[Stalled Sea Winds]② "Construction Costs Soar 30% After Operator Selection... Government and Banks Turn Away from Financing"

Project Costs Exceed 3 Trillion Won...
"Uncertain Investment Recovery" Halts Offshore Wind Power
Domestic Turbines Lag Behind as Foreign Firms Dominate
Offshore Wind Power Ecosystem in Turmoil

The "Shinan Ui Offshore Wind Power" project, which aims to build a 400MW-class offshore wind farm off the coast of Ui Island in Shinan-gun, South Jeolla Province, was selected through the Ministry of Trade, Industry and Energy's fixed-price bidding in 2023. At that time, the project cost was 2.5 trillion won, but it was increased to 3.1 trillion won in last year's preliminary feasibility study by the Ministry of Economy and Finance to reflect the surge in material costs, and was later adjusted again.

Korea Offshore Wind Power Co., which is pursuing an offshore wind power project of similar scale in Buan, North Jeolla Province, expects the project cost to be 3.2 trillion won, or about 8 billion won per MW. An industry official in the offshore wind sector said, "Just two years ago, the investment cost per MW was 6 billion won, but now it has jumped by about 30% to over 8 billion won," adding, "Costs are expected to continue rising in the future."

◆ "European Turbines: Name Your Price" = The biggest reason offshore wind projects have stalled is lack of economic viability. As project costs soar, profitability declines, and as a result, many projects selected as operators in government bids cannot proceed to construction. Public sector projects fail to pass preliminary feasibility studies, while private projects struggle to secure financing from banks, making progress difficult. Korea South-East Power, which withdrew from the Shinan Ui Offshore Wind Power project, also failed to pass the preliminary feasibility study.

The CEO of an offshore wind EPC (engineering, procurement, and construction) company said, "Due to the surge in inflation following the Ukraine-Russia war, material costs have risen, causing construction costs to increase sharply beyond initial expectations," and added, "As the recovery of investment becomes uncertain, financial institutions are reluctant to provide funding."

Offshore wind power projects are large-scale, worth several trillion won. For this reason, it is common to cover only 10% of the total project cost with equity, while the remainder is financed through project financing (PF). While public institutions or foreign developers find it relatively easier to secure funding, projects led by domestic private companies are considered high-risk, making it difficult to obtain loans from financial institutions.

According to Korea Development Bank, as of last year, the capital required for renewable energy generation by 2030 is estimated at 188 trillion won, with 161 trillion won to be financed by financial institutions. Of this, wind power accounts for 105 trillion won (65.2%). The bank analyzed, "For offshore wind power projects that require early-stage investment, financial institutions are reluctant to lend," and emphasized, "There is an urgent need for venture capital willing to take on risk at a level of about 30% of the total project cost."

The key factor driving up project costs is wind turbines. Due to the trend toward higher capacity, recent bids have been dominated by European turbines such as those from Vestas and Siemens Gamesa. Domestic wind turbines from Doosan Enerbility and Unison remain at the 10MW demonstration stage. Chinese turbines also attempted to enter the market but were pushed out in last year's bidding due to negative perceptions.

Turbine prices continue to rise. One offshore wind farm began contract negotiations at 2.2 to 2.3 billion won per MW, but the final offer was 2.6 billion won. A project official said, "The internal rate of return (IRR) needs to be at least 6.57% for the project to be viable, but as turbine prices rise, it has dropped to 5%, making financing difficult." The fact that European suppliers require the use of expensive wind turbine installation vessels (WTIV) is another factor driving up investment costs. Chartering a European WTIV costs several hundred million won per day.

◆ Domestic Offshore Wind Power Dominated by Public Enterprises and Foreign Developers = Due to complex permitting, uncertain business prospects, and financing challenges, major domestic conglomerates have already withdrawn from the offshore wind market. An official from an offshore wind development company said, "There is no reason to take on the burden of a payback period of over 10 years, resident compensation issues, and complicated permitting."

Currently, the domestic offshore wind market is left to foreign developers, some public power companies, and a few specialized developers. According to the Korea Wind Energy Industry Association, as of the end of last year, foreign developers accounted for 18.67GW (61.2%) of the total 30.53GW of approved generation capacity, and 44 out of 90 approved projects (48.9%). Foreign companies such as Equinor (Norway), Orsted and CIP (Denmark), and TotalEnergies (France) are forming special purpose companies (SPCs) with Korean firms to carry out development. The head of the Korean branch of a foreign developer said, "When global developers with high credit ratings participate, it becomes easier to secure financing, which helps foster the offshore wind ecosystem."

Within the wind power industry, there has been much criticism that policies focused on localization have caused project delays. Starting this year, the government has decided to separate public tenders in offshore wind power fixed-price bids and provide incentives for the use of domestic equipment.

An equipment supplier representative said, "As a result of emphasizing the domestic supply chain, European turbines have swept the market, and as investment costs have risen and economic viability has deteriorated, only foreign developers remain." Another industry official commented, "Trying to save specific companies is ruining the ecosystem."

European turbines are 30% more expensive than domestic or Chinese ones, leading to higher levelized cost of energy (LCOE). The industry suggests that utilizing Chinese turbines would create price competition and encourage technology transfer. An industry official pointed out, "Even European turbines mostly use Chinese parts," and added, "Blocking Chinese products unconditionally is just turning a blind eye to reality."