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Reality has returned to the European offshore wind sector, bringing financial challenges to the forefront. These challenges are not solely due to higher interest rates but are increasingly driven by supply chain constraints, Power Purchase Agreement (PPA) issues, and investor caution. In a surprising announcement, Dutch Minister of Climate and Energy, Rob Jetten, has informed the market, government, and parliament that the costs of offshore wind projects in the North Sea will be significantly higher than previously assessed. Minister Jetten, a member of the left-wing liberal democrat D66 party, has also indicated that consumers should expect substantially higher electricity prices than initially anticipated.

This news has come as a shock to mainstream political parties and renewable energy sector operators. They had been advocating offshore wind and other renewables not only as a means of addressing climate change but also as a progressively cost-effective alternative. In the coming years, the development of hundreds of gigawatts of offshore wind capacity is required to establish a comprehensive renewable energy supply capable of significantly reducing or eliminating the reliance on fossil fuels. While some major projects have already been completed, many are still in the construction phase or awaiting investment decisions.

The increased costs are not primarily linked to global market developments but rather to the extra €10 billion required for connecting offshore wind farms at sea to onshore infrastructure. The Dutch state-owned company, TenneT, now faces higher financial burdens and increased risks. Previous assessments of TenneT's plans indicated financing needs of approximately €2 billion per year for the next several decades. However, new assessments reveal investment requirements of €3.6 billion per year, equivalent to €0.04 per kWh. In reality, these costs will ultimately be passed on to consumers through net tariffs, the fees for the delivery or transport of energy. The average Dutch household consumes 2,800 kWh per year. Related: Switzerland Stops Strategic Fuel Stock Drawdowns As Supply Normalizes

In response, Minister Jetten has pledged to explore ways to reduce the additional costs for consumers. One proposal is to use the same offshore-onshore connections for offshore solar projects. However, this concept is still in its infancy, as there are currently no viable large-scale offshore solar projects.

Analysis indicates that the Dutch government's decision to exclude Chinese manufacturers from participating in TenneT tenders has contributed to the current cost increases. This decision was made to prevent Chinese involvement in critical national infrastructure projects, particularly electricity networks. It appears that Dutch energy transition and renewable energy strategies and projects may be advised by consultants who lack not only an understanding of market fundamentals but also foresight regarding potential challenges or risks. Increased material and manufacturing costs have been anticipated for years, predating both the Ukraine crisis and the COVID-19 pandemic. Labor shortages and supply chain disruptions were also known factors but were apparently not fully considered.

Minister Jetten has suggested potential solutions, such as optimizing offshore grid usage and using offshore wind production for green hydrogen. These options are intended to reduce the overall future grid investment requirements. However, in the current and near future, the costs of these solutions, especially offshore hydrogen production, are extremely high, which may not yield positive outcomes.

Dutch offshore wind projects are now joining the global sector in facing negative financial news. Several major offshore wind producers, including Vattenfall in Sweden and Ørsted in Denmark, have encountered financial difficulties, primarily related to higher costs, interest rate issues, PPA constraints, or commercial factors making projects financially unfeasible. Without a comprehensive offshore-onshore power grid, most current and future projects may be put on hold.

In addition, news has emerged that Tennet Holding's planned divestment of its German subsidiary, Tennet Germany, faces political constraints. If this deal does not materialize, it could significantly increase overall investment pressure and financial risks for the Dutch Transmission System Operator (TSO). This situation might necessitate reassessments of strategies and investments in the coming years.

By Cyril Widdershoven for Oilprice.com

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Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently he works as a Senior Researcher at Hill Tower Resource Advisors. Next… More