Europe’s offshore wind sector is running into serious trouble as high commodity prices and supply-chain issues in the wake of the coronavirus pandemic undermine profitability, according to industry researchers and WindEurope, a Brussels-based association.
The sector was already facing issues with diminishing returns before Russia invaded Ukraine — partly because of an aggressive charge into wind by big utilities and oil companies and the impacts of this on the profitability of government-backed power deals — but the war has increased supply-chain bottlenecks and pushed up the costs of raw materials to critical levels.
European sanctions aimed at ending dependence on Russian imports have led to a stampede for alternative sources of oil and gas, but also raised expectations about expanding renewable sources of energy even further.
Prices have been rising rapidly for commodities such as steel, copper and nickel, which are key for the industry.
“Energy policy in Europe has been completely turned on its head by the current situation,” WindEurope chief policy officer Pierre Tardieu told Upstream.
“On one side, we see disruption to the supply chain, on the other, we see a strategy to phase out reliance on Russian fossil fuels well ahead of 2030.”
He said the drive to replace Russian energy supplies is potentially a major incentive for electrification and the roll-out of wind power.
While welcoming Europe’s growing appetite for wind power, WindEurope has voiced its concerns for some time over the steep drop in profit margins amid increasing competition from developers.
WindEurope also warns there are not enough auctions of offshore wind acreage to accommodate such fierce competition.
“This has led to a race to the bottom, with extremely tight margins, and on top of that we now have rocketing commodity prices and supply-chain disruption,” said Tardieu, who suggested that some bids show a clear risk of going into negative territory, resulting in reverse subsidies.
Cost overruns are usually shared among developers and suppliers.
However, Petter Osmundsen, professor at the University of Stavanger’s Industrial Economics Section, reckons suppliers and contractors are struggling more than developers, and may be carrying a greater share of the risk.
Siemens Gamesa is among the wind turbine manufacturers to report big losses over the past year.
The net loss of nearly €2.4 billion ($2.6 billion) reported by Italy’s Saipem for 2021 was blamed, in part, on project performance on downward revisions in the offshore wind sector, although engineering and procurement in the onshore and gas sector also performed badly.
Saipem has since indicated that it intends to reduce its emphasis on offshore wind and focus more on the offshore oil and gas sector.
Developers hurting too
“According to our research, average cost overruns are around 10% for global offshore wind projects, and considerably higher in times of scarce capacity and high prices of raw materials. Thus, developers are not completely shielded against rising costs,” Osmundsen said.
WindEurope warned as early as last August that the industry faced supply-chain strains and high raw-materials prices as the world started opening up following the Covid-19 pandemic.
Russia’s invasion of Ukraine has further driven up project costs, with Tardieu pointing to the sharp rise in steel prices compared to pre-pandemic levels as a major concern.
With Russia being the world’s fifth-largest steel producer and Ukraine the twelfth biggest, the rapidly rising cost of steel is a continuing concern.
“Since the beginning of the invasion, [the cost of] hot rolled coiled steel has increased by 40%,” Tardieu said. “Steel is a very important raw material for our industry.”
WindEurope is concerned that such increases will undermine the competitiveness of the European wind power sector at a time when geopolitical pressures and concerns about energy security are demanding faster expansion in capacity.
Bidding wars for limited acreage are a continuing cause of concern. Tardieu reckons the competition for the Thor wind farm development in Denmark in December 2021 may have taken the winners, German energy utility RWE, into negative territory.
“Thor could thus be the first offshore wind farm in the world to be built with payments to the state.... We find this development problematic,” Tardieu said.
In early March, WindEurope wrote to the European Commission calling for the permitting of wind energy projects to be simplified and Europe’s renewable manufacturing base to be strengthened.
“Our message to the authorities is that over-tight margins and lower-and-lower costs are not the solution if we want a wind supply chain in Europe,” Tardieu said.
“We need to move away from the notion that cheaper is always better. We want a more holistic approach to the awarding of wind projects.”
He added that low margins could also take their toll on offshore wind projects due to the impacts on the bottom line for both developers and the supply chain.
“I think the projects will go ahead, but may be delayed,” Tardieu said.
Osmundsen added that low margins at the outset threaten profitability of projects.
“Cost overruns are often associated with project delays, increased operating cost and production problems, further reducing the rate of return,” he said.
Osmundsen said another major issue for the sector is that the electricity price is fixed by the contracts for difference (CFD) for the first 15 years — essentially a fixed price guarantee that acts as the most common subsidy for offshore wind in Europe.
The price is regulated according to the consumer price index, but offers no protection against large increases in producer prices.
“This means that cost increases cannot be shifted over to customers,” Osmundsen said, adding that these projects typically have a debt ratio over 70%, making them more exposed to cost increases than other industries.
Norwegian energy giant Equinor, one of the project partners in Dogger Bank, which will be the world’s largest offshore wind farm, is also concerned about rising commodity prices.
“Our projects will, of course, be affected by global price trends in commodities,” an Equinor spokesman told Upstream, stressing that the company’s contracts with suppliers have mechanisms for commodity price adjustments to help balance risk.
US problems, too
A recent report by the New York State Energy Research & Development Authority (Nyserda) suggested that a new legal requirement that only American-made steel can be used in state-funded industrial projects could lead to development costs spiralling in a fledgling US offshore wind sector, too.
New York authorities are giving developers more time to submit comments on a draft offshore wind tender on concerns that American-made steel in project proposals could aggravate cost escalations and supply chain issues, according to a recent report.
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