Planet-saving wind farms fall victim to global inflation fight

New industry is at mercy of economies and supply chains.

Off the coast of New England, winds whip over the frigid Atlantic Ocean creating perfect conditions for giant offshore turbines. While plans are in place to tap that natural power to generate electricity, progress — here and around the world — is being held up by soaring inflation.

As investment foundations crumble due to rising interest rates and higher materials costs, developers in the U.S. are delaying clean-power projects like the 1.2-gigawatt Commonwealth Wind development near Massachusetts, which would be one of the largest wind farms in the country and capable of powering 700,000 homes.

The problem is even worse in Europe, where authorities have in some cases made the situation harder. Around 6 gigawatts of wind farms proposed off Germany’s coast won’t move ahead as planned. The setbacks mean precious time is lost in reducing the use of fossil fuels to fight the climate crisis.

“Governments need to wake up to the reality that investments in offshore wind are not happening,” said Giles Dickson, head of industry group WindEurope. “The stakes are very high here.”

To get on track for net zero by 2050, the world needs to more than double the rate of investment in renewables to around $1 trillion a year, according to BloombergNEF. That level of spending has to happen as soon as possible and continue into the 2040s to prevent the worst impacts of global warming.

Unlike traditional power plants that require fuel over their lifetimes, the vast majority of the cost for renewables comes up front. That makes the sector especially sensitive to changes in financing and construction expenses.

That’s particularly true for giant offshore wind farms, which use turbines the size of skyscrapers, specialized installation vessels and miles of copper cables to connect them to grids on shore. But they offer vast generation potential and there’s less of the not-in-mybackyard resistance compared to land-based wind farms and solar installations.

It’s not just offshore wind that’s suffering. Battery and solar developers in the U.S. are trying to keep up with higher equipment costs. The capital expenditure necessary to develop onshore wind farms in the U.S. has increased by more than 16% between 2020 and last year, according to BloombergNEF.

“We’re still miles away from a rate of deployment that would get the power system to be on track for net zero,” said Seb Henbest, head of climate transition at HSBC. “Something has to move if projects are under stress and unbankable.”

One rare bright spot is China, where installations are expected to rebound this year after a big post-subsidy drop in 2022. BloombergNEF expects the country to nearly double offshore wind additions this year, accounting for more than half the world’s total.

Long-term agreements to purchase the power are key to the viability of big renewable investments. Whether backed by governments or private companies, those contracts ensure producers can recoup billions in upfront costs eventually.

For projects to work, electricity rates need to keep pace with construction costs, but that’s not happening. In Europe, governments have set aside $811 billion to shield companies and consumers from price increases. In the U.S., authorities are holding developers to electricity rates set before inflation surged.

President Joe Biden’s Inflation Reduction Act is an overall boon to the clean-energy industry, but its longer timeline for tax credits can contribute to delays because developers know they can tap benefits years later.

For wind farms in the early development stage, the bill’s benefits became part of baseline assumptions, leaving uncertainty about how long head winds from inflation and supply chain kinks will persist, said Timothy Fox, a ClearView Energy Partners analyst.

“Anyone who thought that building offshore in the U.S. was going to be a light breeze might not have been paying close attention,” he said.

The Biden administration wants to build 30 gigawatts of offshore wind by 2030. But some of the biggest projects are in turmoil. Denmark-based Orsted said it would take a hit of about $365 million because of higher costs for the 924-megawatt Sunrise Wind — one of the largest off the coast of New York.

Ultimately, unclogging renewable investment involves increasing subsidies or letting monthly bills for homes and businesses rise. Neither are palatable for leaders in the U.S. and Europe.

“There are a lot of concerned developers out there because the economics are challenging,” said Phil Grant, renewable-power consultant at Baringa Partners. Governments and investors are both in a bind, and “there may be a question of who blinks first.”