The ripple effect of rising wind costs

Wind turbines don't come cheap, and that's never been more true: the cost of building one has risen by 38% over the last two years. 

The price of key critical minerals used in turbines has almost doubled since 2020. And a recent survey found that supply chain issues are the main business obstacle for more than half of turbine owners and operators. 

As a result, many offshore wind projects are faltering. Energy firm Avangrid, for example, agreed to pay $16 million to scrap its contract for a planned Massachusetts offshore wind farm; the company said that, partly due to inflationary pressures, the project was “unfinanceable.”

Meanwhile, wind leader Ørsted warned that it may take a $2.3 billion write-down on the value of its U.S. offshore wind projects. And Sweden’s Vattenfall said it will halt development of its 1.4 gigawatt Norfolk Boreas project in the North Sea.

When the U.K. government held an auction of renewable energy contracts last summer, not one offshore wind developer made a bid. And this reticence is not brand new; according to figures from industry group Wind Europe, there wasn't a single new investment in large-scale offshore wind in Europe in 2022.

Of course, this is a blow for the broader move to offshore wind as a direct supplier to the grid. However, it also has implications for technologies such as green hydrogen and direct air capture, which can only deliver on their emissions reduction promises if they have reliable access to clean energy.

Ørsted and Phillips 66, for example, recently called a halt to their joint Gigastack project, which was intended to take power from the U.K.’s Hornsea 2 wind farm to produce green hydrogen for industrial use. And while the companies won't go into detail on the reasons for the move, a project spokesperson cites a need for further project maturation, together with improvements to the supply chain.

Thierry Lepercq, founder and president of the hydrogen industry platform HyDeal Ambition, said pressure from increasing turbine costs is affecting the green hydrogen industry as a whole.

"What has happened over the last two years is that turbine costs and other costs, including financing costs, have gone up significantly,” he said, “which means that you have a number of companies that won the tenders at these very low prices now saying 'no way can I reach these levels because my costs have gone up.'"

For green hydrogen to be economically viable, the price needs to be comparable to that of hydrogen made with natural gas, or roughly $1.50 per kilogram. Today, green hydrogen prices hover around $5 per kilogram. 

One key element of cost reduction is bringing down the cost of the renewables powering the electrolysis process, which Lepercq said should ideally be a maximum of $21 per megawatt hour. While solar power can make this achievable, the best-value tenders allocated for offshore wind projects have hovered around the $48 per MWh mark. 

Most current wind-based green hydrogen projects that have been finalized, said Lepercq, are based on corporate balance sheets and thus don't need external investment.

But, he asked rhetorically, how many projects are “based on long-term contracts between a supplier and an uptaker at a given price” and not on either those balance sheets or the expectation of huge government subsidies? "The answer is zero," Lepercq said.

Wind cost uncertainty is also having ripples across the carbon removal market.

DAC is still a nascent technology, with only 27 plants having so far been commissioned worldwide, according to the International Energy Agency. However, it's receiving significant attention from both the public sector and the private, especially in the United States. 

But Howard Herzog, senior research engineer at the Massachusetts Institute of Technology Energy Initiative, said such projects are already unlikely to hit their projected cost estimates — even without rising renewable energy costs. 

"I see no basis to believe that the $100 to $300 per ton of [carbon removal] range from the IPCC 15 report can be reached anytime soon, if at all,” Herzog said, citing the fact that DAC prices today can reach $1,000 per ton of carbon removal. “It is based on estimates from early-stage development, which from past experiences turn out to be unreliable.”

However, others are holding onto hope, and putting down money to boot. The Department of Energy’s Carbon Negative Shot, for instance, is explicitly aimed at bringing average carbon removal prices down to $100 within a decade. And last summer, following through on a $3.5 billion pledge in the 2021 infrastructure law, DOE announced it will start by spending $1.2 billion on two facilities, one in Texas and the other in Louisiana. 

In the meantime, though — while projects are already strictly speaking economically unviable and requiring significant subsidies — rising wind costs are contributing to an overall sense of uncertainty.

And it's not just wind that's getting more expensive. Prices are rising right across the energy sector, said Megan Smith, offshore wind associate director at non-profit environmental services organization the Carbon Trust.

"It is particularly important we do not focus solely on baseline cost when discussing energy pricing,” she said. “This is an important metric, but it's not entirely useful when comparing the cost of renewables to fossil fuels."

"Building a gas power plant may be cheaper now, but we are totally beholden to volatile prices of raw materials needed to power the generation, which could greatly outstrip solar or wind,” Smith added.

With energy costs unpredictable across the board, DAC and green hydrogen suppliers are operating in an inherently uncertain environment. While the move toward net zero will depend on such new technologies, their path to economic viability is far from clear.

However, the increase in the cost of wind is unlikely in itself to compromise the success of either DAC or green hydrogen projects — so long as governments and industry keep their nerve.