If I have misunderstood, apologies: is it your belief that this would have been a profitable project for Orsted at the contract price?
Relatedly, this is a great development for U.K. ratepayers, who are already paying the highest power bills in Europe due to such high “renewable” grid penetration.
And, sadly, having no effect on climate , whatsoever. The U.K.’s less than 1% of global CO2 emissions ensures that nothing it ever does can ever affect climate anywhere.
Not even a rounding error on Asia’s huge and still increasing emissions.
It should have been profitable for them if they bid that price, but presumably some parameters they had not locked down (but could have) move unfavorably, and they are trying to get a better price a bit later.
The old ROC (and the even older NFFOs) are expensive and inefficient, but CfDs are a pretty cost effective way to get power.
We need to do our part for decarbonation. China is increasingly pulling their weight and their emissions will soon be going down for real, with all the solar and wind they are installing.
There is some reality to this for future projects (lease round 4 projects) but it does not apply to R3 projects like Hornsea. This would be reflected in higher bids in CfD rounds.
Here we are talking about someone getting a CFD and abandoning it less then year later.
I wonder if the ongoing uncertainty surrounding global tariff wars might also be a contributing factor here. With goods and raw materials being shipped across international borders, tariffs are poised to have a wide-reaching impact on costs. However, the extent of that impact remains unclear at this stage, which only adds to the current climate of unpredictability.
When this is combined with recent concerns around inflation and interest rates—despite the fact that those rates are now beginning to fall—it creates a complex environment of financial uncertainty that companies have to navigate.
That said, I agree with much of what you’ve outlined, particularly the core idea that when the government goes to market and asks industry experts, “What will this project cost?”, those experts should be prepared to stand by the estimates they provide. After all, this is their area of expertise, and quoting a reliable price should be part of their professional responsibility.
Strengthening penalties for failure to deliver on commitments is certainly one approach. Another, perhaps more sustainable, strategy is to foster a culture that prioritizes reputation, accountability, and excellence. When firms understand that their long-term credibility and future business depend on the quality and reliability of their work, it incentivizes a higher standard of performance overall.
Thanks. The general uncertainty doesn't help, but it should not affect offshore wind too much, as not much of it is in the US (and that does not change the main point that they should have locked their costs when they bid). The point by another commenter that they could not find a buyer for their usual sell-down is probably more relevant, in terms of what has impacted them recently (but again, they should bear that risk).
I agree about your point on excellence, but utilities seem to be able to get away with mediocrity by appearing to be indispensable to their local politicians
Isn’t the issue here that Orsted usually derisks construction by offloading an equity interest and there aren’t any takers in the current environment - mostly attributable to interest rates and potentially lower power price forecasts, particularly in the tail after cfd
That's probably part of the story indeed. But it's a risk that they are consciously taking and should bear. A lot of businesses make bets on something happening in the future - if it does not happen as expected (or on worse terms), they are on the hook. Why should big utilities get a "get out of jail" card for free?
You are correct that substantial bank backed bid bonds are the best form of guarantee. It ensures that bids are at sensible levels, with bank oversight of the risks being run. It would of course push bids somewhat higher, as the game of win the contract and worry about finagling or renegotiating it later would be undermined. Moreover, any company that misled its banking partners would soon be out of business.
Banning competitors from bidding is the wrong solution. It reduces the competitive pool and the supply chain capacity for project management. Favouring smaller projects is harder to evaluate, but it may come with other costs in the form of extra costs for multiple connections to shore.
It has to be said that wishful thinking on the part of government must take a large share of the blame. Foolish belief in ever lower costs accompanied by a messianic desire to pursue wind as the mainstay of future investment left the industry believing that they could force the government to rectify problems, but first they needed to be in the game. Bad decisions have been made by government through ignoring the real world data on costs, and relying on outdated hopium projections. That's still happening.
- I hear your point that banning parties is bad for competition. If there are high bid bonds it's probably necessary.
- I was not proposing smaller projects, but to allow smaller developers to bid for the existing zones and bring (large) projects forward. This has been done many times over the years when it was possible (see Gemini, the 600 MW Dutch project brought to construction in 2014-17 after being developed by a very small developer - and after the Dutch government was sued by utilities that claimed that a small developer could never build the project)
- Everybody believed in the trend towards lower costs, and to be fair, two of the three things that derailed it (Covid an the war in Ukraine) could not have been predicted. The third one was the move towards "zero bids" and merchant projects in some jurisdictions that led utilities to squeeze the supply chain to the point that they bankrupted them, and the backlash has been fierce ever since.
"Everybody" was just the government echo chamber, including senior management in some wind farm developer companies, elevated because they promised miracles. The mad Mads Nipper for example, now sacked. Anyone who actually looked at installed costs reflected in company accounts and financing following FID decisions could see that the assumptions were baloney, and anyone with some understanding of the basic engineering and physics behind wind turbines could see there was no way to make dramatic increases in economies of scale, with costs of deeper water going the other way as well. Indeed, the risks were that larger turbines would become more vulnerable to mechanical stresses and the need for repair, which seems to be borne out by the data.
