The government’s green energy ambitions have been dealt a blow after plans for a giant offshore windfarm off the Norfolk coast ground to a halt due to spiralling supply chain costs and rising interest rates.
The Swedish energy giant Vattenfall said it would stop work on the multibillion-pound Norfolk Boreas windfarm, designed to power the equivalent of 1.5m British homes, because it was no longer profitable.
The state-owned company said costs had climbed by 40% due to a rise in global gas prices which have fed through to the cost of manufacturing, putting “significant pressure on all new offshore wind projects”.
“It simply doesn’t make sense to continue this project,” said Anna Borg, Vattenfall’s chief executive. “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 bidding a record low price of £37.35 per megawatt hour (MWh) for the electricity generated.
Borg said it was “so obvious to everyone that the situation has changed dramatically since last year”, meaning the price would now need to be “significantly higher” to make financial sense.
According to its latest results, the decision to stop work has cost the company 5.5bn Swedish krona (£415m) but Borg said the move was “prudent” given the impact of costs on the project’s future profitability.
“The market framework is simply not reflecting the market situation,” Borg said. “Something needs to happen. It’s important to understand that our suppliers are being squeezed. They have problems in their supply chain so it’s not so easy to mitigate these situations.”
Borg said Vattenfall has called on the UK government to adapt the financial framework which controls the price and was in “constructive discussions” with officials.
Industry experts have said that without an overhaul of the government’s financing approach to take into account the steep climb in costs, the UK risks missing its target to increase its offshore wind capacity fivefold to 50GW by 2030.
Jess Ralston, the head of energy at the thinktank the Energy and Climate Intelligence Unit, 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 supply chain price inflation, excluding them from entering the auction,” she said. “The sensible strategy would be to seek to involve in auctions as much capacity as possible.”
Under the government’s scheme developers can compete in the auction for a contract which gives a guaranteed price for the electricity generated. If wholesale market prices are below this level the project receives a “top up” payment through a levy on energy bills. But if market prices are above the “strike price” the project must pay back the difference to consumers, leading to lower bills.
Setting the auction’s starting price at a higher point would still result in contract prices well below the current market rate, according to Ralston, meaning windfarms will continue to pay money back to households for the foreseeable future.
Dan McGrail, the chief executive of RenewableUK, said ministers would have 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 statement as a matter of urgency,” he said.
“The government needs to step up with a robust response to enable industrial growth throughout Britain.”
