Key UK Offshore Wind Project Axed in Blow to Climate Plans
General view of the Walney Extension offshore wind farm operated by Orsted off the coast of Blackpool, Britain September 5, 2018. REUTERS/Phil Noble//File Photo
(Bloomberg) —
Vattenfall AB halted the development of an offshore wind project in the UK after costs surged, posing a major setback for a key part of Britain’s climate and energy security plans.
The Swedish utility said a wind farm planned in the North Sea, which would provide power for 1.5 million UK homes, is no longer viable after costs for the technology soared 40%. Vattenfall will take a hit of 5.5 billion Swedish krona ($537 million) because of the decision, it said in a report released Thursday.
“Although demand for fossil-free electricity is greater than ever, the market for offshore wind power is challenging,” Vattenfall Chief Executive Officer Anna Borg said in a statement. “Higher inflation and capital costs are affecting the entire energy sector, but the geopolitical situation has made offshore wind and its supply chain particularly vulnerable.”
Vattenfall’s decision follows years of soaring costs for materials, logistics and financing — threatening the viability of a technology that’s key to cutting reliance on gas and coal-fired power stations. Nowhere is the dependence on offshore wind greater than in Britain, which plans to nearly quadruple its fleet of wind farms at sea by the end of the decade.
The decision not to build the wind farm leave the UK more dependent on imported fossil fuels, undermining promises by Conservative Party prime ministers, including Rishi Sunak, to use offshore wind to boost the country’s energy independence.
“The government has set very challenging targets for the expansion of offshore wind in order to bolster our energy security through clean domestic power which can reduce our costly reliance on imported fossil fuels,” said Adam Berman, deputy director at industry group Energy UK. “The government needs to recognize the much-changed economic picture for developers.”
Norfolk Project
Vattenfall’s 1.4-gigawatt Norfolk Boreas wind farm was key to realizing the UK’s plans in the near term. It’s among projects at an advanced stage of development, and a final investment decision was expected later this year. Last year, the company received a government-backed contract for the project that would have locked in record-low power prices for 15 years. But the low price may have ultimately doomed the project.
“The market framework in the UK that’s supposed to incentivize investment in renewables isn’t reflecting the current market environment,” said Helene Bistrom, the head of Vattenfall’s wind business. “This is important for the UK, but Vattenfall needs to invest responsibly.”
Developers had warned the government that rising costs could jeopardize projects that won those contracts. However, a number of the companies decided to push on, or have said they plan to do so. That relieved some pressure, but any major wind farm that doesn’t get built leaves a void of power production that will have to be filled.
“If government gets the policy wrong on the current round of renewables auctions and doesn’t keep pace with increasing costs, the UK could end up even more reliant on foreign gas, leaving households on the hook with higher bills,” said Jess Ralston, head of energy at the Energy and Climate Intelligence Unit. “Doubling down on renewables, which remain much cheaper than gas, means in future price spikes we’ll be less exposed.”
For Britain to realize its 2030 offshore wind goal would require just about everything to go right. Now with at least one major project stopped, reaching that goal becomes less likely. And it will be more expensive than once thought.
Vattenfall said its wind business overall is profitable and that it’s looking at options for the Norfolk Boreas project and others it’s developing in the same area.
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Vattenfall Stops UK Offshore Wind Project Citing Costs and Lower Profits
Vattenfall has become the latest developer of wind farms to report that rising costs are undermining the economics of offshore projects. The Swedish energy company announced that it has decided to shelve a late-stage development project in the UK saying the market for offshore wind power is “challenging.” The company’s decision also raised broader concerns for the UK’s offshore wind energy sector which is a key component of the government’s future energy plans.
“We have decided to stop the development of Norfolk Boreas in its current form,” Vattenfall President and CEO Anna Borg announced in the company’s mid-year financial report. “We will examine the best way forward for the entire Norfolk Zone, which in addition to Boreas also includes Vanguard East and West.”
The project was planned for an area about 30 miles off the south east coast of Britain. Boreas was to have an installed capacity of 1.4 GW and was due to deliver its first power in 2027. The zone with the three wind farms was to consist of between 180 and 312 turbines with a total capacity of 3.6 GW.
“Higher inflation and capital costs are affecting the entire energy sector, but the geopolitical
situation has made offshore wind and its supply chain particularly vulnerable,” Borg said in explaining the decision to suspend the development project. She told investors that the company has seen cost increases of up to 40 percent, saying that this affects the future profitability of the project. They are citing soaring material and project costs along with the impact of inflation and interest rates on the projects’ economics.
The company, which has grown its wind portfolio in the past year from 4.2 GW to 5.6 GW, said it is still convinced that offshore wind power is “crucial for energy security.” Nonetheless, based on the changing economics, they are recording a more than $500 million impairment charge against earnings to stop the development of these UK projects.
Vattenfall had previously said the Boreas project and its advancement was “great news” for the UK. They received planning consent for the project in December 2021 and won Contracts for Difference a year ago. The company reported the contract provided for a 15-year fixed revenue stream with Reuters estimating the guaranteed minimum price at nearly $58 per MW hour. The company signed grid contracts with Siemens Energy and Aker Solutions last October and was expected to make a final investment decision later this year for Boreas.
The decision to suspend the development is raising broader questions about the UK’s industry. The government has highlighted that it plans to have 50 GW of offshore wind energy as part of its energy plan. The UK currently has around 14 GW of installed capacity. The Boreas project was seen as among the most advanced of the UK’s future projects.
Addressing investors, Borg said that they now believe that the UK does not currently have the investment environment needed to meet its offshore wind targets. The company hopes that the contract prices might improve to make it possible to go forward with projects. They said the incentives currently available no longer reflect market conditions while noting that other developers including Ørsted have also called for target support of the industry.
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