Trouble at t'Windmill

Developers pulling out, lobbyists in disarray and turbine makers bleeding cash

Introduction

There is a lot of trouble in the world of wind power at the moment. Offshore wind developers are pulling out of the contracts they agreed only last year at supposedly record low prices. The wind lobbyists are in disarray, unable to make their minds up whether wind is cheap or if there is a crisis because of rising costs. To cap it all, the actual turbine manufacturers are bleeding cash and taking massive losses on dwindling offshore order books.

Vattenfall Pulls Out of Norfolk Boreas

Vattenfall has pulled out of its agreement to build the Norfolk Boreas wind farm, citing rising costs. It agreed to build this development only last year at £37.35/MWh in 2012 terms. In March 2023 that would equate to £45.37/MWh according to LCCC. They offered to pay more than the £44/MWh Government has said it will cost in 2025 and they have still pulled out. This can’t have been an easy decision as it has cost them ~£415m in sunk costs. They said it was a “prudent” move given the impact of increased costs on the project’s future profitability. More ominously, Vattenfall also said that other projects that it was involved with, Norfolk Vanguard East and West, were under scrutiny.

Wind Lobbyists in Disarray

As a result, wind lobbyists are very confused. RenewableUK cannot make their mind up whether wind costs are falling or rising. On Friday On Friday 4^th August they retweeted an image from Carbon Brief about how cheap offshore wind was going to be for the foreseeable future, starting with £44/MWh in 2024.

The very next day, they retweeted an article that warned of a tipping point facing offshore wind because of the funding crisis. Within the article, a RenewableUK spokesperson was quoted as saying “It’s a perfect storm of factors changing, difficult economic circumstances and still having this really narrow focus on driving down prices.” Wait a minute, the wind lobby industry has been banging on about cheap prices for years. They made price the differentiating factor for wind, ignoring the costs of managing the inherent intermittency.

So, which is it? Are prices going to be low for the foreseeable future, or is there a crisis because of rising costs? The article in the Observer, quotes the head of the Carbon Trust think tank:

“The UK offshore wind industry is at a tipping point. The maximum prices set are now too low. Last month, we saw Vattenfall withdraw from the Norfolk Boreas windfarm. This may be the first of many if bold and swift action is not taken.”

Clearly, he thinks wind prices have to rise. The deputy director of Energy UK warned that the latest Allocation Round (AR5) might not result in any new major offshore wind projects unless there is a more financially sustainable regime. This sounds like a Mafia threat: ‘more money or the windmill gets it.’ Evidently, he thinks wind prices have to rise too.

If wind is so cheap and demand for energy is rising, it ought to be easy to get new wind farms built. Investors and developers should be falling over themselves to bid. Maybe, as I said last week, the claims of low-cost wind are just a big lie? Construction costs have gone up and so have interest rates. That’s even before the eye-watering costs of balancing the grid that came in at over £4bn last year.

Wind Turbine Makers Bleeding Cash

In addition, the turbine manufacturers are facing severe difficulties. It has been widely reported that Siemens Gamesa (now rolled into Siemens Energy) expects to make a loss of €4.3bn this financial year as a result of quality problems with its onshore wind turbines. Siemens Gamesa has also seen a free cash outflow of €1.89bn so far this year.

Less widely reported is that Vestas, another major wind turbine supplier, is also facing difficulties. It has made a loss before tax of €130m in its second quarter and has seen a free cash outflow of €1.22bn in the first half of the year.

Order volumes for both companies have picked up a bit, but Siemens’ priority order is stability, profitability and then growth. Turbine prices may well have to increase further to bring them back to profitability. Vestas said that “stronger operational and commercial discipline across the industry [is] imperative to ensure value capture and quality.” This is another warning that prices need to rise further to get back to profitability.

Conclusions

It is clear there is significant turmoil in the offshore wind industry. Projects are being cancelled, costs are rising and new projects are in doubt. The turbine manufacturers also have their own problems and need to focus on getting back to profitability.

It would take a very brave or foolhardy energy minister to rely upon wind to be the backbone of the grid by 2050. And an even braver or more foolish Shadow Energy Minister to commit to a completely decarbonised electricity system, requiring a 4x increase in offshore wind capacity, by 2030. They need to face up to the truth: it’s simply not going to happen.  Better to admit that now and come up with a contingency plan than to put the country at risk of blackouts and worse.

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