UK Offshore Wind Industry Faces Turbulent Times: Hedge Fund CEO
Posted 22/09/2023 14:22
The once-flourishing UK offshore wind industry is poised for a challenging period ahead, marked by potential project delays and even cancellations due to surging expenses and higher interest rates. These concerns come to the fore as Per Lekander, CEO of Clean Energy Transition LLP, a London-based hedge fund managing $2.6 billion in assets across various sectors including renewables, utilities, oil, and gas, sounds a cautionary note.
Lekander stated in a recent interview, "The industry needs a complete reset. It's going to be a very long period with very disappointing growth, where projects might be delayed or not even built."
Across Europe, wind energy developers are grappling with a host of challenges, including escalated turbine costs, supply chain bottlenecks, and international competition. These obstacles, combined with difficulties in securing financing for new projects, cast a shadow over the industry's prospects. In the UK, the situation is exacerbated by an auction system that fails to guarantee adequate returns on investment, potentially stalling new offshore construction initiatives.
Before the pandemic, a prolonged period of low-interest rates saw a surge in investment in UK wind capacity, surpassing natural gas as the primary source of power connected to the grid. However, persistent inflation and efforts to combat it now threaten to halt this growth in its tracks.
While the UK possesses thousands of miles of coastline and abundant offshore energy potential, offshore wind faces uncertainty regarding its growth prospects, similar to other clean-energy technologies such as heat pumps and electric vehicles. Most of the funding required to achieve the government's net-zero emissions target will need to come from the private sector, a challenge that industry experts acknowledge.
Emma Pinchbeck, CEO of industry group EnergyUK, emphasized the importance of retaining green investment, stating, "At a time when other countries are stepping up their efforts to attract green investment, we cannot risk that money going elsewhere."
According to Per Lekander, the wind-energy investment boom in the UK abruptly halted in the wake of the pandemic, with costs skyrocketing for various aspects, including freight and labor. Many companies that secured projects during the industry's growth spurt from 2019 to 2021 now find themselves "dramatically out of money."
Swedish state-owned utility Vattenfall AB is in early-stage talks to sell one of the UK's largest offshore projects, which it suspended in July. A spokesperson for Vattenfall mentioned they are "evaluating all options to determine the best way forward for the whole Norfolk Offshore Wind Zone."
Mads Nipper, CEO of Denmark's Orsted A/S, expressed doubts about a final investment decision on its Hornsea-3 wind project in the North Sea due to higher interest rates. Combined, the Vattenfall and Orsted projects could provide power to over 4.5 million UK homes.
In addition, a recent government auction for offshore wind projects failed to attract any bids, underscoring the industry's challenges. Denmark's Vestas Wind Systems A/S is now reconsidering plans to manufacture more turbines in the UK.
One contributing factor to the industry's struggles is that developers previously bid too aggressively in auctions, resulting in government-set electricity prices that are too low to justify the effort required to build new projects.
Per Lekander concluded, "It's clearly going to be a painful situation from here."