Wind power industry drifts off course

A perfect storm of supply chain delays, design flaws and higher costs in the offshore wind industry has put dozens of projects at risk of not being delivered in time for countries to meet climate goals, industry executives, investors and analysts said. The race to reduce reliance on fossil fuels is putting pressure on manufacturers and supply chains to keep pace with demand for more clean energy, especially in the European Union which is finalising a legally binding goal to produce 42.5 per cent of energy from renewables by 2030.

Up from 32 per cent now, the new target would require 420 gigawatts (GW) of wind energy including 103 GW offshore, more than double the current capacity of 205 GW of which just 17 GW is offshore, according to industry group WindEurope.

But so far this year, projects off Britain, the Netherlands and Norway have been delayed or shelved due to rising costs and supply chain constraints while Britain's renewable energy auction this month failed to attract any bids from offshore wind developers, also because of high industry costs.

"If this turns into a prolonged pause of projects then without a doubt a lot of the 2030 renewables goals will be under pressure," said Jon Wallace, an investment manager at Jupiter Asset Management.

Even before the EU agreed its new renewables target this year, companies including Orsted, Shell, Equinor, wind turbine manufacturer Siemens Gamesa and WindEurope had warned that the offshore wind industry was not big enough to deliver on climate targets.

Supply chain disruptions which started during the global pandemic have been exacerbated by the Ukraine war while higher shipping rates, raw material costs, interest rates and inflation have dented profits for some wind developers.

Markus Krebber, CEO of Germany's RWE, posted on LinkedIn that a combination of issues, all coming at time when the offshore industry was expected to expand quickly, called into question the achievement of climate protection goals.

"We certainly see a big gap between the renewables and wind targets for 2030 and the path we are on right now. We are growing but nowhere near fast enough," said Ben Blackwell, CEO of the Global Wind Energy Council.

BIGGER AND BETTER?

Over the last two decades, the industry has grown fast and cut technology costs to be on a par or even cheaper than fossil fuels in some parts of the world. But the race to develop ever bigger and more efficient turbines may have been too hasty, some executives and analysts said.

Turbines have roughly doubled in size every decade with the largest ones operating in 2021 and 2022 coming with 110-metre blades and a capacity of 12 to 15 megawatts (MW). But the bigger they get the more susceptible they have become to faults, said Rob West, analyst at consultancy Thunder Said Energy.

"Physics inherently punishes larger turbines. Larger blades will inherently deflect more, which means they need stiffer spar caps, shear webs and more expensive materials. They will also weigh more which pushes more stress and strain through the blade, root and nacelle during each rotation," he said.

In June, Siemens Gamesa said quality problems at its two most recent onshore wind turbines would cost 1.6 billion euros ($1.7 billion) to fix.

Fraser McLachlan, chief executive of GCube Insurance, said the number of insurance claims from wind developers has fallen in the past year but the amounts and severity of claims has gone up significantly.

"It's like the iPhone. Everyone wants the next generation technology and equipment and the manufacturers have been trying to outdo each other and the result is you are not getting a sufficient amount of R&D invested in the technology," he said.

"Participation in the offshore wind market has become a risky business, not only for insurers, but also manufacturers, developers, and supplier companies – with some now facing a material risk to their survival," McLachlan said.

Siemens Gamesa Chief Executive Jochen Eickholt said its offshore business was facing separate issues to the onshore problems, including delays in construction of production sites, supply chain glitches and shortages of quality components.

"We became a victim of our past successes over the last years. The interest in our products was very high, and this resulted in increased number of orders in 2021 and 2022 and it now requires a ramp-up in almost all of our production facilities," he said in August when the company reported third-quarter results.

The world's leading turbine maker Vestas has also said it is struggling to deliver a backlog of orders and expects supply chain disruptions to continue this year.

'MAJOR MARKET FAILURE'

At the same time, governments have stepped up auction rounds and tenders for seabed licences. Bloomberg New Energy Finance said it expected more than 60 GW of offshore wind contracts and leases to be for grabs worldwide through the end of 2024.

But some wind developers said the electricity price on offer at auctions was too low for them to embark on new projects given the industry's problems with rising costs.

"This is coming through to the developers who are discussing prices of turbines, labour, project deployment, hiring ships and finance and that's flowing into how they are budgeting projects," said Wallace at Jupiter.

Britain aims to triple its offshore wind capacity to 50 GW by the end of this decade but the lack of bids from wind developers at its Sept. 8 auction could be a sign of things to come, some experts said.

"The ratio between risk and reward is out of line in the offshore wind market in many jurisdictions. You can see this from investors not showing up," the Global Wind Energy Council's Blackwell told Reuters.

"Governments can and should fix this issue quickly, otherwise we could see a major market failure and climate and economic goals will simply not be met," he said.

In some auctions, prices have become too high for traditional renewables utilities to compete with major oil and gas companies on the hunt for greener assets.

For example, BP and TotalEnergies won a German tender for 7 GWs of offshore wind after paying a record 12.6 billion euros for the leases. RWE and Denmark's Orsted dropped out of the auction due to concerns about the price.

"We participated in that auction, and we would have loved to win. However, bid prices reached levels where our return expectations would not be met even in very optimistic scenarios," said RWE's Krebber.

Such is the concern about the industry's problems, the European Commission said this month it will put forward a package of support measures.

European companies are also struggling across the Atlantic.

In recent months, developers including Orsted, Equinor, BP and Shell have sought to cancel or renegotiate power contracts for the first commercial-scale U.S. wind farms due to start operating between 2025 and 2028.

And a fleet of U.S. projects central to President Joe Biden's aim for 30 GW of offshore wind by 2030 may not advance unless his administration eases requirements for subsidies in the Inflation Reduction Act, project developers have said.

"The situation in U.S. offshore wind is severe," Orsted CEO Mads Nipper said last month.