{"id":2009,"date":"2023-09-13T08:40:06","date_gmt":"2023-09-13T08:40:06","guid":{"rendered":"https:\/\/reports.electricinsights.uk\/?p=2009"},"modified":"2023-09-13T08:40:06","modified_gmt":"2023-09-13T08:40:06","slug":"offshore-wind-held-up-by-the-inflation-storm","status":"publish","type":"post","link":"https:\/\/reports.electricinsights.co.uk\/?p=2009","title":{"rendered":"Offshore wind held up by the inflation storm"},"content":{"rendered":"\n

Vattenfall have suspended development of their 1.4 GW Norfolk Boreas wind farm, in a major blow for the offshore wind industry.<\/strong> They cited inflation driving up costs by 40% within a year<\/a>. Just one year ago, Vattenfall was awarded a record-low Contract\u2011for\u2011Difference (CfD) for the wind farm at \u00a337.35 \/MWh<\/a>, which is \u00a351.10 \/MWh in today\u2019s money. After more than a decade of being in development<\/a>, the project is now halted \u2013 although not cancelled \u2013 at a cost of \u00a3415m to Vattenfall. The project was due to use 100 of Siemens Gamesa\u2019s massive 14 MW turbines<\/a> (with rotors nearly a quarter of a kilometre in diameter). Norfolk Boreas is part of a wind farm cluster developed by Vattenfall, which leased seabed rights from the Crown Estate in 2010. The adjacent 2.8 GW Norfolk Vanguard wind farm is still being developed, having received approval in February 2022.<\/p>\n\n\n\n

Why did this happen?<\/h2>\n\n\n\n

Vattenfall won a CfD auction at a strike price of \u00a337.35 \/MWh in 2012 money, meaning they would receive this price (plus inflation) for all electricity produced over the first 15 years of operation. At the time of bidding, Vattenfall must have deemed the project viable, but is likely to have suffered the \u201cWinner\u2019s Curse\u201d<\/a>, bidding lower to undercut the competition, but regretting having won the auction. Since the auction, the global financial situation has worsened, supply chain issues have intensified, and financing costs have increased, meaning that expected losses from continuing the project would likely exceed the cost of pausing it.<\/p>\n\n\n\n

In normal times, such cost escalation shouldn\u2019t matter as CfDs account for inflation. However, CfDs are adjusted using the Consumer Price Index (CPI) indicator, which does not reflect cost inflation that project developers bear. Inflation rates across different parts of the economy differed sharply over the last few years. Whereas CPI tracks inflation in consumer goods and services (housing, food, etc.), the Producer Price Index (PPI) is a better measure, tracking price changes in raw materials, machinery and labour. Between July 2022 and July 2023, consumer goods inflation peaked at 11.1%, while producer cost inflation peaked at 22.7%, more than twice the rate. The PPI is already easing off and commodity prices are coming down, although they are still at a higher level.<\/p>\n\n\n\n

\"\"
Consumer Price Index (CPI) and Producer Price Index (PPI) measures of inflation over the last five years. Data from the ONS CPI and PPI indices.<\/figcaption><\/figure>\n\n\n\n

Increasing project costs can often be offset with design changes to the wind farm, such as using bigger and more cost-effective turbines (e.g. as seen at Dogger Bank). While Vattenfall is likely to have discussed using bigger wind turbines at Norfolk Boreas, these did not materialise before the decision to halt the project. Wind turbine manufacturers are not making any money on current projects<\/a> and are therefore reluctant to increase turbine size before recouping the money spent on developing the current generation. Norfolk Boreas\u2019 supplier, Siemens Energy warned of \u20ac4.5 bn losses for its wind division<\/a>, just weeks after Vattenfall\u2019s decision.<\/p>\n\n\n\n

It is not just Vattenfall. The offshore wind industry both in the UK<\/a> and worldwide<\/a> is affected by these cost increases. However, all other UK wind farms are still planned to go ahead, having passed their 12 month Milestone Delivery Date<\/a> successfully. This includes four more projects, totalling 5.6 GW, which were also awarded the same strike price<\/a> as Norfolk Boreas. Three of these are adjacent to existing wind farms which might be able to leverage O&M cost savings, and carry less site development risk (e.g. soil conditions are better understood).<\/p>\n\n\n\n

What can be done?<\/h2>\n\n\n\n

There are several options available to policy makers. International examples include NYSERDA in New York, which has added a commodity inflation adjustment after the auction. The indexation basis between auction and the operation of the wind farm could be based on PPI, to better reflect costs to producers.<\/p>\n\n\n\n

Denmark has a cap on the total lifetime payments of a generator in either direction of the CfD, allowing new Danish wind farms to operate on a merchant basis. Germany and the Netherlands have a 1\u2011sided CfD, so wind farms receive either the strike price or the market price (whichever is higher), but these cost more to the consumer than the UK\u2019s CfD design.<\/p>\n\n\n\n

There are examples where the government has (re-)negotiated a CfD with the generator: (1) Hinkley Point C has a negotiated CfD from the outset, which was argued being in the national interest. (2) The CfD for the Neart na Gaoithe wind farm was delayed following consenting issues. In essence, the wind farm received a higher CfD strike price from an earlier auction, but later moved to use bigger (and lower cost) turbines.<\/p>\n\n\n\n

Considering that Norfolk Boreas is not (yet) cancelled, a CfD extension is a likely route forward. Any increase in CfD strike prices would have to be granted to the other wind farms from CfD Allocation Round 4 as well, which would make this politically difficult. A one-off \u2018commodity price adjustment\u2019 might be more feasible.<\/p>\n\n\n\n

Some voices in the industry are concerned that the CfD cap price for the next auction round (\u00a344 \/MWh in 2012 money, \u00a360.20 \/MWh in today\u2019s money) may be too low for wind farms to be viable, meaning offshore wind may not even feature in the next auction round<\/a>. Delays or cancellations of offshore wind farms at this scale would seriously jeopardise the UK\u2019s goal to reach 50 GW of offshore wind by 2030<\/a>. Norfolk Boreas (and the rest of CfD Allocation round 4) has commissioning dates for 2026\/2027, so even a delay of a couple of years risks overrunning the 2030 deadline.<\/p>\n","protected":false},"excerpt":{"rendered":"

Vattenfall have suspended development of their 1.4 GW Norfolk Boreas Wind farm, in a major blow for the offshore wind industry. <\/p>\n","protected":false},"author":3,"featured_media":2027,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[34],"tags":[],"class_list":["post-2009","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-q2-2023"],"acf":[],"aioseo_notices":[],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/2009","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2009"}],"version-history":[{"count":3,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/2009\/revisions"}],"predecessor-version":[{"id":2029,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/2009\/revisions\/2029"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=\/wp\/v2\/media\/2027"}],"wp:attachment":[{"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2009"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2009"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/reports.electricinsights.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2009"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}