26th Sep 2023


Why EU offshore wind is in trouble

  • Despite rising demand for clean energy and political enthusiasm, offshore wind projects are being cancelled or delayed thanks to rising costs (Photo: CE)
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A few months after Russian president Vladimir Putin invaded Ukraine, five European leaders and the EU Commission signed the Esbjerg Declaration.

Named after the eponymous Danish coastal city, the May 2022 document outlines ambitions to transform the North Sea into the "green power plant of Europe," an offshore renewable energy system connecting Belgium, Denmark, Germany and the Netherlands.

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  • Offshore wind projects are complex and require more upfront investment than land-based wind farms (Photo: www.CGPGrey.com)

The coalition — since joined by France, Ireland, Luxembourg, and the non-EU Norway and United Kingdom — aspires to build a giant interconnected system of offshore wind fields capable of generating 300 gigawatts (GW) of power by 2050 — a tenfold increase from current capacity and enough to power 200 million families.

With little space inland but extensive coastlines (the UK shoreline alone stretches for 17,820km), offshore wind seems primed for a big breakthrough. But despite rising demand for clean energy and political enthusiasm, offshore wind projects are being cancelled or delayed across the North Sea coast thanks to rising costs.

Investment in new offshore wind projects fell by 40 percent in 2022, down to the lowest level since 2009. Not a single commercial offshore project was given the final go-ahead in 2022.

Perfect storm

Lobby association Wind Europe, in a recent market update, blamed last year's revenue caps and government clawbacks — meant to help protect households and businesses — for creating uncertainty in the market, which deterred investors from reaching final investment decisions.

There are signs that 2023 will see an uptick, with 212 wind turbines connected to the grid in the first half of this year. But to meet its own targets, the EU needs to build over 11 gigawatts a year on average until 2030. This translates to around 1,100 wind turbines.

And there are signs the recovery is still on shaky grounds. Swedish clean-energy developer Vattenfall recently shook the market by backing out of its Norfolk Boreas offshore wind project in the UK, citing a 40-percent cost rise in a single year due to the difficulty in securing components from China and general inflation.

Supply problems and general inflation are likely temporary problems. But industry leaders are clear-eyed about the deteriorating underlying business case and warn of long-term troubles ahead.

"Offshore wind is caught in the perfect storm," Vattenfall senior vice president Heleen Biström said in June when presenting interim financial results. "We continue to believe offshore wind is essential for the [clean energy] transition, but the challenge to profitability is a structural problem."

One of the fundamental forces undermining the supposed offshore wind boom is the somewhat abstract notion of the cost of capital (CoC).

Developing and constructing offshore wind projects is complex. It requires more upfront investment than land-based wind farms and solar energy. Investing in it is considered more risky, prompting investors to seek higher returns and causing developers to incur a premium on their loans.

This can be significant in the best of times. According to recent research published by Mak Đukan, a researcher at the Climate Finance and Policy Group at ETH Zurich, return premiums on offshore wind projects in Germany were 3.3 percentage points higher than solar and land-based wind projects in the period between 2017 and 2020.

The 3.3 percentage points may seem like a small difference, but it leads to 26 percent higher electricity production costs, according to the ETH researcher, while fossil fuel-based electricity costs are much less affected by rising interest rates and could even become lower, markedly reducing the viability of renewables, especially offshore wind.

Furthermore, the combination of the European Central Bank's interest rate hikes, geopolitical unpredictability and price instability has driven the sector past a crucial tipping point.

"Capital costs are affecting the entire energy sector," Vattenfal's chief executive, Anna Borg, said in the company's interim financial report, but has made offshore wind "particularly vulnerable."

But it isn't just external shocks that are undermining offshore wind. It's flawed domestic policy.

Negative bidding

Many of the countries that want to transform the North Sea into a green power plant want to achieve this by paying as little as possible.

Investments in turbine and cable factories, workforce, port infrastructure, and new grid connections are lagging behind, and available EU public support schemes mainly consist of a reshuffling of existing funds.

The EU Net Zero Industry Act outlines EU ambitions to meet 40 percent domestic clean tech manufacturing by 2030, but 80 percent of the estimated €92bn in cost will have to be covered by private investors — an arrangement recently described by Brussels-based think tank Bruegel as "unconvincing."

An underlying issue is the way contracts are awarded. As it goes, most countries hold competitive auctions between developers. This year sixty percent of all auctions have been awarded under so-called 'uncapped bidding contracts.' These contracts require developers to pay for the privilege of building an offshore wind farm in national waters.

Zero-bid contracts fully expose developers to price risks, which leads to "worse financing conditions" (higher cost of capital), Đukan also told EUobserver.

But uncapped bidding is attractive for finance ministers who can sell it as a big win for taxpayers. It has been the standard in Germany, and the Netherlands indeed only allows negative or zero bids.

In one example of an auction with uncapped negative bidding this year, two oil majors — BP and Total — won all available sites in Germany's first of two offshore wind auctions. They paid €6.7bn and €5.8bn, respectively, translating to €1.8bn per gigawatt.

In a recent statement, lobby association Wind Europe wrote that "governments must not fall for the temptation of uncapped negative bidding" because energy companies will only pass on those extra costs to consumers or manufacturers, "both of which are already struggling."


Not all countries adhere to this system, however. The UK and Denmark negotiate so-called two-sided contracts that introduce a cap on profits but also guarantee a minimum price for developers.

This system reduces price volatility as it mandates producers to pay back excess profits while at the same time reducing investment risk as future revenues are ensured.

Industry insiders and academics agree price predictability under two-sided contracts reduces risk and pushes down the cost of capital for offshore wind projects. And the EU Commission has been pushing strongly for so-called 'two-sided CfDs' to be adopted EU-wide.

But this form is not without problems of its own. Previously negotiated prices in recent UK projects, for example, quickly became unviable as development costs suddenly jumped by 40 percent.

Vattenfall is seeking to renegotiate last year's contracts to guarantee higher minimum prices for its cancelled project and projects that are still under development. But renegotiation has proven cumbersome as the government insists on keeping prices low and because the contracts lacked an inflation indexation clause.

Wind Europe is therefore advocating to fully index the auction prices to cover inflation between the auction and the actual procurement of equipment, which typically takes a year-and-a-half.

Germany begins dismantling wind farm for coal

German energy giant RWE has begun dismantling a wind farm to make way for a further expansion of an open-pit lignite coal mine in the Western region of North Rhine Westphalia.


How safe are EU's North Sea wind farms from attack?

Acts of sabotage on wind farms or the underwater electricity grid are likely to be carried out as 'grey zone tactics', state-sponsored sabotage may be disguised as a civilian accident, or carried out from a leisure yacht or fishing boat.


German wind energy stumbles

A case study: red tape, "Not In My Back Yard" (NIMBYs), and Green vs Green conflicts are putting brake on Germany's rapid wind expansion.

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