LONDON—A major European utility said Tuesday it would scrap a wind farm that was due to become the largest offshore wind project ever built, a sign of the struggles the industry is having in attracting investment.
The Atlantic Array, in the Bristol Channel off the west coast of England, could have generated up to 1,200 megawatts of electricity, almost twice as much as the largest farm operating in U.K. waters. But RWE said that continuing with the project faced problems that were “prohibitive in current market conditions.”
RWE’s decision highlights the central difficulty in achieving Europe’s wind targets. Huge projects are planned, but few investors are willing to stake the billions needed to build them in an environment where government subsidies are essential but uncertain and costs can skyrocket.
The U.K. has pioneered offshore wind power, maximizing its island status with more turbines than any other country, but some investors have balked at the relatively new technology and the cash outlay needed for the next phase of development.
“You worry at the moment, when [offshore] is very expensive, and relies on a long-term government contract at a very high price. And you also don’t know how it’s going to be to operate in very harsh conditions” out at sea, said Emma Tinker of private-equity firm HgCapital, a long-established investor in renewable energy.
Investors are essential to offshore wind’s future. The U.K. is planning to increase offshore-wind energy production from 3.65 gigawatts now—enough to power 2.5 million homes—to 39 gigawatts in a construction phase stretching out to 2030. But the financial outlay is huge: £37 billion ($60 billion) is needed to achieve 16 gigawatts, or less than half the total, according to industry body Renewable U.K.
HgCapital, which has £5.6 billion under management, is putting its money into onshore wind and solar, technologies that could be competitive with fossil-fuel power and “shouldn’t need cash subsidies” within five years, according to Ms. Tinker. The high cost of building offshore wind generation, by contrast, means that government support is required to make the price competitive.
Utilities have historically funded the building of energy-producing facilities. But the expense of technologies like offshore wind is driving them to seek a wider range of investment.
“The utility industry is not able to fuel the capital needs for the growing offshore industry on its own. We need to tap into new sources of capital,” said Samuel Leupold, head of wind power for Dong Energy.
Dong has already committed a lot of money to European projects. This month it said it would pour €2.2 billion ($2.97 billion) into two German offshore projects, and it has invested €3.5 billion in U.K. offshore wind farms. Outside investors have taken stakes worth €2.5 billion in the company’s already built farms.
Finding investors to finance construction is much harder.
“You have to spend a huge amount of money before the first turbine starts to turn…You could have a couple of years where you have hundreds of millions of pounds out and no return,” said Richard Nourse, managing partner at Greencoat UK Wind, an infrastructure fund that invests solely in British wind farms but won’t risk money on building offshore installations.
Greencoat did buy part of the Rhyl Flats Offshore Wind Farm, off the coast of north Wales, from RWE, but only when it was up and running. “We tell our investors, day one, that we own the asset, it’s turning, and the proposition to investors is about a good, safe, growing income,” Mr. Nourse said.
To make matters worse, the bounty of cheap oil and gas from U.S. shale has made renewable energy even less competitive.
Advocates of green energy say sticking with fossil fuels is a short-term plan. But the market preference for cheaper alternatives means only government can force through plans for new, expensive technologies.
Of these, offshore wind is arguably the priciest, and uncertainty over how subsidies will work is another reason for investors hanging back.New energy legislation, due to pass in the U.K. before year’s end, might provide some clarity. But utilities remain concerned.