Offshore wind forms a crucial part of decarbonization strategies, as evidenced by expanding capacity targets from many governments.
Given the capital-intensive nature of these projects, however, rising interest rates can significantly impact project economics, turning many schemes into a financial burden on developers’ balance sheets.

Offshore wind projects require high up-front investment to win the rights to develop wind farms, secure development sites and construct and install large turbines, with median rotor diameters already exceeding 150 meters.
The Bank of England has been steadily increasing interest rates since 2022, with rates currently at 5.25% having been left unchanged at the most recent review on 21 September.
The European Central Bank, meanwhile, increased its interest rate by 25 basis point to 4.25% and then again to 4.5% in September.

The European continent had a lacklustre year in 2022 in terms of offshore wind developments with no final investment decisions (FID) made for commercial offshore wind farms, in part owing to the difficulties in obtaining financing and soaring service price inflation.
More recently, Swedish developer Vattenfall halted development of its Norfolk Boreas project off the UK in July this year, citing high interest rates and supply chain price inflation.
The Norfolk Boreas project was awarded at a low strike price of £37.35 per megawatt-hour (MWh) in 2012 prices which translates to around £47.2 per MWh in current terms.
The low strike price has been cited as a significant factor in Vattenfall’s decision to halt the project since the profitability of the project was adversely affected amid the elevated cost of capital.

Danish developer Orsted won the contract for difference (CfD) for its Hornsea 3 wind farm on the same terms as Norfolk Boreas and is yet to reach FID on the project, pointing out the risk of the project being put on hold due to the current economic climate.
Moreover, Orsted saw an unprecedented drop in its share prices after it declared potential impairment charges amounting to $2.3 billion for its US portfolio.

In the US, developers have been seeking to renegotiate strike price agreements to account for their increased cost of financing and components.
The US offshore wind industry being at a relatively nascent stage means the challenges for developers are further compounded in terms of the supply of key components, port infrastructure and shortage of Jones Act-compliant installation vessels.
While last year’s Inflation Reduction Act does provide credits to offshore wind developers, the conditions to receive full credits include wage and apprenticeship requirements as well as domestic content requirements, which can be challenging to meet in a fledgling supply chain.

It is not just developers that can be adversely affected by high interest rates – the cost of debt for service providers and equipment contractors can also rise, increasing the strain on already squeezed profitability.
For example, turbine installation vessels – a sector already seen as a near-term bottleneck in wind farm development owing to the tight supply of vessels – may see further increases in dayrates as contractors pass on their increased cost of debt to developers.

It will take policy support and an overhaul of the auction mechanism to refuel investments in offshore wind.
Meanwhile, challenges in the onshore wind sector appear to be easing in terms of demand certainty as the UK this week called an end to its de-facto ban on new onshore wind farms.
However, turbine suppliers that have only just begun to emerge from the era of rampant input cost inflation and supply chain disruptions will be looking to recoup profitability by increasing their average selling prices (ASP).
Western original equipment manufacturers have steadily increased their ASPs, as shown in Figure 2 below, which has increased the strain on an already hard-pressed sector.