EU wind targets under threat from volatile costs

Europe's power authorities must index wind contracts to rising component costs and speed up permitting to limit the impact on wind farm construction, industry officials said.

Job cuts and slashed profit margins at wind turbine suppliers have highlighted the impact of rampant inflation and logistics issues on the wind industry.

The cost of energy and components in the European Union has soared since Russia invaded Ukraine and economies bounced back from the pandemic. Wind turbine production costs have surged by 40% and much of this has been absorbed by suppliers, according to industry group WindEurope.

"In most cases, contracts were not indexed to factor in these cost increases," said Christoph Zipf, WindEurope spokesperson.

"This led to the unsustainable situation that all of Europe's five wind turbine manufacturers were making a minus in the first half of 2022."

Leading onshore turbine supplier Vestas posted a net loss of 1.0 billion euros ($1.0 billion) in the first nine months of 2022 while Siemens Gamesa closed the 2021 fiscal year in September with a net loss of 940 million euros. Nordex, Europe’s third largest supplier, reported a net loss of 283 million euros in the first half of the year.

Suppliers have started to raise their prices and this will impact developers' bidding and construction strategies.

The rise in global commodity prices is slowly reversing, but prices remain volatile and a shifting regulatory landscape for renewable energy is increasing market uncertainty. The European Union is implementing a price cap of 180 euros/MWh for wind and solar revenues and additional national measures are disrupting Europe-wide growth plans.

Without indexation of contracts to rising prices and faster permitting rules, wind growth will be stunted, industry officials warn.

The European Commission aims to install 39 GW of new wind farms annually up to 2030, but only 11 GW was built in 2021 and 18 GW per year is expected between 2022 and 2026.

Stable and effective regulation is needed to help the region get back on track, officials said.

Runaway costs

Rising prices are endangering Germany's plan to accelerate onshore wind installations to over 12 GW per year by 2025. Germany also aims to quadruple offshore wind capacity to 30 GW by 2030, rapidly ending its reliance on Russian gas.

German wind energy industry association Bundesverband WindEnergie (BWE) is calling for a rise in the reference energy price in wind power auctions to ensure the viability of new projects after the recent cost surge. France plans to index auction prices to inflation and is allowing developers recently awarded fixed-price contracts to temporarily capture high wholesale power prices.

                      European wholesale power prices by country

                                                          (Click image to enlarge)

Source: LevelTen Energy

Germany has already lifted a two-year deadline on building new wind farms to allow companies to adapt to volatile markets but the past two wind energy auctions have been undersubscribed. Without indexation, this is likely to re-occur in the next auction in December, BWE spokesman Frank Gruneisen said.

"Currently, we see increases of up to 40% or 45% in the German industry price index, which means that in order to be economically viable, the reference value (for wind power) would have to go up by approximately 40 to 45%," Gruneisen said.

The latest monthly data from the federal statistics office shows Germany's producer price index in September was 45.8% higher than a year ago, driven in particular by a 132% rise in energy prices.

Faster permits

Wind and solar permitting can take several years due to complex administrative processes and a lack of resources at permitting authorities. The EU has called on member states to accelerate permitting procedures, in some cases to under two years. Several national governments plan to fast track approvals but implementation will be challenging in areas that face opposition.

                          Annual wind installations in Europe by country

                                                                 (Click image to enlarge)

Source: WindEurope

Faster wind permitting or a requirement that developers acquire permits before bidding in auctions would speed up construction and reduce the risk of volatile prices derailing projects, Heikki Willstedt, Energy Policy and Climate Change director of Spain's wind power industry association Asociacion Empresarial Eolica (AEE), said.

Developers who were awarded energy contracts in Spanish auctions in 2021 for projects that are set to come online in 2024 are currently suffering the pressures of the recent surge in turbine prices.

"Now, when they have to start thinking about buying turbines in 2022 and 2023, the price has gone up by to 20%," Willstedt said.

"If you already have all the permits, you could have a shorter lead time of one and a half years and two years between the auction and the connection to the grid," he said.

Developers in Spain unable to renegotiate prices with wind turbine suppliers for projects awarded in auctions may decide to back away from regulated fixed-price contracts and look for more profitable power purchase agreements (PPAs) in the private sector, Willstedt said.

Spain is Europe's leading market for corporate renewable energy PPAs and developers in other countries have less PPA market options.

Reporting by Anna Flavia Rochas

Editing by Robin Sayles