I don't think that Covid is responsible for much beyond the delay to projects that were in train at the time: the delays to those did add costs and squeeze cashflows, leading to some manufacturers trying to secure signing bonuses to generate cash by offering at too low a price. Similarly, the Ukraine war had very little impact on wind supply chains, which are not much dependent on Russia or the Ukraine. There was a significant impact from the commodity price boom, particularly for steel, Cu, Al, Nd, Co, Ni with many of those heavily controlled by China.
You may be right that there are better project managers out there (there have been spectacular failures at several wind industry companies both in turbine manufacture and wind farm project management). You would at least hope so. But I think it is quite difficult to risk manage a large portfolio of smaller operations: opening up could equally attract the wrong sorts looking at securing upfront bonuses and not caring if their enterprise goes broke. There are some advantages to scale in terms of securing better financial terms through having a portfolio of assets that can act as collateral. If you look at mining or oil and gas you get "juniors" who go out and find prospects, and maybe management buyout teams who nurse an asset in its later years to extract the maximum from it as efficiently as possible. I could see the wind industry moving to that model.
Jérôme je suis tout à fait d’accord. Les événements en Ukraine et Covid représentent des cas de force majeure mais c’est bien difficile de voir ce qui a changé que permet Ørsted à abandonner Hornsea 4. Mais selon les règles déjà existantes leur punition ne consistera qu’en devant attendre deux ou trois ans avant de participer aux enchères britanniques. Je suis d’accord que le gouvernement britannique doit changer ces règles et que les gouvernements ailleurs doivent considérer leurs propres systèmes pour voir si là on doit effectuer des modifications éventuelles.
If I have misunderstood, apologies: is it your belief that this would have been a profitable project for Orsted at the contract price?
Relatedly, this is a great development for U.K. ratepayers, who are already paying the highest power bills in Europe due to such high “renewable” grid penetration.
And, sadly, having no effect on climate , whatsoever. The U.K.’s less than 1% of global CO2 emissions ensures that nothing it ever does can ever affect climate anywhere.
Not even a rounding error on Asia’s huge and still increasing emissions.
It should have been profitable for them if they bid that price, but presumably some parameters they had not locked down (but could have) move unfavorably, and they are trying to get a better price a bit later.
The old ROC (and the even older NFFOs) are expensive and inefficient, but CfDs are a pretty cost effective way to get power.
We need to do our part for decarbonation. China is increasingly pulling their weight and their emissions will soon be going down for real, with all the solar and wind they are installing.
What do you make of Paul Butterworth’s view that the difficulties faced by offshore wind in the UK reflects the fall in carbon price expectations and the rise in the sea bed leasing fees which the crown estate charges of almost £40/mwh in current money ? There’s a great chart here https://www.crugroup.com/en/communities/thought-leadership/2024/navigating-the-future-ensuring-stability-for-uk-offshore-wind-through-high-carbon-prices/
There is some reality to this for future projects (lease round 4 projects) but it does not apply to R3 projects like Hornsea. This would be reflected in higher bids in CfD rounds.
Here we are talking about someone getting a CFD and abandoning it less then year later.
Jérôme,
I wonder if the ongoing uncertainty surrounding global tariff wars might also be a contributing factor here. With goods and raw materials being shipped across international borders, tariffs are poised to have a wide-reaching impact on costs. However, the extent of that impact remains unclear at this stage, which only adds to the current climate of unpredictability.
When this is combined with recent concerns around inflation and interest rates—despite the fact that those rates are now beginning to fall—it creates a complex environment of financial uncertainty that companies have to navigate.
That said, I agree with much of what you’ve outlined, particularly the core idea that when the government goes to market and asks industry experts, “What will this project cost?”, those experts should be prepared to stand by the estimates they provide. After all, this is their area of expertise, and quoting a reliable price should be part of their professional responsibility.
Strengthening penalties for failure to deliver on commitments is certainly one approach. Another, perhaps more sustainable, strategy is to foster a culture that prioritizes reputation, accountability, and excellence. When firms understand that their long-term credibility and future business depend on the quality and reliability of their work, it incentivizes a higher standard of performance overall.
Thanks. The general uncertainty doesn't help, but it should not affect offshore wind too much, as not much of it is in the US (and that does not change the main point that they should have locked their costs when they bid). The point by another commenter that they could not find a buyer for their usual sell-down is probably more relevant, in terms of what has impacted them recently (but again, they should bear that risk).
I agree about your point on excellence, but utilities seem to be able to get away with mediocrity by appearing to be indispensable to their local politicians
Isn’t the issue here that Orsted usually derisks construction by offloading an equity interest and there aren’t any takers in the current environment - mostly attributable to interest rates and potentially lower power price forecasts, particularly in the tail after cfd
That's probably part of the story indeed. But it's a risk that they are consciously taking and should bear. A lot of businesses make bets on something happening in the future - if it does not happen as expected (or on worse terms), they are on the hook. Why should big utilities get a "get out of jail" card for free?
