Ørsted warns about rising costs of UK wind development

Danish power group Ørsted is set to press ahead with its major UK offshore wind project despite rising costs, but warned that the British government needs to do more to support the sector.

Ørsted’s chief executive Mads Nipper said the company was working “very hard” to make viable its planned Hornsea 3 project off the Yorkshire coast, the world’s largest offshore wind project, after warning in March it could be derailed by financial pressures.

But he added that the electricity prices the UK government offers to developers are not high enough to absorb surging costs and ministers may struggle to secure the rapid capacity growth they need to hit climate targets.

“If a project which is by far the biggest in the world, with all these opportunities, can only become investable after having worked intensively for a year with everything, it’s hopefully also a stark reminder to the British government that something must change,” he said.

Global wind developers are facing major challenges due to rising interest rates and supply chain costs over the past year.

Sven Utermöhlen, chief executive of RWE’s offshore wind business, told the Global Offshore Wind 2023 conference in London this week that the costs of developing offshore wind have risen 20-40 per cent since Russia’s invasion of Ukraine. He added that he did not expect costs to fall anytime soon.

Ørsted, which is listed in Copenhagen and 50.1 per cent owned by the Danish state, had its most profitable year last year. This month it confirmed plans to develop 50GW of renewable energy by 2030, tripling its portfolio. It also increased its return targets.

However, rising costs have caused problems for Ørsted and other developers at projects where costs cannot easily be passed on because they have a fixed-price contract to sell the electricity.

Ørsted’s Hornsea 3 project, which will have a capacity of almost 3GW, or enough to supply almost 3mn homes, last year secured a government contract fixing most of its electricity at £37.35 per megawatt hour in 2012 prices, indexed to inflation.

But with costs having risen so sharply, Ørsted’s UK head Duncan Clark in March said there was a “real and growing risk” projects could be put on hold or abandoned.

Speaking to the Financial Times at Ørsted’s capital markets day earlier this month, Nipper said it was now “likely” Hornsea 3 would go ahead, after the company worked to cut down and boost revenues. It is expecting to make a final investment decision this year.

The government is currently auctioning a new round of contracts for offshore wind projects, but Nipper said the maximum price set was too low and he “would be surprised” if it secured the full capacity on offer.

“It is inconceivable that others are not having a difficult time,” Nipper warned.

He added that costs were becoming easier to pass on elsewhere, however, noting that the prices business customers are locking in have jumped and that the Irish government recently awarded contracts to offshore wind developers at €86 per megawatt hour.

UK energy minister Graham Stuart told the wind conference that Britain had the right support in place to maintain the “attractiveness of investing” in offshore wind.

“I’m confident that we will continue to be not only a European, but a global leader,” he said.