The government’s green energy ambitions have taken a hit after plans for a giant offshore wind farm off the Norfolk coast were halted due to spiraling supply chain costs and rising interest rates.
Swedish energy giant Vattenfall said it would stop work on the billion-pound Norfolk Boreas wind farm, designed to power the equivalent of 1.5 million British homes, because it was no longer profitable.
The company said costs had risen by 40% due to a rise in global gas prices that has been reflected in the cost of manufacturing, putting “significant pressure on all new offshore wind projects.”
“It just doesn’t make sense to continue with this project,” said Anna Borg, chief executive of Vattenfall. “Higher inflation and capital costs are affecting the entire energy sector, but the geopolitical situation has made offshore wind and its supply chain particularly vulnerable.”
Vattenfall won a government contract to build the Norfolk Boreas project last year after offering a record price of £37.35 per megawatt hour (MWh) for electricity generated by the wind farm.
Borg said it was “so obvious to everyone that the situation has changed drastically since last year,” meaning the price would now have to be “significantly higher” to make financial sense.
The decision has cost the company SEK5.5bn (£415m) in its latest set of results, but Borg said it was “prudent” given the impact of costs on future project profitability.
“The market framework simply doesn’t reflect the market situation,” Borg said. “Something has to happen. It is important to understand that our suppliers are being squeezed. They have problems in their supply chain so it is not so easy to mitigate these situations”.
Borg said Vattenfall has called on the UK government to adapt the financial framework that controls the price and was in “constructive discussions” with officials.
Industry experts have said that without a review of the government’s financial approach to take into account the sharp rise in costs, the UK risks missing its target of increasing its offshore wind capacity five-fold to 50 GW by 2030. .
Jess Ralston, head of energy at the Energy and Climate Intelligence Unit think tank, said the government had set the starting price for the next contract auction before the global rise in market prices, meaning it was now too low.
“There are some concerns that this could be too low for projects that have suffered from price inflation in the supply chain, excluding them from participating in the auction,” he said. “The sensible strategy would be to try to get as much capacity involved in the auctions as possible.”
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Under the government scheme, developers can compete in the auction for a contract that awards a guaranteed price for the electricity generated. If wholesale market prices are below this level, the project receives a “supplement” payment through a tax on energy bills. But if market prices are above the “strike price,” the project must return the difference to consumers, resulting in lower bills.
Setting the auction start price at a higher point would still result in contract prices well below the current market rate, according to Ralston, which means that homes will continue to return money to homes for the foreseeable suture.
Dan McGrail, chief executive of RenewableUK, said ministers would need to take into account global inflationary pressures “which have significantly changed the economic landscape.”
“We need a stronger industrial strategy for the sector, which the chancellor should support with new measures in the autumn declaration as a matter of urgency,” he said. “The government must step up with a strong response to enable industrial growth across Britain.”