Wind of Change Over the North Sea

The winds of change are blowing, but the European Union's wind energy sector is encountering a crisis. We watch with regret the significant increase in equipment costs stems from a shortage of raw materials for the powerful magnets used in generators. Moreover, the assembly and maintenance of wind turbines demand a substantial number of skilled workers. Wind, being an inherently unstable energy source, requires either flexible gas-consuming energy blocks or industrial battery storage to balance its intermittency. Both options come at a hefty price, particularly as rising interest rates in developed countries have inflated the cost of financing new wind energy projects and compensatory capacities. Yet, EU nations are gradually overcoming these hurdles amid the "Green Transition."

In the presence of King Willem-Alexander of the Netherlands, ten energy ministers from North Sea Energy Cooperation (NSEC) countries convened in The Hague on November 20 to endorse the transformation of the North Sea into Europe's offshore powerhouse. This ambitious initiative aims to strengthen the European wind energy supply chain, complementing the EU Commission's Wind Energy Package.

Notably, NSEC countries aspire to build offshore wind installations with a capacity of 76 GW by 2030, 193 GW by 2040, and 260 GW by 2050. This vision appears ambitious, especially given that the EU's plan to increase wind power capacity by 2.5 times by 2030 is now at risk of faltering. Even the European Commission acknowledges the formidable challenges in achieving the 500 GW target, citing the wind energy sector's encounter with a "unique set of problems," as stated in an official EC statement.

The costliness of "green" projects, escalating prices of wind farm components, sluggish permit issuance, competition pressure (particularly from China, a key equipment and material source), and a shortage of skilled labor contribute to these challenges. European companies are now shifting focus to other markets to test their technologies and swiftly reap profits on a larger scale. Prior to Russia's full-scale invasion of Ukraine, EU conglomerates showed a keen interest in Ukrainian "green" energy projects.

For instance, from 2018 to 2021, Norway, a leader in EU wind energy, invested around €750 million in Ukraine's renewable energy sector. Vestas, one of the largest wind turbine manufacturers, supplied equipment to Ukrainian wind farms for many years. However, after February 24, 2022, over 90% of wind farms in Ukraine fell under occupiers' control or were destroyed.

While European companies are actively participating in Ukrainian wind energy projects in the western part of the country, which is defending itself from aggression, they must also contemplate how to increase the share of electricity from renewable sources (RES) to 45% within seven years. This poses an unprecedented challenge.

PHOTO: King Willem-Alexander of the Netherlands addresses the energy ministers of the North Seas Energy Cooperation (NSEC) countries in The Hague on the 20th. All this to transform the North Sea into Europe's offshore power station. SOURCE: Official website of the King of the Netherlands.

Worse Weather, Better Output

Despite wind contributing over a third of the total electricity from renewable sources (RES) in Europe, the continent's energy landscape faces challenges. Both wind energy systems and solar power stations rely on unpredictable weather conditions. Recall the spring and summer of 2021, when prolonged calm periods led to a decline in electricity production. Orsted, a leading global wind energy company, lamented that 2021 was one of the worst years in the last two decades in this regard.

Although the autumn of 2023 has been quite windy, the situation could change abruptly. Unfavourable weather conditions during a relatively warm winter, as experienced in 2022, do not favour wind stability. Professor Mark Z. Jacobson, a civil and environmental engineering professor at Stanford University, explains that climate and energy models confirm wind turbines increase their power during cooling periods, boosting electricity production.

Moreover, not all European territories are suitable for wind energy systems. The most effective wind farms are those situated offshore or in coastal areas. Therefore, leading wind energy producers, including Germany, the Netherlands, Spain, Denmark, and Sweden, have coastlines. For example, the total capacity of all generators in the North Sea, washing the shores of Great Britain, Scandinavia, and continental Europe, amounts to 20 GW. By 2030, the capacity of North Sea wind farms will increase to 76 GW, reaching 260 GW by 2050, equivalent to half of the entire EU wind energy capacity.

Companies Counting Losses

Wind energy requires colossal investments. The investment per megawatt for wind power generation stands at approximately €1.23 million. Company expenses are escalating due to the gradual increase in turbine prices, logistics, communication infrastructure, and installation work.

This extends the payback period for such projects, diminishes their attractiveness, and results in financial losses. Against the backdrop of expensive credits, this is painful for the wind business. In the second quarter of 2023, Vestas incurred €130 million in losses before tax. Siemens Energy reported €2.9 billion in net losses for the third quarter of 2023 due to turbine production and quality-related issues.

Companies are also compelled to pay fines for the delayed commissioning of wind energy facilities. Although project halts occur for entirely objective reasons, in July, Swedish company Vattenfall announced the suspension of the Norfolk Boreas wind farm construction, a 1.4 GW project off the coast of the UK. Vattenfall attributed its decision to a 40% increase in costs, rendering the financial project unviable.

"The offshore wind energy market is currently complex. Due to the geopolitical situation, offshore wind energy and its supply chain are particularly vulnerable," commented  Anna Borg, the president of the company.

There is a problem in the EU's power grids, which are struggling to handle the influx of electricity from renewable sources. The European Commission has pledged to approve a €584 billion plan for the capital repair and modernization of electrical networks. The UK pays annual penalties of up to £30 million to wind energy operators since the energy system cannot absorb all the electricity generated by wind farms.

Doubts are also raised about whether shifting almost half of the EU's energy to alternative sources will help slow down global warming. According to a WWF report, only 10 EU member countries' wind energy development plans align with the Paris Agreement's goal to limit global warming to 1.5°C.

PHOTO: Aerial view of wind turbines park in the North Sea, off the coast of Denmark. SOURCE: Getty Images.

Tackling Bureaucracy and Reducing Dependence on China

Governments are ready to support wind energy to avoid a deeper crisis. Siemens Energy has reached an agreement with the German government for a €15 billion extension of financial guarantees. This will help the company continue participating in major renewable energy projects. The UK government has increased support for new offshore wind farms by 66% to stimulate investment in this sector.

In addition, Brussels has presented a new wind energy development plan for the EU. The main tasks that should have been implemented "yesterday" include eliminating bureaucratic barriers and replacing imported components used in turbine production and other equipment.

As explained by EU Commissioner for Energy Kadri Simson, restrictions on permit issuance need to be eased. "In the European Union, four times more licenses for operating wind energy facilities have been issued than the number of projects under construction. This needs to be corrected," stated the EU Commissioner.

Import substitution is another crucial direction. Currently, China is the dominant supplier of many components for wind farms, including rare earth metals used in modern efficient generators.

"The EU is forced to purchase rare earth elements from China, which we use in permanent magnets and fiberglass for blades too. The blades of our wind turbines are made from it," says Giles Dickson, CEO of WindEurope.

First and foremost, Brussels wants to ascertain to what extent importing equipment from China could undermine the positions of European manufacturers and find alternatives to Chinese suppliers. The European Commission is also ready to "activate trade defense instruments" if necessary.

The only remaining question is what will happen to the cost of wind electricity for household consumers in the future. According to a report from the Potsdam Institute for Climate Impact Research, for the EU to achieve complete energy independence, at least €2 trillion is needed. Considering the tight deadlines for capacity expansion and the challenges the EU faces, cheap kilowatts are unlikely. At least until these massive current investments pay off. However, interest in wind stations is growing rapidly against the backdrop of supply problems and the rising cost of fossil fuels, primarily natural gas and oil.