This has been extensively been quoted in Recharge:
https://www.rechargenews.com/analysis/orsted-halt-to-hornsea-4-is-poor-behaviour-that-should-be-punished/2-1-1816416
You are correct that substantial bank backed bid bonds are the best form of guarantee. It ensures that bids are at sensible levels, with bank oversight of the risks being run. It would of course push bids somewhat higher, as the game of win the contract and worry about finagling or renegotiating it later would be undermined. Moreover, any company that misled its banking partners would soon be out of business.
Banning competitors from bidding is the wrong solution. It reduces the competitive pool and the supply chain capacity for project management. Favouring smaller projects is harder to evaluate, but it may come with other costs in the form of extra costs for multiple connections to shore.
It has to be said that wishful thinking on the part of government must take a large share of the blame. Foolish belief in ever lower costs accompanied by a messianic desire to pursue wind as the mainstay of future investment left the industry believing that they could force the government to rectify problems, but first they needed to be in the game. Bad decisions have been made by government through ignoring the real world data on costs, and relying on outdated hopium projections. That's still happening.
Thanks for the comments.
- I hear your point that banning parties is bad for competition. If there are high bid bonds it's probably necessary.
- I was not proposing smaller projects, but to allow smaller developers to bid for the existing zones and bring (large) projects forward. This has been done many times over the years when it was possible (see Gemini, the 600 MW Dutch project brought to construction in 2014-17 after being developed by a very small developer - and after the Dutch government was sued by utilities that claimed that a small developer could never build the project)
- Everybody believed in the trend towards lower costs, and to be fair, two of the three things that derailed it (Covid an the war in Ukraine) could not have been predicted. The third one was the move towards "zero bids" and merchant projects in some jurisdictions that led utilities to squeeze the supply chain to the point that they bankrupted them, and the backlash has been fierce ever since.
"Everybody" was just the government echo chamber, including senior management in some wind farm developer companies, elevated because they promised miracles. The mad Mads Nipper for example, now sacked. Anyone who actually looked at installed costs reflected in company accounts and financing following FID decisions could see that the assumptions were baloney, and anyone with some understanding of the basic engineering and physics behind wind turbines could see there was no way to make dramatic increases in economies of scale, with costs of deeper water going the other way as well. Indeed, the risks were that larger turbines would become more vulnerable to mechanical stresses and the need for repair, which seems to be borne out by the data.
I don't think that Covid is responsible for much beyond the delay to projects that were in train at the time: the delays to those did add costs and squeeze cashflows, leading to some manufacturers trying to secure signing bonuses to generate cash by offering at too low a price. Similarly, the Ukraine war had very little impact on wind supply chains, which are not much dependent on Russia or the Ukraine. There was a significant impact from the commodity price boom, particularly for steel, Cu, Al, Nd, Co, Ni with many of those heavily controlled by China.
You may be right that there are better project managers out there (there have been spectacular failures at several wind industry companies both in turbine manufacture and wind farm project management). You would at least hope so. But I think it is quite difficult to risk manage a large portfolio of smaller operations: opening up could equally attract the wrong sorts looking at securing upfront bonuses and not caring if their enterprise goes broke. There are some advantages to scale in terms of securing better financial terms through having a portfolio of assets that can act as collateral. If you look at mining or oil and gas you get "juniors" who go out and find prospects, and maybe management buyout teams who nurse an asset in its later years to extract the maximum from it as efficiently as possible. I could see the wind industry moving to that model.
Excellent stuff Jérôme - equivalent to 'land banking' that the supermarkets have been doing for years.
“Currently, the main penalty in the UK for giving back a CfD is that you are not allowed to bid in the next two rounds. “
Could you point to the clause in the CfD contracts where this penalty is defined?
This - https://assets.publishing.service.gov.uk/media/5a757977e5274a1622e2213c/NDD_Policy_Update_DECC_Update.pdf - actually says that it's a block for 13 months.
the non-delivery disincentive was updated / strengthened in 2022 to cover the next two rounds
"Regulation 2(2) of the instrument will amend the current NDD exclusion period…so
that an application cannot be made in respect of an excluded site in the subsequent
two applicable allocation rounds"
https://www.legislation.gov.uk/uksi/2022/842/contents/made
Milibrain will have that amended nothing can stall his mad mission to decarbonise UK electricity grid.
Thanks!
Jérôme je suis tout à fait d’accord. Les événements en Ukraine et Covid représentent des cas de force majeure mais c’est bien difficile de voir ce qui a changé que permet Ørsted à abandonner Hornsea 4. Mais selon les règles déjà existantes leur punition ne consistera qu’en devant attendre deux ou trois ans avant de participer aux enchères britanniques. Je suis d’accord que le gouvernement britannique doit changer ces règles et que les gouvernements ailleurs doivent considérer leurs propres systèmes pour voir si là on doit effectuer des modifications éventuelles.