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Shell disappoints with wind farm withdrawal

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Common sight: An offshore wind farm,
three km from Copenhagen harbour

Daily Telegraph: Shell disappoints with wind farm withdrawal

Last Updated: 1:02am BST 02/05/2008

Government aspirations for renewable energy may be thwarted by the oil major’s decision to pull out of the London Array, reports Russell Hotten

A lot of people said they were “very disappointed” yesterday – Environment Minister Hilary Benn, the chief executive of E.ON UK, Dr Paul Golby, and Friends of the Earth campaigner Nick Rau. In truth, though, being disappointed was probably a euphemism for being pretty damn angry.

Royal Dutch Shell’s shock decision to withdraw from the London Array wind farm may have wasted plenty of time and money, but it has certainly dealt a significant blow to the UK’s ambitions to meet emissions reduction targets. To have united the diverse interests of the Government, energy firms and the green lobby, is no small feat. But Shell achieved that yesterday.

The £2bn wind farm would be the world’s largest, built in the Thames Estuary and pumping out enough renewable power to supply a quarter of homes in the Greater London area. Shell had teamed up with Germany energy giant E.ON and Denmark’s DONG Energy to install and run up to 341 turbines and produce 1,000 megawatts of power.

Shell has now thrown the London Array into disarray, putting its stake up for sale to concentrate on cheaper and easier onshore wind farm projects in the US. Dr Golby said E.ON remained committed to the project, but accepted that Shell had thrown a huge X-factor into the equation.

“Shell has introduced a new element of risk into the project which will need to be assessed,” Dr Golby said. “The current economics of the project are marginal at best… I believe that, at the very least, some delay to the project is now inevitable.”

Even if Shell can find a buyer, there will be question marks over whether E.ON and DONG can work with them and whether the London Array business model will have to be completely redrawn.

Most major European energy firms, including the UK’s Centrica, are potential buyers of the Shell stake. So, too, are private equity firms. However, a source at one power company said yesterday that Shell should not expect a queue of buyers. “A lot of money has already been committed elsewhere.”

Wind farms are a key part of the Government’s strategy to produce 15pc the UK’s energy needs from renewable sources by 2015 with an “aspiration” to produce 20pc by 2020. Given that current renewable output in the UK is just 2pc, the targets were already seen as ambitious. It is clear that the Government will want some answers. Yesterday, Mr Benn told the Commons: “I have to say, the news that Shell wishes to sell its stake is very disappointing. And I think a lot of people would want to understand why, especially in a week in which the company has announced record profits.”

On Tuesday, Shell posted a 12pc rise in first quarter profits, to $7.8bn (£3.9bn), on the back of soaring oil prices.

Shell’s view is that it would not make such profits if it invested in projects like the London Array. Quite simply, the costs of wind farms are spiralling out of control. The price of steel and turbines is soaring. Ships needed to install turbines are booked out for years to come. Siemens, which makes turbines, has no spare capacity.

Shell’s views have been echoed by Centrica, the owner of British Gas, which is planning a £3bn expansion into alternative energy. Centrica is already building a £300m offshore wind farm, and is planning an additional project costed for the moment at £600m. The company said yesterday: “There are real cost and supply chain challenges out there.” Centrica is talking to potential investment partners, including private equity firms, about additional finance for the wind farms.

The Government has laid down targets for energy companies to build 33 gigawatts of offshore wind farms by 2020. Three years ago, the industry estimated that meeting this figure would mean £40bn of investment. But Sarwjit Sambhi, Centrica’s director of power generation and renewables, told The Daily Telegraph in March that the cost of building 33 gigawatts is now £80bn. The Government’s “wind dream” was under threat, he said.

Shell makes much of its environmental credentials, even though only about 1pc of its investments are in “green” projects. The company has stakes in 11 wind farms in Europe and America – the majority being onshore in America, with combined capacity of 1,100 megawatts.

But the London Array decision will not help Shell’s green image. The company has already sold much of its solar power business, and is a large and expanding investor in Canada’s tar sands, where oil extraction has been criticised for its huge CO2 emissions.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/02/cnshell102.xml

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