susan Collins (R-Maine) and Tom Carper (D-Del.) have introduced a bill to extend the tax credit for up to eight years.
The Interior Department has held eight competitive lease sales that resulted in 15 offshore wind leases over 1.7 million acres that has the potential for 21 GW of capacity. In February 2022, the Bureau of Ocean Energy Management completed a bidding process that realized $4.37 billion for 488,000 acres across six lease areas in federal waters off New York and New Jersey.
Projects have also been proposed off the Southeast coast, off California and Hawaii, and for the Great Lakes.