Chief executive of the largest offshore developer in the world, Mr. David McKay, has warned that the UK government is unlikely to be able to attract any new offshore wind projects during its current auction round due to recent steep cost increases.
Mads Nipper is the chief executive officer of Orsted. He said that he “would find it surprising” if the round was well received, as the maximum price for electricity wasn’t high enough to cover the rising costs of wind companies.
Nipper’s remarks on Thursday highlight the challenges facing industry. This comes weeks after Vattenfall , a rival company, halted the development for its major offshore wind farm planned off the coast of England.
offshore winds have been suffering from rising costs for everything, including turbines, labour and financing. This is due to supply-chain problems and high interest rate following the pandemic in Ukraine and Russia’s invasion. Vattenfall announced in July that its costs have risen by 40 percent this year. This is higher than the fixed price of electricity for Norfolk Boreas, which it agreed to with the UK Government in July 2022.
Nipper confirmed that Orsted still plans to move forward with Hornsea 3 – its planned UK offshore windfarm – which was awarded the same price as Norfolk Boreas during last year’s bidding round. He did not believe that the latest round of auctions, which began in March 2023 and will end in April 2023, “would enable significant viable offshore investments”.
In the UK, the system for supporting renewable energy involves developers bidding for government contracts, which guarantee a fixed-price for the majority of electricity needed for a project.
Developers are compensated for the difference if the wholesale price of the product is less than the retail price. This payment comes from a tax on the consumer bill. If the wholesale price was higher, the developer must make up the difference.
The government has set a maximum guaranteed price of £44 per Megawatt-hour at 2012 prices. This means that developers will be competing for contracts below this amount. This price is indexed to inflation and therefore worth about PS60 per megawatt hour today. Wholesale prices for megawatt-hours are currently around £90.
The Energy Department said that the scheme is designed to “protect generators from price fluctuations and compares favorably with other international schemes. . . We do understand that there are pressures on the supply chain. . . We are also listening to their concerns”.
Nipper warned against the dangers of uncapped auctions, where the rights to build wind farm are given to the highest bidder in certain countries. This could drive up the prices of customers or cause supply chain strains.
BP and Total have agreed to pay €12.6bn to acquire the rights to build and run 7 gigawatts worth of new offshore projects in the North Sea or Baltic Sea, following a competition conducted by a German regulator.
Nipper stated that “if governments decide to maximize short-term revenues, some industry participants will choose to pay very high prices.” “That’s a form of mortgage on the future,” Nipper said.
There are only two possible ways to pay the price — either by increasing power prices in the future for consumers and business, or by adding more pressure on a supply chain already under stress.
Orsted reported on Thursday a 24% drop in revenues for the first half of the year, dropping from 60bn (£7bn ) to 46bn. Pre-tax profit also fell by 68.3%, falling from 7.4bn down to 2.4bn. This was partly due to lower prices in electricity affecting Orsted’s bioenergy division.
The offshore wind business did relatively well, and the company maintained its annual profit guidance. Nipper stated that he is “happy to see the [offshore-wind] division continue to deliver a majority of our earnings”.
In the lunchtime session, shares fell by 3.7 percent to 553.