Orsted Cancels Major UK Offshore Wind Farm as Costs Jump
(Bloomberg) -- Orsted A/S canceled plans for a huge offshore wind farm in the UK, a significant blow to the nation’s plans to boost the clean energy source in the coming years.
It’s the latest setback for the offshore wind sector, which has struggled to cope with soaring costs in recent years. The Hornsea 4 project, with a capacity of 2,400 megawatts, would have been one of the world’s biggest offshore wind farms and a critical part of Britain’s plans for a clean power grid. But Orsted said the project no longer made economic sense, even with a contract to sell power at government-guaranteed prices for 15 years.
“The adverse macroeconomic developments, continued supply-chain challenges and increased execution, market and operational risks have eroded the value creation,” Orsted’s Chief Executive Officer Rasmus Errboe said in a statement.
The company, which pioneered offshore wind, has now canceled more projects than any of its competitors as it struggles to find a stable footing after rising costs and interest rates upended its business model in recent years. Orsted axed two major wind farms in the US a little less than two years ago, which cost the company billions of dollars and led to the departure of some of its top executives. After a series of failed efforts to turn the company around under the previous chief executive, Errboe took the top job earlier this year and unveiled a plan to cut investments and deliver more reliable earnings.
“The cancellation of Hornsea 4 comes as a surprise but highlights stronger discipline under the new CEO,” Deepa Venkateswaran, an analyst at Bernstein, wrote in a note.
Britain has the ambitious goal of having a clean power grid by the end of the decade. Energy Secretary Ed Miliband’s plan relies heavily on offshore wind as a key source of renewable power and Orsted’s project was slated to be ready by 2030.
The company kept its full-year earnings guidance despite rising costs and regulatory uncertainty for a pair of offshore wind farms under construction in the US. While tariffs on steel and aluminum have increased costs for those projects, it doesn’t “materially change the project returns,” it said in a report Wednesday.
The company expects to incur 3.5 billion to 4.5 billion Danish kroner ($533 million to $685 million) in breakaway costs this year because of the decision to terminate Hornsea 4. Shares in the company were fluctuating after earlier falling as much as 3% in Copenhagen.
Keeping Rights
Orsted will keep the development rights and will look to advance the project in the future in a way that is more value-creating for the company and its shareholders, according to Errboe’s statement. That may mean a higher electricity price, despite last year’s auction price for offshore wind rising some 40% from the last successful one a few years prior.
The UK government recognizes the effect that high inflation and supply-chain constraints are having on industry across Europe and will work with Orsted to get Hornsea 4 back on track, a spokesperson for the Department for Energy Security and Net Zero said in an emailed statement.
It’s not the first time that a major offshore wind farm has been canceled in the UK. Swedish developer Vattenfall AB halted a 1.4-gigawatt project in the face of similar rising costs in 2023. Unlike Orsted, Vattenfall opted to retain its CfD contract and sold the project to RWE AG for almost £1 billion.
Hornsea 4 won a contract last year to sell electricity at £58.87 per megawatt-hour in 2012 prices. When adjusted for inflation, that’s around £80 per megawatt-hour in today’s money, based on calculations for similar projects published by the Low Carbon Contracts Company, the government body that administers the contracts. That’s just below UK average wholesale electricity prices in the last year, meaning that if offshore wind needs a higher price to be economically viable, it will struggle to help the government deliver a promise to bring down bills.
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