UK, German Moves To Support Offshore Wind Point To Challenges Ahead

Ørsted’s Travails

World’s biggest  offshore wind energy developer- Danish firm Ørsted on November 1 this year announced ceasing developing two of its proposed offshore wind projects in the United States (US) at the cost of around £3bn in penalties. These projects were slated to come up at New Jersey off the US coast. They had the total capacity of around 2.2 GW. The wind energy behemoth attributed the rising inflation in the US, supply chain crunch, higher rate of interest and others as prime reasons behind the decision. The announcement led to a plunge its stock. It was followed by the departure of two of its senior most managers weeks after.

The Danish firm said that the US offshore wind sector in the past few months has suffered a setback due to several unfavourable conditions. “On 29 August 2023, Ørsted announced anticipated impairments on its US portfolio of up to DKK 16 billion. Since the announcement, the US offshore wind projects have experienced further negative developments from adverse impacts relating to supply chains, increased interest rates, and the lack of an OREC (Offshore Renewable Energy Certificate) adjustment on Sunrise Wind. The total impairments recognised in the interim financial report for the first nine months of 2023 amount to DKK 28.4 billion, and the majority of these (DKK 19.9 billion) relate to Ocean Wind 1,” it said.

Besides cost inflation, the offshore wind industry is also yet to convince activists who donot want offshore wind on the coasts, leading to more delays and litigation.

Ørsted is also developing offshore wind farms in Norfolk and Lincolnshire in the United Kingdom. Marred by the lower fixed prices for these projects, it had also approached the UK government seeking subsidies. Although it had fixed prices of £37.35 per megawatt hour, its increasing building cost added to its stress. The firm also anticipate similar support from the US government to rescue its stranded projects in New Jersey.

The UK government has responded, seeking to ensure success for future auctions with an increase in the maximum prices for offshore wind by 66% for contracts of difference (Cfd) round next year. “The maximum strike price has been increased by 66% for offshore wind projects, from £44/MWh to £73/MWh, and by 52% for floating offshore wind projects, from £116/MWh to £176/MWh ahead of Allocation Round 6 (AR6) next year.”

Meanwhile In Germany, A National Champion Gets Support

Meanwhile, in Germany, the German government has assured USD 8 billion to rescue the stressed wind turbine maker Siemens Energy. This was meant to provide bank guarantee to banks and other stakeholders. The support has come after repeated flip flops on whether the firm would need the support, as conditions linked to it are unlikely to be welcomed by shareholders, leading to a steep cut in Siemens share price as well.

“In recent weeks, the German government has been in close contact with Siemens Energy, Siemens AG, the largest shareholder of Siemens Energy, and private banks. The federal government’s precondition was that all stakeholders participate appropriately in safeguarding the company,” the German government said in a statement.

The government said that with around 26,000 employees in Germany, Siemens Energy is an important employer in future-proof industries. The inauguration of the Siemens Energy Giga-Factory for electrolyzers at the Berlin-Moabit site is the latest example of this.

The government said that due to the strong growth in the volume of orders, companies such as Siemens Energy – in addition to their specific challenges with their subsidiary Siemens Gamesa – were  experiencing difficulties in obtaining the required guarantees in full on the financial market. “This is because guarantors could face cluster risks in a technologically challenging market. Against this background, the German government is already working on a program to secure the construction of converter platforms, which is to be presented shortly. The European Investment Bank is also working on setting up a guarantee programme for the wind energy sector,” it said.

The Ørsted travails, coupled with the backstop for Siemens indicates just how tough the environment has become for Offshore Wind, within 12 months of what seemed like the dawn of the greatest growth phase ever. Interestingly, the growth will probably still happen, but in bad news for consumers of power, energy prices from Offshore wind are likely to be headed only one way now-Up.

That will be resisted, and cash strapped government’s will not be able to bridge the gap everywhere. How much of an impact that has on actual offshore capacity growth, remains to be seen in the next 24 months.