Like many industries, skyrocketing costs of raw materials and materials have impacted the utility sector. The costs of purchasing renewable equipment, especially offshore wind farms, have caused some utilities to abandon some of their projects.
Recently, the Danish company Orsted announced a depreciation of 2.1 billion euros on its offshore wind farm projects in the United States. Rising costs, higher interest rates, and uncertainty over related subsidies have had a dramatic impact on the expected return on investment. Vattenfall, the current Swedish operator, launched its offshore wind farm off the Dutch coast, but announced it would suspend development of its 1.4 GW Norfolk Boreas offshore wind farm, scheduled to power 1.5 million UK homes. .
Offshore wind farm development is now 40% more expensive than previously seen
According to the Swedish utility, project costs increased by 40%, negatively affecting the company’s future revenues.
The current Italian company Enel presented its new strategic plan in December 2023, in which investments in renewable energy are revised downwards for the period 2024-2026, especially for onshore wind. With higher returns, Enel decided to allocate more capital expenditures on its regulated network activities.
In September 2023, the UK failed to attract bids for its offshore wind auctions. Offshore wind promoters argued that the government’s offer was not commensurate with rising costs and higher financing expenses. The same reasons explain the poor results of the auctions that Spain registered in December 2022. Only 50MW of wind projects were subscribed when the authorities planned to allocate 3.3GW of new onshore wind energy and solar panels.
Several European utility companies have a presence in North America, where they operate power plants (renewable and/or conventional energy) and, sometimes, transmission/distribution networks. The United States has been among the favorite places to develop renewable activities thanks to attractive fiscal policies.
In recent months, major European players such as Orsted, EDP and Enel have announced disposals in the United States, especially of wind and, occasionally, solar and geothermal projects. In its Renewable Energy Industry Outlook to 2024, Deloitte highlighted the good performance of the solar industry, whose installed capacity grew by 36% in 2023. At the same time, the additional capacity of wind projects amounted to 2.8GW, 57% less than in 2022. The consulting firm cites a average cost increase of 50% for wind projects between 2021 and 2023, which led to a decrease in the portfolio. Difficulties in obtaining permits and connections to networks are other reasons for disaffection with wind projects.
Despite higher costs, renewable capacity development remains a key focus
The shift in the business model of European integrated utilities from producers and suppliers of conventional energy generation (coal, natural gas and nuclear) towards renewable energy is reflected in past and future investments. In 2018, 33% of total investments were dedicated to renewables. We forecast that renewables will account for 52% of total investment in 2024. With the closure or elimination of conventional power generation plants, capital expenditure for this segment is decreasing significantly from 39% in 2018 to 22% in 2024. Despite higher costs, European utilities remain committed to meeting their carbon emissions reduction targets.