Following the announcement of major US offshore wind developers stepping out of certain markets and scrapping their projects, it doesn’t take long before people across other regions start asking “are offshore projects unprofitable and will this soon happen here?”
Cancellations of this significance are heavily affecting the global offshore wind industry, especially as the key rationale behind such decisions are not unique to the US. With RWE announcing its intention to step back from projects in Taiwan and Italy, it’s clear the problem is not only American.
So why are developers exiting their investments? The basic answer is simple – the suspension or cancellation of a project might have a lesser negative impact on the company’s performance than continuation and potential failure.
We are talking about (multi) billion-dollar investments, so this is a major consideration even for the market leaders. We should accept the fact that the company will take care of its stakeholders' and shareholders' interests in the first instance, this is how business works. However, it would be much more interesting to understand how this happens.
Some common tropes are obviously the issues with the supply chain (both in terms of increasing costs and availability) and inflation, increasing interest rates and support scheme insufficiency (tax credits in the US case). These are very common problems seen around the world. It would then be easy to blame the developers by saying that the risk management process failed and macroeconomic predictions were inadequate, with some “black swan” events not identified at all.
Then, one could also blame the governments, regulators, and other institutions, which did not establish frameworks tackling the long-term projections of expenses and covering the risks related to strategic turbulences.
However, the situation is obviously a little more complex. The entire industry did a lot to decrease the cost of energy produced by offshore wind turbines, making projects really competitive, while governments benefited from the leasing fees and positive impacts on energy prices, setting the tremendous installed capacity targets for the next decades.
However, the pandemic and subsequent war in Ukraine affected the global economy so heavily, that maybe we cannot expect “business as usual” or that the market players will deal with that on their own. Maybe we should accept that the paradigm of continuously falling offshore wind costs and quick ascension towards zero subsidy conditions is no longer possible, at least for a while. This would require serious self-reflection for all the stakeholders involved.
In the US, there’s been a clear need for “the White House to guarantee more support” in order to make the projects feasible in current conditions. One solution could be raising minimum strike prices for Contract for Difference, the plan announced recently by the UK government, which is getting positive feedback. This means that the next auction rounds will have a dedicated pot of offshore wind funding, to make sure the projects will make their way to the market. Steps like this demonstrate the vital interest of the government.
A cancelled project is a better outcome than a never-ending development, with a decreasing chance of realisation.
In other markets, regulators are establishing various tweaks like support indexation schemes or currency risk solutions, with further rumours of increasing the reference prices in some cases. So, there is hope for even more satisfactory solutions in the future.
Regardless, I would risk a statement that from a society perspective, a cancelled project is a better outcome than a never-ending development, with a decreasing chance of realisation. This at least gives a chance that the designated offshore area could be used in an effective way, another time, in other conditions, with a better chance of success.
The key point would be understanding, “what is our actual target and why are we creating this kind of project?”. After that, maybe we could adapt the rules to make reaching these important targets possible (and yes, proper design of the auction schemes and lease proceedings are the basic things).
I wish luck in this next round of auctions to whoever will tackle the challenge, as an increasing amount of offshore wind energy in the mix, both locally and globally, will be beneficial one way or another.
Lukasz Sikorski is director of Europe at global renewables consultancy OWC.
