Wind energy is key to renewable electrical generation. Green energy transformation plans all feature wind energy alongside solar and hydro as a key electrical generator. The rollout of wind energy is proving difficult. Expectations for results are likely to be missed. This piece is part of series of backgrounds on why wind energy is hard.
EkaLore has previously looked at wind turbine manufacturers and the structure of the global market. The manufacturers are faced with common problems globally. Taken together these factors will make expectations hard to accomplish.
Financing costs have seen critical failures. Inflating costs require more investment with expectations of higher returns. Rates of return for investors must now meet higher return expectations. Long term assumptions set for prior very-low-interest-rates now meet demands for economic viability with higher real-rates of return, terms with less exposure to change, and different competition for capital. “ESG” (environmental, social, and governance) investments are insufficient in themselves to generate the billions needed for rapid deployment business cases.
Spanish Iberdola, Danish Oested, and Swedish Vattenfall have all delayed, written down, or outright cancelled large offshore wind projects due to increasing costs and finance costs. Iberdola moved to buy out certain development agreements as no longer viable. Oested saw expected tax credits on USA projects lower by more than USD$700M and interest financing costs increase by more than USD$700M.
The higher costs of funds (equity or debt) in the current rates have moved projects from a “low financing cost environment” to a “high financing cost environment” where the levelized cost of electricity has increased up to 50% (UNDP, 2017 study). Rate pressures keep rates lower than passing costs along quickly to buyers. These pressures set the stage for higher risks to new projects.
For ESG investors the higher risks in the wind energy market are not offset by a higher rate of return. The depressed weighted rates of return reducing viability for ESG investors stem from combinations of higher direct project costs, higher financing costs, and lower likely payouts. This in turn reduces further the pool of likely investment, or debt, financing. This consequentially increases rates for all projects and especially those with higher risks.
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