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It is impossible to prevent a rise in offshore wind costs in the UK

The offshore windfarm industry is being driven off course, ushering in the next energy crisis in the United Kingdom. Due to the cost of leasing seabed plots from the crown domain, the answer is no.

Rather, an inflationary gale is blowing through supply chains, upsetting the long-held and reassuring belief that the cost of getting the turbines to rotate in real terms always declines.

Vattenfall’s decision to halt construction on a large project off the coast of Norfolk is indicative of how much the economics of new wind development have shifted in the past year.

The state-owned Swedish company has determined that it is preferable to endure a financial hit of 5.5 billion Swedish krona (£415 million) for the Norfolk Boreas development than to continue.

In last year’s auction for renewables capacity, the contract for the Boreas-generated electricity was priced at £37.35 per megawatt-hour (in 2012 dollars).

Anna Borg, the chief executive officer of Vattenfall, says that the price must be substantially higher for the project to be financially viable.

If this sounds like a request for additional subsidies – which it is – there is little point in informing Vattenfall and the other winners of last year’s auction that it’s their damn fault for bidding so aggressively.

Winning an auction confers the right but not the obligation to construct a wind farm. The government cannot merely order businesses to complete their tasks.

Given that it can take up to two years to secure contracts with suppliers, it is clear why, according to Borg, annual cost increases of “up to 40 percent” have undermined financial incentives to construct. In addition to the greater cost of steel, the higher cost of borrowing will be a factor.

Neither will the economic shift be unique to Boreas. The procurement round for this year has already begun, and all developers will estimate higher costs.

It is uncertain whether the government’s maximum strike price of £44 per megawatt hour (again in 2012 prices due to the industry’s peculiar metric) will attract anywhere near the desired number of bidders.

What is required? The government, and therefore all of us via our energy bills, will have to pay more for the next generation of wind farms.

If not, construction will continue to slow, and the fantasy of becoming “the Saudi Arabia of wind” will vanish into the North Sea haze.

Abandoning the goal of 50GW of capacity by 2030 would be the worst possible outcome – a false economy.

Even with slightly higher strike prices to account for higher construction costs, offshore wind remains a substantially cheaper source of energy than gas, according to medium-term gas price projections.

In this situation, developers are in a strong position. Offshore wind remains a relatively inexpensive technology, albeit not as inexpensive as it once was.

One solution would be to renegotiate the 15-year contracts that were signed last year, or to be more generous to the successful candidates.

The problem with this proposal is that it would circumvent the competitive contracts-for-difference regime, which has been highly successful in lowering consumer costs and protecting the government from being taken advantage of.

It would be more prudent to simply rerun the auction and solicit new proposals. Regarding this year’s auction, the £44 per megawatt-hour ceiling will almost certainly need to be raised.

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Ahmed Farman, an analyst at Jefferies, states that the offshore wind industry in the United Kingdom requires higher tariffs and more policy support in order to encourage investment. Yes, this is the lamentable state of affairs. The crisis persists.



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