Tag Archives: UK offshore windfarms

Offshore Windfarms Threaten To Pull Out Of Uneconomical Contracts

From NOT A LOT OF PEOPLE KNOW THAT

By Paul Homewood

The wheels are falling off the offshore wind bandwagon:

A string of offshore wind projects meant to power Britain are in jeopardy after the global race to net zero sent costs soaring, casting doubt over the industry’s future as a cheap source of energy.

A surge in supply chain costs has pushed up the price of wind turbines, while increases in global interest rates have raised refinancing costs substantially.

It has made several projects unviable just a year after they won government subsidy contracts – leading to fears from industry insiders that Britain’s future is in jeopardy as the “Saudi Arabia of wind”.

Inch Cape, a 50:50 joint venture between Ireland’s ESB and China’s Red Rock Power to develop a project located 15km off the east coast of Scotland, is understood to be at risk, with the Irish side refusing to proceed with a so-called final investment decision (FID) after balking at the economics of the project.

One source said: “People won’t invest if it doesn’t give you a decent return on equity. And presently, it’s hard to see how it can.”

Schemes developed by Danish company Ørsted and Swedish player Vattenfall are among other projects understood to be at risk, as the industry seeks more government help to ensure projects remain viable.

Senior executives have also described Net Zero Secretary Grant Shapps as a “remote” figure who is reluctant to engage with company bosses.

The struggles faced by some of the biggest offshore wind developers raise fresh questions about whether the Government will achieve its target of 50GW of offshore wind by 2030, from current levels of around 14GW.

So-called contracts for difference (CfDs) are designed to guarantee companies that operate offshore wind projects fixed prices to sell electricity over a 15-year period. If the market price falls below the so-called strike price, the Government makes up the difference.

However, if the reverse is true, the companies must pay money back to the Government.

Last year’s CfD auction was the biggest to date and secured enough capacity to provide more than 10 million homes with clean power.

However, it is understood that the £37.35 strike price secured by Inch Cape is currently “below the waterline” for ESB, meaning they are not satisfied with the level of returns on offer.

“It should be nearer £50 to £55,” a source said.

The Norfolk Boreas offshore wind farm operated by Vattenfall is also understood to be at risk as costs mount.

A spokesman admitted that market conditions were “extremely challenging”, suggesting that a final investment decision was not forthcoming. He warned that the Government must reflect the realities of the market, suggesting Vattenfall was unwilling to proceed without more state help.

Catrin Jung, the company’s head of offshore wind, said: “Vattenfall has not yet taken FID on the Norfolk Boreas offshore wind farm.

“Market conditions are extremely challenging currently, with rising costs and a supply chain crunch as well as increasing costs of capital. We are looking at the best way forward for all three projects which make up the 4.2GW Norfolk Offshore Zone and how we can work with the supply chain, including what opportunities there are for UK businesses.”

Ørsted’s Hornsea 3 in the North Sea is also understood to be at risk, although a spokesman insisted that the company was “increasingly confident that we will be in a position to take a Final Investment Decision during 2023”.

The spokesman added: “The offshore wind sector has delivered huge growth in the UK over the last decade but it has arrived at an inflection point.

“It will require continued focus from stakeholders in Government and across industry to ensure offshore wind delivers on its potential to become the backbone of the UK’s energy system and bring further investment, provide low-cost electricity for consumers and help deliver our net zero ambition.”

Insiders suggested that Red Rock Power, a subsidiary of China’s state-backed SDIC, is willing to proceed with Inch Cape at a loss in order to avoid the embarrassment of abandoning what would be its biggest investment in offshore wind in Europe.

However, it is understood that any decision to proceed would have to involve a project redesign.

A joint statement issued by ESB and Red Rock Power said the companies remained “strategically aligned and committed to the delivery of the Inch Cape Offshore Wind Farm project”.

A Department for Energy Security and Net Zero spokesman insisted that Mr Shapps “regularly engages with the industry”. The spokesman said: “Offshore wind is a vital part of our work to boost energy security and cut emissions.

“Our plans to power up Britain, combined with the annual auction process now in place, gives the industry more confidence to invest.

“We have already attracted £120bn of private investment in renewables since 2010 and expect to attract a further £100 billion of investment which will support up to 480,000 jobs by 2030.

https://www.telegraph.co.uk/business/2023/06/24/net-zero-at-risk-offshore-wind-companies-turn-away-britain/

It has been apparent for a long while that the prices agreed under CfDs by offshore wind farms are in no way viable. It is worth noting that the £55/MWh figure quoted as a reasonable price is at 2012 prices, and works out at about £67/MWh at current prices. This certainly does not equate to the “cheapest” claims made by the renewable lobby. Furthermore because CfD prices are inflation linked, these prices will likely be over £80/MWh by the time the wind farms come on stream.

With interest rates now back to proper levels, and supply chain issues pushing up costs, the economics of offshore wind look distinctly unfavourable. If investors in these Round 4 auctions are getting cold feet, despite the fact they can sell on the free market anyway, what chance is there that investors will bother to bid at even lower prices for the next allocation round? And if these investors pull out, the 2030 wind power target is pie in the sky.

