Why It Matters: Wind developers say they are facing steep costs.
The failed auction is the latest blow to offshore wind, a technology that governments and utilities in Europe and the United States are betting on to deliver large amounts of clean electric power to tackle climate change. The British government, for instance, aims to triple offshore generating capacity by 2030.
Hit with rising costs on all aspects of offshore wind farms, from wind turbines to steel and copper, developers are signaling that they need higher revenues to make the projects financially viable.
So far, governments have largely declined to change their terms, and so a kind of developers’ strike has set in that will likely delay projects or even lead to some being scrapped.
The costs of electric power from offshore wind, which have declined sharply over the last two decades, also seem likely to rise.
All that said, the auction was not as much of a disaster as portrayed by critics. Deepa Venkateswaran, an analyst at Bernstein, a research firm, said that eligibility criteria and other considerations meant that very few developers were likely to participate in this round anyway.
The British auction did attract bidders for onshore wind and solar schemes.
Behind the Story: A system to spur investment may need an update.
Britain supports renewable energy through a subsidy system known as “contracts for difference.” In essence, developers are guaranteed to be paid a certain price — an estimated £69 per megawatt-hour in this case — for the power that their projects generate.
These guarantees are intended to give companies certainty and encourage financial institutions to put up the large sums, ranging well into billions of dollars, required to build big wind farms.
Until recently, the British system received good reviews and has helped encourage large investments in renewable energy.
More recently, though, with inflation soaring, the government’s efforts to use the scheme to drive down power prices for consumers have caused developers to back away.
Vattenfall, a major developer, put a large planned project in the North Sea on hold earlier this year, saying costs were rising by as much as 40 percent.
The problem is not limited to Europe. Offshore developers are also trying to renegotiate the terms of contracts to supply power in the United States. Some have been willing to scrap contracts and absorb the resulting financial penalties.
Recently, Orsted, the largest offshore wind developer, announced a potential $2 billion write-down on planned projects in the United States and warned that it could wind up canceling them.
What’s Next: ‘We will work with industry,’ the U.K. government says.
Analysts say that this series of problems for a much promoted technology is likely to push governments to revise the terms of future auctions. In Britain, the failure “puts pressure on the U.K. government to change auction parameters” said Ms. Venkateswaran, the Bernstein analyst.
The government does seem chastened by the tarnishing of an industry that is seen in Britain as a major success.
“We will work with industry to make sure we retain our global leadership in this vital technology, “ the British government said in a news release on Friday.
The sputtering of government support systems may also encourage a shift away from subsidy regimes, some analysts say.
Stanley Reed
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