The European Commission has presented a new ‘European Action Plan for Wind Energy’ in order to ensure that the Union achieves its ambitious goals set for 2030.
The new plan comes at a time when Germany is dismantling its wind farms to make way for coal mines and when offshore wind projects are being canceled or delayed along the North Sea coast due to rising costs. Indeed, investments in new offshore wind projects fell by 40 percent in 2022, reaching the lowest level since 2009, and no commercial offshore project received the green light in 2022. Additionally, the European Court of Auditors recently reported in its September report this year that the development of renewable energy at sea in Europe, specifically wind farms, threatens the natural world. As we can see, the problems with wind farms in Europe are significant, yet this does not prevent EU bureaucrats from continuing to speak of wind energy as a great success.
Now the EU aims to generate 42.5 percent of its energy from renewable sources by 2030. However, while it seems that solar energy is on the right track, wind energy is lagging behind. To meet the overall target, member states need to install 37 gigawatts (GW) of wind power annually, but the harsh truth is that only 16 GW was installed in 2022.
– Wind energy is a European success story. But our industry is now facing serious challenges – said Green Deal Commissioner Maroš Šefčovič while presenting the plan.
He noted that many problems have occurred that have caused delays in the installation of new wind farms due to ‘complex’ permitting processes, lack of access to raw materials, supply chain issues, high interest rates and inflation, as well as foreign competition, particularly from China.
However, underlying all these problems is actually a lack of profitability. In recent years, all major European wind turbine manufacturers have reported significant business losses. Particularly the more expensive ‘offshore wind’, i.e., offshore wind farms, are in big trouble. Investments in new offshore wind projects fell by 40 percent in 2022, reaching the lowest level since 2009. No commercial offshore project received final approval in 2022.
For instance, Swedish clean energy producer Vattenfall recently shook the market by withdrawing from its offshore wind project Norfolk Boreas in the UK, citing a 40 percent increase in costs in one year due to difficulties in securing components from China and general inflation.
The development and construction of offshore wind projects is a complex business and requires more upfront investment than onshore wind farms and solar energy. Therefore, such investments are considered riskier, which forces investors to seek higher returns. According to a recent study published by Mak Đukan, a researcher in the Climate Finance and Policy Group at ETH Zurich, the return premiums on offshore wind projects in Germany were 3.3 percentage points higher than those for solar and onshore wind projects between 2017 and 2020.
The combination of rising interest rates from the European Central Bank, geopolitical unpredictability, and price instability has brought the sector to a critical turning point.
Although there are signs that 2023 will experience a surge, with 212 wind turbines connected to the grid in the first half of this year, it seems that the surge is still far off as the EU must build more than 11 gigawatts annually on average by 2030, which means about 1100 wind turbines.
But it is not only external shocks that undermine offshore wind; politics is also to blame. Many countries that want to turn the North Sea into a green power plant want to achieve this by paying as little as possible. Investments in turbine and cable factories, labor, port infrastructure, and new grid connections are lagging, and available EU public support programs mainly consist of restructuring existing funds.
No More Unlimited Bidding?
To help the struggling industry, the Commission has proposed an action plan to address all these issues. The central element aimed at addressing profitability is an improved auction design. This will ‘send investment signals throughout the entire value chain and is crucial for ensuring the profitability of the sector,’ the Commission announced.
Exact guidelines will not be published until the end of March 2024 after discussions with member states and the industry, but some elements are already clear. Currently, the ‘Renewable Energy Directive’ requires member states to submit long-term plans for auction scheduling. The wind package now also calls on national ministries to ensure short-term and medium-term auction schedules, which, according to the Commission’s plans, will ‘give the industry greater confidence in short-term and medium-term business opportunities.’
The Commission’s text also warns countries not to excessively use so-called ‘unlimited negative bids’ for offshore wind contracts. Popular in the Netherlands and Germany, this form of contract creates a situation where contractors pay the state for the right to operate the wind farm.
The German Federal Network Agency recently awarded 7 GW of offshore wind farms for 12.6 billion euros to two major oil companies, BP and Total Energy.
Unlimited bidding is attractive to energy ministers as it seems like a good deal to the public. But higher initial investment increases the electricity costs that consumers have to pay.
The Commission therefore warns that such a system increases the financial risk for contractors.
Indeed, researchers in the Climate Finance and Policy Group have previously shown that higher contractor risk also means that investors charge higher interest rates. This increases the wholesale price of electricity, making it less competitive and attractive to investors.
– This, along with cases where there are insufficient penalties for project non-fulfillment, increases the risk for the full and timely delivery of projects – states the Commission’s plan.
In Small Letters
Although no specific alternative is mentioned, the Commission alludes to a reform of the bloc’s electricity market. Countries are already discussing whether so-called Contracts for Difference (CfDs) will become favored in Denmark (and the United Kingdom), a standard across Europe.
This contract allows governments to recoup excess revenue if prices exceed a certain threshold, preventing a repeat of last year’s energy price crisis. A minimum price is also introduced to protect electricity producers if market prices fall below the minimum.
Although this would eliminate uncertainty for contractors and investors (and consumers), a recent unsuccessful auction in the United Kingdom also revealed the weakness of the plan if auction prices are set too low.
Another problem is inflation. Wind farm contractors win auctions at a given price. But if costs become significantly higher when companies come to order their turbines a year later, the project is canceled. To prevent this, the Commission proposes that member states index auction prices to the inflation rate in contractual clauses.
What will ultimately be accepted will only be known after March 2024 following discussions with member states and the industry.
