Author Sam Lin
Updated March 29, 2023

Unexpected macroeconomic events sent energy and raw material prices surging, disrupting supply chains, adding to worldwide inflation due to stimulative monetary policies. Susceptible to raw material prices and reliant on capital invenstments, the construction of offshore wind farms took a direct blow. The EU’s annial inflation was 9.3 in 2022, whilst US CPI reached beyond 7% every month except for December. The runaway inflation forced governments to accelerate interest rate hikes. The European Central Bank's main refinancing operations (MRO) rate rose from 0% in June 2022 to 3.00% in February 2023, and the U.S. Federal Funds Rate rose from 0.08% in March 2022 to 4.83% in March 2023, affecting investment decisions, procurement, and power purchase agreements (PPA) of wind farms.

Delayed investment decisions force wind farms to review PPAs

Soaring global inflation has affected wind farm investment in the past six months. According to WindEurope, except for several small floating wind farm projects, the EU saw no offshore wind farm reaching financial close in 2022, largely because inflation drove up turbine cost by 40% and its market inventions of a EUR 180/MWh price cap to tackle surging energy prices, which cast uncertainties about future price fluctuations for equipment and revenue, deterring developers.

On the other side of the Atlantic, developers in the U.S. struggled too. The Mayflower Wind Farm and the Commonwealth Wind Farm requested to renegotiate PPAs due to rising construction costs and financing difficulties in November 2022, but were declined by the Massachusetts Department of Public Utilities. Commonwealth Wind Farm appealed the decision to the state Supreme court in January 2023, while Mayflower chose to continue the construction. The Sunrise Wind Farm in New York, the Park City Wind Farm in Connecticut, and the Ocean Wind 1 in New Jersey also had to adjust valuation or equity in response to rising costs, because many PPAs were signed before 2022, when no one could have thought of Russia's war in Ukraine. Park City and Sunrise signed in 2019, and the Mayflower and Commonwealth won the bid in 2021. 

Soaring turbine prices is a key factor pushing up construction cost


Macroeconomic impacts2

Turbine prices ceased declining, affecting the estimation of construction costs. Inflation and rising transportation costs increased manufacturing costs. Meantime, supply chain blockage led Siemens Gamesa and Vestas to pay their customers penalties for late delivery. Under double pressure, the profitability of system manufacturers deteriorated. Siemens Gamesa lost EUR 942 million in fiscal year 20221, while Vestas' power solutions business recorded a loss of EUR 1.5 billion euros in 20222. The massive deficit resulted in factory layoffs, mergers, and a 40% increase in current turbine prices over two years ago. Had been carrying cost pressures, system manufacturers raised turbine prices for consecutive quarters, overthrown developers' assumption that "turbine prices will continue to drop." Since turbine accounts for 30% of development costs, banks worry whether developers' original financial model is still feasible, while developers fret about lower-than-expected return if they rush into investment.

In addition to turbines, price hikes for steel and copper also increased prices for equipment that comprise large amounts of metal, such as underwater foundations, power systems, and submarine cables. With copper taking up 60% of the total manufacturing cost,  these infrastructure are highly susceptible to fluctuations in raw material prices. Furthermore, Europe's expansion into deep waters and the short supply of global installation vessels built up construction costs even higher.  Doubled with price fluctuations, developers find it difficult to build a solid financial model. As mentioned, central banks are raising interest rates to curb inflation, driving up the risk-free interest rate. The 10-year U.S. Treasury yield reaches beyond 3%, nearly 4%. Banks will request higher interests from developers. As more than 70% of capital expenditures (CAPEX) of most wind farms come from debt financing,  even an interest rate hike of 1% can increase CAPEX considerably.

Impacts on wind farm CAPEX


Industry responses 

Inflation has yet to be tamed. Prices for copper and iron ore rebound in November 2022. The Federal Reserve (Fed) raised interest rate by 25 basis point in March as expected. Pressures from rate hikes and inflation are likely to persist for the foreseeable future. The only good news is that the China Containerized Freight Index (CCFI) has fallen from its historical high, indicating easing supply chain congestion.

All markets should stick to their offshore wind power policy goals despite inflationary pressure.  Wind farms currently under construction may remain intact if protected by Feed-in Tariffs (FIT) or government subsidies, thus financially healthy, as developers should be able to bear the burden on their own. For instance, in Taiwan, generous FIT rate provide a strong financial buffer. Except for the Yunneng Wind Farm, no wind farms under construction face default risks due to soaring costs.

Markets will be less likely to see wind farm applications decrease, if supported by policies such as in the U.S. In the previous example, the state of Massachusetts refused to renegotiate PPA prices on the grounds that the Inflation Reduction Act (IRA) can cover the rising costs of wind farms. Additionally, the New York City is estimated to have installed 4.3 GW of capacity, whilst attracting six developers in the third round of tenders, suggesting resilient strength of the US market in the long run. In Europe, however, developers hold off investments as high inflation volatility makes it difficult for them to predict long-term price trend. Given that, the EU presented the Green Deal Industrial Plan, aiming to accelerate permitting procedures and financing of renewable energy infrastructures and to stabilize the supply chain. The plan also limits offshoring driven by the IRA. Specific measures have yet to be introduced. Therefore, the price cap set by the EU should not be the primary cause to the decrease of wind farm application, for the profit margin between the price cap and operating costs is already attractive to investors. 

Inflation and rate hikes pose challenges to wind farm construction. InfoLink believes the difficulty in valuation and the rise in construction costs due to rampant inflation to be momentary and may be controlled within a year, while the pressure brought by rate hikes may last for over a year. High interest rates will change the landscape of capital supply, meaning the flood of cheap money in the past will subside, putting pressure on all capital-intensive industries, including the offshore wind industry. Still, it is uncertain how contagious the sudden bank failures recently are and whether it will force central banks to break from its interest-raising cycle.

1: Siemens Gamesa’s Activity Report – Fiscal Year 2022 (October 2021-September 2022):
2: Vestas Annual Report 2022:

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