Wind Energy's Success Poses a Risk to Its Future

Orsted A/S, one of the world's largest developers of renewable energy, is concerned that the energy transition could slow down as rising competition and interest rates squeeze returns and make investment less attractive.

Orsted is the world’s largest developer of offshore wind farms. It pioneered offshore wind farms from a niche technology into one of the fastest-growing forms of renewable energy. Offshore projects can use much larger turbines - the size of skyscrapers - and are able to tap into stronger and more consistent winds off the coasts. Europe, China, and the US plan to rapidly increase their offshore wind fleets to reach their climate goals.

As governments around the world set their sights on transitioning away from fossil fuels to clean electricity, the companies that will be tasked with making this shift are feeling the financial pressure. Executives are sounding the alarm that avoiding catastrophic climate change will require trillions of dollars in additional investment, and that wind-power companies need to be able to make healthy returns in order to make this happen. At the moment, the path to viability is complicated by the rising cost of borrowing money to build clean power plants, as well as increased competition. In the future, it could also be complicated by European windfall taxes on renewable power producers.

The story of wind power has been one of increasing affordability, with costs plummeting as turbines grew in size. However, this trend has come to an end in recent years, with inflation and rising interest rates putting continued growth at risk.

Nipper warned that if states around the world say energy prices can only go down, it will be a race to the bottom. Eventually, the capital will dry out.

Wind power prices have increased due to rising commodity costs and supply chain issues.

There is little room for error when it comes to offshore wind farms. According to Nipper, these farms typically generate a return of only 1% above the cost of capital. A really good project might see returns of up to 3%. However, with higher interest rates, these returns are diminishing. If the price of electricity from offshore wind farms does not increase, companies will not be able to invest at the pace needed to achieve climate goals.

Orsted and its green-power competitors have traditionally put pressure on their suppliers to bring down costs. However, this is no longer sustainable, as wind turbine suppliers have lost hundreds of millions of dollars in recent years due to surging prices for steel and costly supply chain disruptions. As a result, these suppliers are now raising prices.

Henrik Andersen, CEO of Vestas Wind Systems A/S, told Bloomberg last year that creating the impression that wind power costs could only tumble was the biggest mistake that the industry ever made. Many developers who bought into that promise are now struggling to adjust. In the US, companies meant to be building the first wave of wind farms in the Atlantic Ocean are trying to renegotiate contracts because the price at which they agreed to sell power is no longer viable. There's a risk that the same could happen in the UK, the world leader for offshore wind following a government auction last year that set a new record low for power price.

Wind power producers are making the case that their product is still cheap, even if the price does go up.

"The price will have to be more realistic," Nipper said, "which will still be significantly cheaper than any of any fossil fuel."