BY Heather Johnstone

Until the credit squeeze and the weakening British pound began to bite, the future of the burgeoning UK offshore wind industry was looking healthy. Now investment in the sector has more or less stalled and projects are being delayed or even shelved. However, are fortunes about to be reversed once again?

With a coastline of close to 12 500 km, the UK’s potential to generate electricity from offshore wind is impressive, representing over 33 per cent of Europe’s total potential.

The British government has recognized this potential, and in its energy package, which was released at the end of 2007, it set a target of 33 GW of offshore capacity by 2020.

The UK’s 90 MW Burbo Bank offshore wind farm. Source: Siemens Energy
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To date, there are nine operational offshore wind farms located off England, Scotland and Wales, generating almost 0.6 GW of electricity, with 1.3 GW under construction and a total of over 3.5 GW approved.

With the completion of Centrica’s 194 MW Lynn and Inner Dowsing wind farm in October last year, the UK overtook Denmark, leading the world in offshore wind power generation. Further, the Crown Estate, which owns most of the UK foreshore, opened bidding for the Round Three offshore wind farm programme in September last year. The aim of Round Three is to deliver up to 25 GW of new offshore wind farm sites by 2020.

Clearly the UK government’s target to have over 30 GW in place by 2020 is an ambitious one, and all looked to be progressing well – at least until the global financial crisis began to bite.

Now the picture is looking very different. According to the British Wind Energy Association (BWEA), at least five big wind projects, all offshore, are in danger of being delayed or even shelved because of higher costs and a shortage of credit. Ironically, in the current economic climate wind farm development costs should have come down as lower commodity prices have cut turbine prices, but a weak British pound has made imports more expensive, cancelling out the gains.

The rate of new applications to build wind farms is also said to be falling and independent developers were struggling to find finance, with offshore projects most at risk of delay. One of the five projects said to be under threat is the London Array, which with a capacity of 1000 MW, is the UK’s largest proposed offshore wind farm.

In May last year, Shell pulled out of the project due to rising costs. This left project partners E.ON of Germany and Dong Energy of Denmark with the unenviable task of finding another partner. Abu Dhabi’s Masdar Initiative subsequently stepped in, taking a 20 per cent stake.

Furthermore, a string of prominent energy companies are either reviewing their commitment to renewables or even scaling back their commitment.

Centrica, Britain’s biggest operator of offshore wind farms who plans to build 1600 MW of offshore capacity, said that because of soaring costs and the rise in the cost of financing it would be reviewing the economics of its £4 billion ($5.8 billion) wind power investment programme.

The investment cost of offshore wind power is said to have risen 50 per cent to about £3 million for every MW of installed capacity. At that price, offshore wind is more expensive in capital terms than building new nuclear power stations – costed at about £2.5 million per MW.

Energy giant BP also confirmed at the end of last year that it had dropped all plans to build wind farms in Britain, and would not be bidding for any offshore licences. Iberdrola Renovables of Spain, the world’s largest wind farm developer, announced that it was cutting its investment programme in renewable energy from €3.8 billion ($5 billion) in 2008 to €2 billion in 2009.

Wind farm developers are also looking to raise funds from the European Investment Bank, which is investing €800 million a year in renewable energy around Europe. E.ON, Dong and Masdar, the owners of the London Array, have applied for funding, but even if granted it would make up only a small part of the estimated £3 billion cost of the project.

Another worrying consequence of the slowdown in the UK offshore wind industry was recently highlighted by a study from the Institute for Public Policy Research, which said that due to a lack of government support Britain could miss the chance to create up to 70 000 new jobs in the offshore wind industry. A sobering thought when you consider that unemployment in the UK has hit a 12-year high of two million.

Speaking on BBC’s Radio Four, Paul Golby, chief executive of E.ON UK, said that offshore wind development had stalled in the UK due to the economic downturn and called upon the UK government to offer extra incentives for offshore wind.

The Chancellor Alastair Darling clearly must have been listening because in his 2009 Budget, which was announced at the end of last month, he increased the money available under the renewable obligation subsidy scheme, with offshore wind farms set to receive a cash injection of £525 million as a result.

In response, wind energy companies said this should be enough to save several proposed projects – including the London Array – from being scaled down or dropped.