The wind industry's success has become its own biggest threat

The head of one of the world's largest renewable energy developers, Denmark's Orsted A/S, fears that the energy transition will slow as increased competition and interest rates reduce profitability and challenge the case for investment.

Orsted is the world's largest developer of offshore wind farms, which it helped move from being a niche technology to one of the fastest-growing forms of renewable energy. Offshore projects can use much larger turbines - the size of skyscrapers - and take advantage of stronger, steadier offshore winds. Europe, China and the United States plan to rapidly increase their offshore wind fleets to meet their climate goals.

But as governments around the world ramp up their ambitions to replace fossil fuels with clean electricity, the companies expected to make that switch are under financial pressure. Executives are beginning to sound the alarm: for the sector to grow sufficiently to avoid catastrophic climate change will require billions of dollars of additional investment and for wind energy companies to be able to make substantial profits. At the moment, the path to viability is complicated by the rising cost of borrowing to build clean power plants and increasing competition; in the future, it could be further complicated by European taxes on renewable energy producers.

"We're a company with a vision of a world that runs entirely on green energy," Mads Nipper, CEO of Orsted, told Bloomberg Green in an episode of the Zero podcast. "And the lack of capital flowing into that transformation is the biggest risk we have."

Paradigm shift

Until recently, wind power was increasingly affordable. As turbine sizes increased, costs plummeted. Governments expected that trajectory to continue forever - an impression the industry supported - and tenders for new projects began to favor applicants who could promise lower power prices. In recent years, however, inflation and rising interest rates have put an end to the downward trend in costs and now threaten continued growth.

"If states around the world say energy prices can only go down, it will be a race to the bottom," Nipper said. "In the end, capital will dry up."

There's not much room to absorb higher costs. A typical offshore wind farm generates a return of about 1% above the cost of capital, Nipper said. A really good project can get as much as 3%. Rising interest rates are eroding that return, and if the price of electricity from wind farms doesn't go up, companies won't be able to invest at the rate needed to meet climate targets.

Prices are rising, but not to the level of fossil fuels.

Traditionally, Orsted and its competitors in the green energy sector have pushed their suppliers to lower costs. But that is no longer sustainable: in recent years, wind turbine suppliers have lost hundreds of millions of dollars through rising steel prices and costly supply chain disruptions. Now prices are rising.

Henrik Andersen, CEO of Vestas Wind Systems A/S, the world's largest wind turbine maker, told Bloomberg last year that creating the impression that wind power costs could only go down was the biggest mistake the industry made. Many developers who believed that promise are now struggling to adapt. In the United States, companies that were to build the first wave of wind farms in the Atlantic Ocean are trying to renegotiate contracts because the price at which they agreed to sell the power is no longer viable. There is a risk that the same could happen in the United Kingdom, a world leader in offshore wind power after a government auction last year set a new record low for the price of electricity.

Despite rising costs, wind power remains a bargain compared with fossil fuels: in Britain, the levelized cost of power from offshore wind was about half that of a natural gas plant in the second half of 2022, according to data from clean energy researcher BloombergNEF. Turbines placed on land are even cheaper, and those estimates don't include the broader benefits of reducing planet-warming emissions.