Meanwhile the reply by the increasingly absurd DESNZ is the usual stock reply – £100 billion investment, which we will have to repay with interest eventually; and all of those wonderful green jobs, which never actually seem to materialise!

But perhaps the most absurd comment of all is this:

“Senior executives have also described Net Zero Secretary Grant Shapps as a “remote” figure who is reluctant to engage with company bosses.”

Well, I am very sorry, but when you sign a contract, you are expected to fulfil it! You don’t go back moaning a year or two alter saying “I’m sorry, but I got my calculations wrong, can I have some more money?

FOOTNOTE

Yet again we see this silly comment by the Telegraph about a global race to net zero. This is the pathetic nonsense spouted by the increasingly irrelevant Jeremy Warner and Ben Marlow.

There is of course no such race, which implies that there is some sort of reward for those countries jumping off the clifftop first! On the contrary, most of the world is quite happy to let Britain, the EU and US continue with the madness, while they make themselves richer with the help of fossil fuels.

For some, it’s better not to work

From Net Zero Watch

By Andrew Montford

Moray East is the first of the (allegedly) supercheap offshore windfarms. When it was awarded its Contract for Difference in 2017, the price agreed, £57.50 per megawatt hour, was said, somewhat naively, to herald a revolution in windfarm costs.

Last year, however, we were able to see how its build costs turned out. At £2.3m per megawatt of capacity, they were on the low side, if not revolutionary, although the site is only 22 km from land, which tends to keep costs down. That said, it is also in quite deep water, which tends to push them up. It therefore looks as though the developers have kept a pretty tight rein on spending.

Moray East is one of the first offshore windfarms to deploy 10 megawatt turbines, so it’s interesting to see how these have performed. Today, I noticed that the windfarm’s generation data for 2022-23, the first full year of operation, are now available, so we can finally check things out.

At first sight, it seems to have been a disaster. Moray East has generated just 2.5 terawatt hours of electricity, which equates to a capacity factor of just 30%. At this level of output, the levelised cost will be in the eyewatering range of £125-200 per megawatt hour. However, this is not the full story, because the windfarm has also spent an astonishing amount of time switched off. According to Renewable Energy Foundation data, its constrained hours were 0.7 terawatt hours. In other words, more than a quarter of the windfarm’s potential output is not being delivered to the grid. We know that CfD contracts ensure windfarms are fully compensated for all this “lost” output, while the grid rules allow them to sell the power anyway if they can divert it to a battery or a flywheel, thus allowing them to be paid twice for the same electricity. For windfarms, being switched off is more profitable than producing power.

If we put the constrained output back into the levelised cost model, then the cost is in the range £86–131, which makes it a rather low-cost windfarm. The problem is that the consumer isn’t paying for power on this basis, but instead on the disastrously expensive “unconstrained only” basis (and even that understates the bill to be paid because of the double-payment issue.

Whatever basis the levelised cost is calculated on, it may still be understated. I’ve previously noted that larger wind turbines are wearing out faster than smaller ones. Because we have very little data on turbines above 6 megawatts, it’s hard to know how fast the output of Moray East’s 10 megawatt beasts will decline. I’m currently assuming, conservatively, that it will be as fast, but no faster, than 5-6 megawatt ones. But all the evidence suggests that we should expect more wear and tear. In which case the costs will be higher still.

Lazard: still unreliable

From Net Zero Watch

By Andrew Montford

A year ago I was rather critical of Lazard’s annual report about the cost of power generation, in particular in relation to offshore wind. The 16th edition of the report has just been published, and there are some interesting changes.

The most egregious problem last time round was capex, and so it’s good to see that Lazard have bumped up costs for the new edition, by 20% for their optimistic assumptions and by 40% for the pessimistic. That gives a new range of $3000-5000 per megawatt of capacity. The graph below shows this range (in pink) alongside build costs for recent UK offshore windfarms (converted to USD at 1.3). So they are now in the right ballpark.

Figure 1

However, elsewhere, things are not so plausible.

For capacity factors, Lazard seem less sure of themselves. The pessimistic figure has fallen from 49% to 45%, while the optimistic one has risen, from 53% to 55%. The 2023 range of 45%-55% is, however, implausible. The output of offshore windfarms declines over their lives, and the levelized cost calculation should reflect that. Lazard’s numbers are barely acceptable as estimates of first year values, let alone a lifetime average. This can be seen in Figure 2, which shows the Lazard range, again in pink, against the same set of recent UK offshore windfarms. The diamonds represent the average capacity factor to date, while the black tails represent the range of values into which the lifetime average is likely to fall.

It’s the same story for operational expenditure. Lazard’s new range is $60-80,000 per megawatt of capacity per year. Recent UK windfarms have been spending at a rate of over $150,000 per megawatt (again converted from Sterling at a rate of 1.3), and, because opex increases over windfarm lifetimes, the lifetime average will be more like $200,000/MW. This is shown in Figure 3.

Overall then, Lazard’s figures remain highly implausible, and they remain a highly unreliable source for information about energy costs.