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Offshore wind developers like strong gusts. The inflationary blasts that led to impairments totalling nearly $5bn last year from companies including Ørsted, Equinor and BP were, however, a little too much for everyone.
The bad news didn’t stop there. Equinor and BP this week cancelled a contract to sell energy from one of their projects planned off the New York coast to the local state. Even so, 2023 should mark the nadir of the industry’s woes.
Contract terminations make for bad headlines. They are proof, though, that most developers do now appear to be acting rationally. Before Russia’s invasion of Ukraine, competition in the sector intensified to the extent that it was questionable how players would make money from certain schemes, particularly in Europe.
More than 3GW worth of US offshore wind projects cancelled their offtake agreements last year, reckons BloombergNEF. Deals were typically struck before the Ukraine war, or not long after. Higher financing costs and a spike in the price of everything from cables to turbines later rendered them uneconomic. That was particularly the case where authorities were slow to grant permits.
In 2022, Equinor and BP had agreed to sell renewable energy credits from their 1.26GW Empire Wind 2 project in New York at $107.50 per megawatt-hour. The state’s utilities regulator last year rejected a bid to raise this to $177.84/MWh.
US states and European governments are waking up to the sector’s woes. Keen to press ahead with renewable energy targets, the New York State Energy Research and Development Authority has fast-tracked a process through which developers can try to negotiate higher prices. The UK has agreed to raise the maximum price offshore wind farm developers can secure in a contract auction this year by 66 per cent to £73/MWh (in 2012 prices).
Admittedly, 2024 will not be completely devoid of turbulence. Ørsted, which has specific issues, has yet to convince investors that it can avoid an equity raise. Siemens Energy also faces a battle to turn around its embattled turbine-making business.
For the sector as a whole, though, improving auction terms should mean the prevailing wind will not be quite so chilly.
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