Stormy times for offshore wind

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Shares in Ørsted, the world’s largest offshore wind developer, nosedived today as it ditched two key US projects and announced a higher than expected writedown of its portfolio, highlighting the fragile situation of an industry that is meant to be a key element in the switch to more sustainable energy.

The Danish company blamed supply chain delays, higher interest rates and problems with construction permits as well as changes to its assumptions around the tax credits available under US president Joe Biden’s Inflation Reduction Act. Offshore projects have also been coming under heavy fire from residents on the Jersey Shore, citing concerns for marine life and fisheries as well as having their ocean views spoiled by giant spinning turbines. 

BP’s head of low carbon energy told a Financial Times conference today that the US offshore wind industry was “fundamentally broken” and would not grow without a “fundamental reset”. 

As our Big Read explains, the sector faces multiple challenges as governments around the world set ambitious targets to tackle climate change but balk at the potential rise in power prices that might entail.

“Offshore wind projects around the world have faced a triple whammy of high supply chain inflation, rising interest rates and a reluctance on the part of governments to adjust auction parameters to respond to these new market conditions as they prioritise keeping costs to consumers down,” says Simon Virley, UK head of energy at KPMG.

The sector has grown rapidly since the world’s first offshore wind farm was built off Denmark in 1991, aided by increases in turbine sizes and ultra-low interest rates helping to push down costs of construction and operation 60 per cent between 2010 and 2021.

Ørsted is not the only European offshore turbine cluster operator buffeted by strong headwinds. Sweden’s Vattenfall in the summer halted a project in the North Sea off England’s coast — one of the most attractive areas in the world for wind farm developers — as surging costs made it unviable given the low price locked in for its electricity. Spain’s Iberdrola has also cancelled or sought to renegotiate power contracts for offshore projects after costs surged.

Turbine manufacturers have also been hit: Siemens Energy, one of the world’s biggest, is in talks with the German government to secure guarantees for long-term projects after warning turbine losses would be higher than forecast. The EU meanwhile is considering an anti-subsidy probe into Chinese turbines amid concerns that Europe was simply swapping its dependency on Russian gas for one reliant on Chinese clean energy equipment. 

Other policy problems abound. In the UK, the failure to attract any bids from offshore developers in its recent annual renewable energy auction, despite the North Sea’s huge potential, was, as the FT editorial board noted, both worrying and embarrassing

On the positive side, others, such as today’s Lex newsletter (for Premium subscribers), argue that some of the doom-mongering around the still young renewables industry, and wind in particular, is overdone. “Fair winds will prevail again, sooner or later, as pressure to decarbonise reasserts itself,” it concludes.

Need to know: UK and Europe economy

Eurozone inflation fell more than expected to 2.9 per cent in October, the slowest annual growth in consumer prices since July 2021, driven by falling energy prices and lower food price increases. The slowdown reflected weaker activity in the economy, which shrank 0.1 per cent in the three months to September.

UK shop price inflation fell to the lowest level in a year, according to industry data. UK house prices however rose unexpectedly in October, although mainly due to the lack of properties for sale.

Moscow tightened capital controls on western companies’ asset sales in a bid to shore up the weakening rouble. Companies exiting Russia must agree on a sale price in roubles or, if sellers insist on receiving foreign currency, face delays and even losses on the amounts that can be transferred abroad.

Need to know: Global economy

The US government is demanding data from insurers to see if more frequent extreme weather is making insurance unaffordable for homeowners. Insurance covered just 60 per cent of the $165bn losses from climate-related disasters in 2022.

Governments are still at odds over the future of fossil fuels ahead of the UN climate summit. France, Spain, Ireland, Kenya and 11 other countries are pushing for an end to new oil and gas projects.

Chinese stocks fell after manufacturing activity unexpectedly shrank in October, according to the official purchasing manager’s index as well as a closely watched private measure. Beijing signalled a further tightening of centralised Communist party control over its $61tn financial sector.

Worsening drought means the number of ships allowed to cross the Panama Canal each day will be slashed in the coming months. More than 3 per cent of world trade passes through the nearly 110-year-old canal, which relies on freshwater to operate its locks.

Need to know: business

Tata Steel is poised to confirm up to 3,000 jobs could be lost in Wales as part of a restructuring of its UK operations. The company, whose Port Talbot site is the biggest single emitter of carbon dioxide in the UK, is under pressure to move to greener, less carbon-intensive forms of steelmaking.

BP reported a steeper than anticipated drop in third-quarter profits to $3.3bn as energy prices fell and its gas trading business faltered, but interim chief executive Murray Auchincloss dismissed speculation about a takeover. Recent mega deals have raised hopes of a gusher of advisory fees for Wall Street banks Morgan Stanley and Goldman Sachs.

European energy companies are using Ukraine to store gas as their usual tanks near capacity, taking advantage of Kyiv’s tariff and customs incentives. The tanks are situated deep underground in the west of the country, far from the war’s front lines.

The $110bn airline maintenance market is in rude health as airlines struggle to keep planes in the sky to meet surging passenger demand. A shortage of new planes caused by supply chain issues and a jump in labour costs have led to airlines spending more on maintenance and repairs than ever before.

A new Big Read series details the impact of high interest rates on business, starting with the private equity industry, where dealmakers have been pummelled. In the UK, the sector has a fight ahead over the Labour party’s plans to raise buyout taxes on bosses if it wins power.

Company insolvencies in England and Wales have hit the highest level since the global financial crisis as businesses struggle with high borrowing costs and slowing demand.

The World of Work

Government and Bank of England officials have been focused on the problem of the UK’s shrinking workforce but faults in official data have raised doubts as to whether they are tackling the right problem.

The new Working It podcast discusses the UK’s productivity problem and what it could learn from places such as Scandinavia.

As Morgan Stanley picks a new boss, US financial editor Brooke Masters highlights the pitfalls of succeeding a star CEO.

The impenetrable job definition of the late actor Matthew Perry’s Chandler character in Friends reflected the work-to-live mentality of a different office age, writes columnist Emma Jacobs, presaging the current discourse around “bullshit jobs”.

Some good news

Despite the widely held belief that cases of dementia are set to rocket as global populations age, experts believe that, in the developed world at least, the prospects of avoiding the disease are stronger than they were a generation ago. Our Big Read explains.

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