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By Kathrin Witsch
First the energy company stops Vattenfall a mega wind project in the UK. Now Orsted, the world's largest offshore operator, has to write off $730 million.
The reason: the projects have become too expensive. Delivery delays, inflation and rising interest rates are making offshore wind turbines a losing proposition for many companies.
"There's a storm brewing"
"We have concluded that our suppliers' ability to meet their commitments and contract schedules is increasingly at risk," says Orsted CEO Mads Nipper. "This could lead to potential revenue delays, additional costs and other impacts on business operations." The energy company's stock plunged more than 25 percent after the announcement.
In the offshore industry, "the perfect storm is brewing right now," warned RWE-Markus Krebber, the company's CEO, said recently. It is not only rising financing costs that are causing problems for the industry. There is an enormous gap between expansion targets and production capacities.
Currently, Europe, the world's second largest wind energy market after China, produces offshore wind turbines with a capacity of seven gigawatts per year. To meet demand, capacity would have to be expanded to 20 gigawatts. This would require massive investments by turbine manufacturers. But they are in deep crisis and in the red. The billion-euro debacle at Siemens Gamesa is just one example of many.
Expansion targets for offshore wind power are at risk
This is fatal for the energy transition. After all, offshore wind power is set to become the world's most important source of energy in the next few years. The expansion targets for Europe alone are ambitious: By 2030, wind turbines with a total capacity of 60 gigawatts are to be installed in the European Union. By 2050, this figure will rise to 340 gigawatts. Currently, there are just 32 gigawatts.
"We have a very overheated market. The expansion targets have also risen so extremely internationally in a short time that the existing resources cannot cope," Dirk Briese from the market research company Trendresearch tells Handelsblatt.
Three times as many workers and substations needed
It will take twice as many power cables, the number of workers will have to more than triple, as will the number of substations. That's simply not possible, say several high-ranking industry representatives. "The 2030 expansion targets for wind energy cannot be achieved. Neither in Germany nor internationally," Briese makes clear.
The Danish offshore giant Orsted is the best proof of this. The affected projects Ocean Wind 1, Sunrise Wind and Revolution Wind off the coast of the US state of New York are postponed by a year because the producer of the foundations cannot meet its delivery date. At the same time, tax breaks via the U.S. government's Inflation Reduction Act (IRA) subsidy program are not coming in the expected magnitude.
The high level of interest rates in the USA is also putting a strain not only on offshore projects but also on some onshore wind farms. If interest rates remain high, the additional costs could rise to a total of $2.3 billion in the worst case. Orsted is still holding on to the projects - but is also considering the option of a complete stop.
Inflation, rising interest rates and supply shortages
"It is actually the worst-case scenario for the energy transition if major projects that have already been awarded are not realized as planned. At a time when the entire offshore industry must meet its expansion targets, this quickly calls into question the achievement of climate protection goals," warned RWE CEO Krebber in mid-August when announcing the quarterly figures.
This dilemma is exacerbated by a combination of factors such as cost increases due to persistent inflation, rising interest rates and structural supply constraints and tight supply chains, he said.
The companies are trying to take precautions and secure long-term capacities, for example for maintenance ships. Special ships are needed to take the giant turbines out to sea, and even one of these can cost several hundred million euros. That, too, drives up costs.
Vattenfall stops construction of its wind farm
The Swedish energy company Vattenfall has completely stopped the construction of its Norfolk Boreas wind farm off the coast of Great Britain due to high costs. "Higher inflation and capital costs are impacting the entire energy sector," Vattenfall CEO Anna Borg had said, explaining the decision. In the case of the 1.4 gigawatt project in the British sea, costs have risen by up to 40 percent.
At the end of last year, Vattenfall had won the auction with a bid of the equivalent of 43.55 euros per megawatt hour. This means that with the planned commissioning in 2026 or 2027, the energy group had expected to produce a megawatt hour of wind power for 43.55 euros.
Industry experts describe the bid as "very ambitious. Especially compared to the prime costs that the analyst firm Bloomberg New Energy Finance (BNEF) for the first half of 2023: That is currently just under 68 euros per megawatt hour.
Not all competitors fall into the cost trap. Some seem to have gone into the tenders on the high seas with more conservative bids. Or to put it simply: they didn't calculate so tightly.
Vestas and other turbine manufacturers raise prices
At Vattenfall, other projects are still at risk, according to boss Borg. All planned wind farms in the Norfolk zone will now be examined first. The projects have a capacity of 4.2 gigawatts.
Overall, prices for building an offshore wind farm have risen by 30 to 40 percent in the past two years alone. Also because turbine manufacturers have started to raise their prices. The average selling price at the Danish wind company Vestas, for example, has risen by almost 37 percent in two years.
Manufacturers have relied on low prices for too long
The strategy of low prices worked for a long time. But manufacturers were too optimistic. For example, the prices for steel and other raw materials have risen massively in the meantime. Turbine manufacturers had not taken this risk into account in their contracts and are now stuck with the additional costs.
Now the wind companies are working on their cost discipline. Contracts are being renegotiated, risks outsourced, prices increased. However, this has consequences for the entire offshore industry. From 2025, experts see a definite gap between demand and production capacity. "Building up resources and capacities such as production facilities, vessels and personnel is costly and lengthy. It will take several years," says wind expert Briese.
As a result, no one in the wind industry believes that the expansion targets for 2030 will be met. Nevertheless, demand remains high. Just on Wednesday, RWE won the contract to build a two-gigawatt wind farm in the Gulf of Mexico off the US coast.
RWE: High cost pressure on the Gulf of Mexico
RWE is thus expanding its US portfolio to a total of around 5.9 gigawatts. In 2022, the Essen-based group had already secured areas in the New York Bight and off the Californian coast.
But the new project in the Gulf of Mexico could become a challenge for the group: The bay is not an easy place for a wind farm because of its hurricanes and soft seabed. Cost pressure is also particularly high for capital-intensive offshore plants due to the already low electricity prices in the region.
Wind energy remains interesting despite rising costs
"But despite rising capital and investment costs for renewable energy projects, we continue to see high demand for project financing, especially in countries with strong political support for renewables, such as Germany and the U.S.," Tim Koenemann, head of Commerzbank's renewables division, told Handelsblatt.
This is also because the companies assume that wind power will still pay off in the long term. At a cost price of 74 euros per megawatt hour, offshore electricity is significantly cheaper than the fossil alternatives. Even nuclear power is three times as expensive as energy from ocean wind, according to BNEF.
