Snatching defeat – What went wrong for Europe's wind power

In September 2023, the UK Government's auction for new offshore wind projects ended unusually: no developers took part. It was a remarkable outcome for a nation seen as the poster child for decarbonising national grids via wind power and one that had just two years previously completed a record-breaking auction of similar sites.

The UK's success came after a breakthrough decade for wind power in Europe when the levelized cost of electricity – which accounts for capital and operating expenditure per unit of energy – more than halved between 2010 and 2020, making wind competitive with fossil fuel alternatives.

Yet rising interest rates, soaring labour and commodity costs in the wake of Russia's invasion of Ukraine and the grip of energy security policies all conspired to rapidly engulf the industry. "After years of being used to costs just going down, supply chain costs spiked and capital costs increased," observes Paul Butcher, Director of Public Policy at Herbert Smith Freehills (HSF) "Maybe the reaction could have been quicker."

Despite such reverses, Europe's wind sector has carved out a robust position faster than many expected, establishing itself as a commercially proven industry with ESG credentials while generating nearly a fifth of Europe's electricity. Moreover, wind remains central to European nations' energy transition agenda as the region plots a dramatic expansion of renewable power to meet net-zero goals. Aside from marginal debates about the aesthetic merits of onshore wind, offshore power – which has huge growth potential and attracts much industry focus – is a sector that largely avoids the controversies that plague many clean power applications.

In short, much rides on how quickly and successfully the industry can recover from the market shocks of the last two years to position itself for what should be a crucial decade. Continuing our Chasing Zero series exploring the key debates within the energy transition, the second of a two-part special on wind power assesses what went wrong in the European market, how the industry has responded, and what its future holds in the race to net zero.

How to REPowerEU

The turbulence in the European wind market is ill-timed, coming as the bloc must start replacing or upgrading its original generation of aged wind farms. According to WindEurope, an industry body, about a fifth of the continent’s roughly 90,000 onshore turbines are at least 15 years old. This is well past middle age for a technology with a lifespan of around 20 years and a substantial challenge for a sector being called upon to simultaneously expand capacity. "A lot of the first-stage onshore wind projects are reaching the end of their lifecycle," says Paris-based HSF partner Rebecca Major. "We're having to see more and more repowering projects."

Modernisation is a complex process. Many of Europe's wind farms were erected on prime energy-generating sites. To ensure efficiency, the ideal course would be to break down old turbines and replace them with fewer, more powerful machines. WindEurope estimates repowering a site in this way would triple its annual energy output.

Some large-scale repowering has already taken place. The Windplan Groen project in the Dutch province of Flevoland saw 98 turbines targeted to be replaced by 90 more powerful machines, taking the site from around 168MW capacity to 500MW. Developer Vestas has been heavily involved in the project.

But there are fears repowering is not making up enough of Europe's net zero drive due to the industry's wider capacity challenges as well as a lack of lucrative government-backed subsidies.

Acceptable bargains – The future of Europe's wind industry

For all its challenges, wind is still an attractive investment, combining scale, a proven business model and ESG credentials in a way few comparable projects rival. As a result, financiers remain largely undeterred by the vagaries of the market, argues Booth: "It's interesting talking to the banks about how to finance into this space; how to incentivise and use elements of circular economy thinking and ESG principles to bring money through at the right rate to make projects happen. I don't see that stalling. While cost of capital has gone up and there are real risks sitting underneath that, I don't see a lack of appetite to invest into this industry."

The challenge for Europe's industry is how to move through a short-term beset by volatile markets and bottlenecks to resume building on wind power's unquestioned fundamentals. One response by industry is to manage market risk by diversifying income between various state-backed schemes and corporate agreements, according to Lucy Dolton, lead analyst for assets and infrastructure at market intelligence consultants Cornwall Insight. "What we have seen are some offshore wind sites opting for a combination route to market. This could be putting some capacity into the CFD, some into the capacity market, and some signed in a corporate power purchase agreement. We've seen interesting approaches where they've decided not to put all their eggs in one basket."

Despite such attempts to adapt to shifting market dynamics, the underlying question remains simple for developers and investors: commit to a project despite rising costs or look elsewhere in hopes of better returns.

Such shifts will ultimately require new levels of honesty with European voters about the trade-offs, argues McDonald: "Governments need to recognise the costs of implementing wind projects are not fixed. They need to ensure the bargain is an acceptable one from the perspective of the project developer. There is a levelling that needs to happen between politicians and the people about the cost, which is starting to happen. Ultimately, the money to pay for the energy transition has to come from the people."

But despite the challenges, developments are going ahead – WindEurope expects the EU to build 200GW of new wind capacity between 2024 and 2030, albeit while missing its 42.5% renewable energy target.