Investors: governments are accepting higher offshore wind power prices to avoid losing projects

Although many countries around the world are banking on offshore wind farms as one of the pillars of renewable energy, the sector is currently in crisis. Several projects in Europe and the US have been suspended or cancelled this year because rising costs have made them uneconomic. Some investors say, however, that governments are gradually becoming open to raising the prices paid for electricity, as offshore wind farms are needed to reduce emissions and meet climate targets.

Offshore wind capacity is set to expand significantly in many countries in the coming years. Although offshore wind farms are generally more expensive to build and operate than their onshore counterparts, they offer several advantages. These include the ability to install taller, larger and therefore more powerful turbines, with access to stronger and more consistent winds, as well as less public opposition.

The offshore wind energy sector is nonetheless in crisis this year, primarily due to a sharp rise in construction costs, which have also been driven up by higher material prices. The prices awarded in auctions in previous years therefore do not always reflect the current costs of building and operating these power sources.

Several projects have been cancelled this year, including Norfolk Boreas in British waters and the Ocean Wind 1 and 2 projects off the coast of the US state of New Jersey. Sweden’s Stora Middelgrund project was also cancelled this year, although the country’s government rejected it on environmental grounds.

The tide is starting to turn, with higher offtake prices on the table

According to investors interviewed by Reuters, governments in some countries are gradually becoming open to raising offtake prices.

"The reality is that governments are starting to respond and recognise that it is worth paying a little more to maintain their offshore wind programmes, which are important for the economy, energy security, decarbonisation targets and employment," Jonathan Cole, CEO of offshore wind project developer Corio Generation, told Reuters.

Corio Generation, together with TotalEnergies and Rise Light and Power, won the October auction in the US state of New York with the 1.4 GW Attentive Energy One project. According to data from the New York State Energy Research and Development Authority, which runs renewable energy auctions in the state, prices awarded in the October auction were 28% higher than in the previous rounds in 2018 and 2020. The authority said the weighted average price awarded in the October auction reached 145,1 USD/MWh.

The industry could lose confidence

The offshore wind energy sector is not enjoying a golden age in Europe either. As mentioned above, several projects have been suspended this year, and not a single bid was submitted in the UK’s latest auction, held this September. Reuters reported that the UK government said it would raise the price cap by 66% in the next auction, which is expected to take place next year.

According to Reuters, the CEO of ScottishPower said that without sufficient incentives, "you risk companies having to write off projects, you risk contracts being cancelled across the supply chain, then the supply chain loses confidence, and you risk investors losing confidence too".