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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently he works as a Senior Researcher at Hill Tower Resource Advisors. Next…

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Natural Gas Stands To Win As Offshore Wind Takes A Hit

While the total number of offshore wind projects, both existing and projected, continues to surge, the sector now grapples with typical economic and financial challenges. In recent weeks, offshore wind companies have sounded alarms about escalating product costs, manufacturing expenses, and price volatility, all of which are poised to significantly impact their ongoing and future endeavors. A striking financial upset in recent days came from the Scandinavian offshore wind behemoth, Orsted, which witnessed its stock market value plummet by over 25%, attributed to elevated global cost estimates and potential financial liability issues in the USA.

In filings submitted to the New York state regulatory authority, other prominent offshore wind developers, such as Norway's energy major Equinor and British oil major BP, have officially requested a staggering 54% increase in the price of electricity generated at three planned offshore wind farms. These projects, known as Empire Wind 1, Empire Wind 2, and Beacon Wind, located off the coast of New York, collectively boast a capacity of 3.3GW (3300MW). According to a filing by the New York State Energy Research and Development Authority (NYSERDA), the implementation of Empire/Beacon's request would result in an average 54% price hike across their portfolio. Specifically, the strike price for Empire Wind 1 is expected to rise from $118.38 per megawatt-hour (MWh) to $159.64/MWh, Empire Wind 2 from $107.50/MWh to $177.84/MWh, and Beacon Wind to a projected $190.82/MWh, compared to its previous rate of $118.00/MWh. Both European developers candidly attribute these increases to "runaway inflation, global supply chain disruptions, and skyrocketing interest rates driven by the COVID-19 pandemic, the Russia-Ukraine conflict, and the accelerating pace of the energy transition." Related: Oil Reaches New 2023 High

Let’s zoom in on Orsted, a favorite among ESG (Environmental, Social, and Governance) investors. The Danish company disclosed on August 29th that it would need to book  16 billion Danish crown impairment (equivalent to $2.3 billion) to its U.S. portfolio, resulting in a sharp decline in its share value. Equinor and BP, thus far, have not reported similar impairments. During an earnings call on August 30th, Orsted officials outlined a total impairment of approximately $2 billion. These developments and filings are expected to exert a substantial adverse impact on current and future offshore wind projects in the United States. Rising financing costs (interest rates) and product expenses (turbines and components) are poised to remain persistent challenges. Key industry players have voiced the opinion that while U.S. offshore wind remains a long-term attractive investment, it requires additional government support, primarily through tax incentives or renewable energy credit subsidies.

While tax benefits and credits can be favorable tools, the primary concern in the global sector revolves around increased limitations and adverse effects on the supply chain. Analysts have primarily focused on financials and regulatory hurdles, yet the offshore wind sector faces supply chain disruptions far larger than anticipated. The main driver of these cost increases is the sector's current success and heightened attention, which has overwhelmed supply chains ill-equipped for such demand or lacking adequate investments.

As noted by the international consultancy giant Wood Mackenzie, global wind turbine order intake in the first half of 2023 surged by 12% year-on-year, reaching an impressive volume of 69.5GW. Most new clients and projects are originating outside of China, demonstrating a year-on-year order demand increase exceeding 47%, totaling more than 25GW. While China remains the largest market with 44GW, North America and Europe are witnessing significant demand and order projections. With global wind turbine orders reaching $25.3 billion in the second quarter of 2023 and $40.5 billion in the first half of the year, the market appears to be approaching a potential breaking point. The increased demand in the United States, driven by the Infrastructure Investment and Jobs Act, has not been matched by sufficient investments in metals, minerals, manufacturing, and installation capabilities. While onshore wind, still the dominant market, boasts relatively straightforward installation, offshore wind, especially floating platforms, is sensitive to supply chain disruptions. A lack of offshore installation vessels and the infrastructure to construct and transport them are causing mounting project delays. As offshore wind orders continue to surge, posting a 26% year-on-year order increase in the first half of 2023, reaching a record-breaking 12GW, the capacity for offshore orders in the second quarter of 2023 surged by 48% year-on-year.

Despite these challenges, some positive news emerges, as several major new projects have been announced. Leading wind turbine manufacturers, such as Spanish-German Siemens Gamesa Renewable Energy (SGRE) and its Chinese rival Goldwind, are poised for record-setting order levels.

Nevertheless, global offshore wind is sailing into what appears to be a perfect storm. In July, the Swedish renewable energy group Vattenfall made headlines when it decided to halt the development of a major offshore wind project in the UK. Vattenfall cited increased costs and supply chain issues as the primary reasons. Similar to the USA, higher interest rates and inflationary pressures are impacting future projects. Concurrently, the guaranteed electricity prices for produced power are perceived as insufficient to ensure profitability. Major players like Orsted and others have already cautioned the UK government that investor and operator interest in offshore wind is waning due to significantly higher costs and existing caps on electricity prices. This issue is not unique to the USA but is also increasingly affecting Europe. As indicated by Vattenfall in July, the costs for its Norfolk Boreas offshore wind project increased by 50% in 2023, significantly exceeding agreed-upon inflation-linked fixed electricity prices.

As mentioned earlier, supply chains are encountering substantial difficulties. The success story of offshore wind, built on the principle of "bigger is better," is now facing new challenges. The growing demand for larger wind turbines, potentially reaching capacities of 20-25MW, not only places immense pressure on global turbine manufacturers but also necessitates longer blades. These developments are currently hindered by a shortage of installation vessels, harbor infrastructure, and investor confidence. The latter group harbors concerns about the long-term viability of their investments as the offshore wind boom begins to slow. A fierce competition is underway to increase turbine size, with blades that may surpass 100 meters in length. Technical risks and profitability are increasingly scrutinized and exacerbated by supply chain disruptions. Western developers, who advocate for the standardization of blades and turbines, face pressure from Chinese competitors who are pushing for larger offshore wind turbines, currently under development at 18MW or more. The call for more affordable renewable energy remains the primary driving force.

In reality, technology developers are optimistic, but supply chain challenges cast a shadow. Wood Mackenzie has already projected that nearly half of the world's installation vessels are expected to be retired, not due to age but because they are ill-suited for newer turbine models. This necessitates replacement orders amounting to approximately $13 billion in the coming years. However, this process will not be swift, as most vessel owners are currently grappling with significant write-downs of their existing fleets.

The ongoing commoditization of offshore (and onshore) wind, coupled with structural financial and supply issues, is likely to result in an overall slowdown in the implementation of projected gigawatt capacity. This development is particularly concerning for projects and capacity in the Global North, especially if Western governments are hesitant to further support China's manufacturing dominance. Concurrently, another major energy sector, natural gas, stands to benefit. Demand for natural gas is expected to rise significantly. If the vast gigawatt additions planned for offshore wind do not materialize before 2030, or given global supply chain constraints, possibly even before 2035-2040, overall energy demand will continue to increase. In the absence of the gigawatts planned for offshore wind in the USA and Europe, and considering the limitations of solar energy, natural gas emerges as the only viable solution. A transition away from coal, partially replaced by nuclear energy, is unlikely to materialize before 2040. Therefore, natural gas, particularly liquefied natural gas (LNG), presents a compelling alternative. Rather than having the wind propel offshore wind, gas producers are now looking forward to a promising future."

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By Cyril Widdershoven for Oilprice.com

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