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Offshore wind projects incur up to 90% of lifetime cost upfront and have very low operational costs. To finance the high upfront capital needs, projects typically take on long-term loans with heavy debt-service commitments. The economic viability of these projects hinges on stable, long-term revenues – but markets cannot deliver those, because of their volatile nature and limited hedging options.

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Governments procure renewables through a variety of mechanisms. Contracts for difference (CfDs) have been used for more than 50% of the global offshore wind supply. The payments awarded through CfDs are sometimes labelled subsidies, suggesting that they support uneconomic activity. Here, we argue that the primary role of CfDs is rather risk management by creating a market for electricity supply at stable long-term prices. Similar to its use in other sectors of the economy, this contract type transforms a variable to a fixed price to reallocate volatility risks. Such long-term contracts are often necessary for renewables financing due to limited hedging options in existing markets.

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As the offshore wind sector struggles with cost increases and the often-hostile scrutiny that this brings, it is worth taking a step back to think about how governments should design auctions to get projects built at the lowest possible cost.

Several of the recent highly publicised project cancellations or delays are directly linked to poor auction design, so it makes sense to avoid or correct certain mistakes.

The goals of auctions are many, and some governments may prioritise some over others, but it is worth listing them explicitly.

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We identify and describe five grand challenges affecting offshore wind finance in the U.S. Failing to address these challenges may put deployment targets at risk. The challenges include (1) Early years financing: navigating the complexities, timing mismatches, and high costs of projects in the development phase; (2) Policy support for project financial solvency: addressing the uncertainty and systematic transfers of tax credits away from offshore wind, characteristic of the U.S. Investment Tax Credit; (3) Workforce development: building a skilled workforce for an emerging market; (4) Transmission and integration barriers: upgrading the power grid to reliably support large scale offshore wind integration; and (5) Floating wind development: financing the development and scale-up of floating offshore wind technologies. The second challenge has already been solved to a large extent by the Inflation Reduction Act.

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So offshore wind has become, almost unexpectedly, a significant part of the picture when future renewable energy systems are considered – at least in OECD countries. It provides diversification, opportunities to Big Energy to go green, possibly less public hostility and potentially reasonable economics. But it’s worth remembering that even in Europe, it’s just 10% of the overall wind capacity installed (and a bit more of actual generation, thanks to higher capacity factors).

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One worker has been killed, and three injured, in an explosion at a factory run by Danish wind sector supplier Welcon, according to media reports in Denmark.

The accident occurred at the company’s recently-expanded factory in the Give area of Denmark, and resulted in the death of a 41-year old Portuguese national, according to a report by Danish news website Vejile Amts Folkeblad, which quoted Stig Simonsen, a deputy police inspector at South East Jutland Police.

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Fox anchor Martha MacCallum and anti-renewable energy activist Michael Shellenberger defended widely debunked statements former President Donald Trump made about whales and offshore wind farms at a recent campaign rally, instead crediting him for “shining a light” on the issue.

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Don’t do tenders based on price if you don’t know when the project can get built (ie if projects are still subject to permitting processes or legal recourse or other uncontrollable delays). That’s a sure way to get unrealistic bids that will then be subject to lobbying and renegotiation.

Featured Offshore

There were no successful bids from offshore wind projects in the latest CfD auction in the UK, and that is already described variously as a setback for net zero plans in the UK, and yet another nail in the coffin of the industry, already struggling from headwinds in the US and UK, where various projects are being cancelled or postponed, and PPAs abandoned or renegotiated.

But I actually take it as a good thing, in that (i) it reflects cost discipline, and (ii) it proves that the tariff design is smart in that it avoids crazy bids like we have seen in other markets.