Swedish giant utility Vattenfall has recently halted a wind farm project, the Norfolk Boreas offshore site off the UK, citing costs that had become inflated by 40%.

The 1.4-GW project would have been the first of three wind farms off the UK with a total capital investment of around GBP10bn-11bn ($12.9-14.2bn).

“What we see today, it simply doesn’t make sense to continue this project,” said Vattenfall’s chief executive, Anna Borg.

The move rattled an already gun-shy sector that has faced cancellations and doubts on both sides of the Atlantic as costs surged for materials such as steel, transport and labour. It has also undoubtedly rattled the UK government, which is relying on offshore wind as a major part of the energy transition.

In mid-July, the main energy utility in the US state of Rhode Island declined to advance the 880-MW Revolution Wind 2 wind farm because it said the project would not reduce energy costs enough. The joint venture is owned by Danish sector leader Ørsted and US utility Eversource.

At the time, Mads Nipper, chief executive of Ørsted, took to social media to complain. Capital costs and prices such as wind turbines, cables and other equipment have “gone up sharply”, he said. “This means that [the] price of renewable energy regrettably must come up temporarily after years of steep decline.”

Meanwhile also in the US, Commonwealth wind off Massachusetts was recently allowed to exit contracts with local utilities for a $48-mn penalty. Avangrid’s Commonwealth had said that the project was no longer economical – with soaring inflation – and that the power purchase contracts should be increased, and the utilities refused.

Avangrid is a division of the Spanish giant Iberdrola. Avangrid hopes to bid the project into another auction in 2024.

After Vattenfall’s announcement regarding the Norfolk Boreas project, the UK government spoke out. “We understand there are supply chain pressures for the sector globally, not just in the UK, and we are listening to companies’ concerns,” the UK Department of Energy said. The UK has a target of 50 GW of wind capacity, up from about 14 GW currently.

This comes as the effects of climate change are becoming ever more obvious, the world’s grids are being strained, and there is a need for more lean fuel to meet net-zero targets and the Paris Agreement not to raise temperatures more than about 1.5 degrees Celsius compared with pre-industrial times.

Countries are also seeking energy security in the wake of the turmoil in the energy markets after Russia’s invasion of Ukraine in February 2022.

“Energy coming from these projects is desperately needed,” said Helene Bistrom, head of Vattenfall’s wind business, on a recent earnings call. “With new market conditions, it doesn’t make sense to continue,” she said.

The signs of an impending stagnation have been apparent for some time. In July, Ørsted chose to exit a landmark German seabed lease auction because of high prices. BP and TotalEnergies, oil and gas companies with deep pockets, won instead, paying the equivalent of $14mn to develop the seabed leases.

Then in June Ørsted had pared back its global offshore wind ambitions from 30 GW by 2030 to 28 GW as it reassessed projects in the US, Taiwan Vietnam and Poland.

Projects could be delayed or costs cut by use of different technology, executives said.  Ørsted would even be “prepared to walk away from these projects,” group president Mads Nipper had warned, if the value creation was not acceptable.

Previously Nipper had said that offshore wind projects were being “hit by a tsunami” of inflation and interest rate hikes. He spoke at a summit in April.

In March, Ørsted had said that its giant 3-GW Hornsea 3 project, said to be the world's largest wind project, might have to be paused unless it gets government support, as costs have risen so fast.

Despite the Inflation Reduction Act (IRA) of 2022, at least 9.7 GW of projects in the US are at risk because their developers want to renegotiate or leave contracts that they say offer too low a price for their projects, said BloombergNEF. The contracts were signed before inflation hit.

Vattenfall said it would “not take an investment decision now” on Norfolk Boreas, instead booking an impairment charge of SEK5.5bn ($537mn).

As recently as July 2022, the project had won a contract for difference (CfD) in a UK auction, giving it a minimum price of GBP37.35/MWh in 2012 prices for the output, about GBP45/MWh currently.

The results of the auction, with record low prices, were welcomed by UK ministers at the time as a sign of the offshore wind’s falling costs.

But Kathryn Porter of Watt-Logic, a consultancy, told the Financial Times that the contracts ignored the “economic reality” of already apparent cost pressures. “When it came to last summer, there was no justification for a lower price,” she told the FT.

“The announcement from Vattenfall to halt the development of the Norfolk Boreas wind farm signals the beginning of what could become a genuine crisis,” Megan Smith, associate director of offshore wind at the Carbon Trust, said to Bloomberg.

“Policymakers must take note and swift action to ensure further developers and wind farms do not follow the same path,” she said.