Taking stock of recent setbacks in the offshore wind industry, executives at the BNEF Summit in London on Oct. 10–11 called on governments to recalibrate remuneration programs to reflect a new reality of rapidly escalating costs.

Developers in Europe and the US have this year sought to renegotiate offshore wind contracts or even back out of advanced plans for new projects after struggling to make their business cases stack up due to rising borrowing and equipment costs.

"In some countries, [governments] don't like to recognize that things change," Iberdrola SA CEO Ignacio Galán told the conference, which was organized by research firm BloombergNEF. "Unless you change the rules, we cannot continue ... because it's not financeable."

Galán pointed to rising interest rates and raw materials costs that had forced the company to renounce certain power purchase agreements, with subsidiary Avangrid Inc. paying $48 million for doing so in Massachusetts.

The cost pressure also hit the UK's latest renewables auction, which failed to attract even a single offshore wind bid, with developers unable to square the industry's new realities with the auction's price cap that they felt was too low.

"I have to say it was partly disappointing, but also partly refreshing to see the discipline shown by sponsors that if you can't build it under that cap, they're not going to bid," said Mark Dooley, global head of green investments at Australian investment group Macquarie Asset Management.

Dooley said the offshore wind industry has made "incredible gains" in recent years to bring the cost of the technology down, and that governments and consumers must now reconfigure their assumptions.

"The price that we've been achieving is now the thing to which people's current expectations are tuned," Dooley said in an interview on the sidelines of the conference.

"It's a surprisingly low price, an amazing outcome for the government and communities. And it's sad that we have to give some of that back, but we do," Dooley said. "But we can give that back and make it a viable thing again, and still see green electrons being produced at a cost-competitive price versus conventional energy."

A key driver behind project failures and power purchase agreement renegotiations is a lack of indexation in contracts, executives said, with the problem most acute in the US.

By not indexing, governments are forcing developers to make assumptions on how prices will develop, according to Grzegorz Gorski, COO at Ocean Winds SL, the joint offshore wind platform of Engie SA and EDP Renováveis SA.

"I have to take forecasts and I will try to be conservative so normally I will charge you more than I could," Gorski said. "And if I make a mistake and I didn't charge enough, I won't do the project. So you cheat yourself by not indexing."

Still, Gorski said things are beginning to change, pointing to new offshore wind solicitations in New Jersey and Massachusetts where prices will be indexed.

"Indexation in the most critical period, so between award and [final investment decision], is included," the COO said. "So they also take the lessons."

'Toxic policies'

Much of the industry cost pressure is being fed through to developers from the supply chain, with the major Western turbine-makers struggling to turn a profit in the face of rising raw materials prices.

Morten Dyrholm, global senior vice president at Vestas Wind Systems A/S, said the grim situation is not helped by the design of certain offshore wind auctions, such as in Germany, where BP PLC and TotalEnergies SE recently agreed to pay a combined €12.6 billion for the rights to build 7 GW of new capacity.

The German auction was designed with an uncapped "negative bidding" phase with the sites awarded to the highest bidder.

"We're not going to bear the cost of these toxic policies that we see with the uncapped negative bidding," Dyrholm said. "I think it's absolutely crazy."

"You cannot squeeze more out of [the supply chain]," Dyrholm said. "We'll do whatever we can to make more effective turbines, standardize, modulize, all these things. But there's a limit to what this industry can do."

The criticism stretched beyond just Germany. Ocean Winds' Gorski said the seabed lease sale in England and Wales in 2021 was "by far more crazy" since companies have to pay an option fee every year of development until a final investment decision is made.

In the case of BP and its German utility partner EnBW Energie Baden-Württemberg AG, that equates to £462 million per year for 3 GW across two projects. The companies expect to make an investment decision in 2025, meaning their total bill is more than £1.8 billion.

In Germany, the €12.6 billion owed by BP and TotalEnergies is back-loaded so that only 10% of the lease fee is required before projects enter operation, which some industry participants have said raises the risk of nondelivery.

"I am not afraid that these projects won't be built. They will be built," Gorksi said, pointing to the fact capital costs involved are small compared to the oil companies' overall spending, as well as the reputational cost of abandoning development.

Gorski added that "the cake is big enough for everyone" given the huge offshore wind targets in Europe and the US, and said that the only way to push back against high prices in price-driven auctions or lease sales is to ramp up supply.

"Increase the supply of leases," Gorski said. "It can be competitive, but just do it more. If you see scarcity pricing, do more."

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