Last week we wrote about how, while rather depressing, the move by the United Kingdom to "shift gears" in its climate commitment was more realism than denialism. We hoped that it would mean a serious grappling with the real and very tough tradeoffs involved in the carbon transition.

We also detailed that the United Kingdom wasn't alone. Other rich and developed countries are finding out that there are real limits - politically and also economically - for how fast you can move away from fossil fuels and achieve the infamous Net Zero.

This is not a popular opinion but we thought it was worth pointing out that, even in the UK, the political opposition is mindful about reversing the Conservative policies if and when they are in power.

"Mindful" is another shorter way of saying they are not going to do it.

So, we argued that the political resistance to Net Zero was both unsurprising and also perhaps useful to re-focus and reevaluate a lot of the grandiose and cheap talk of the past.

The other problem with the march towards Net Zero is perhaps a bigger problem:

Some of the economics of renewables no longer work.

A lot of the big talk around renewables were based on pre-pandemic thinking. That involved some big assumptions.

Namely, there were inbuilt expectations around:

• Low interest rates.

• Low inflation.

• Stable global trade.

Continuing for the foreseeable future. Regardless of how sensible that was all three of those assumptions haven't just been tested over the last few years. In many respects they have been blown out of the water.

This is now having a knock on effects on renewable energy specifically around the costs and feasibility of some big and important projects. Nowhere more so than the US Atlantic coast and the revenues of one of the world's largest renewables enterprises.

Green investors and renewable fans everywhere had a rude awakening when Ørsted, a major Danish wind firm, announced that it would likely have to take an impairment charge of $2.3 billion on its projects off the US Atlantic coast.​

An impairment charge is simply: we said this project would come in at X, now it costs X+$2.3 billion. You obviously have to let your shareholders know when they are going to be on the hook for an extra couple billion.

Not ideal if you hold the highly ESG rated Ørsted shares but also not ideal for the likelihood of major amounts of wind power in the Atlantic any time soon.

​For some very necessary context, the Biden administration has been aiming for 30 gigawatts of East Coast wind power by 2030. That was always ambitious and we would have taken the under on permitting alone but now the entire effort is increasingly at risk.

The impairment charge is a warning bell signaling not just the difficulties of one or two projects but rather the whole idea of offshore wind in the US Eastern seabed.

The reasons Ørsted gave will be familiar to our readers, in no particular order:

• Supply chain problems.

• Dramatically higher interest rates

• And a lack of new tax credits.

Ahem.

Obviously, investors really hated hearing this news. The share price tanked. Ørsted's shares fell by some 20% in a single day.

That plunge may have less to do with the charge - which is sizable - or the hit to profits - there won't be any - so much as the fact that the company might just walk away from its projects. That means they won't happen or at least won't happen any time soon.

This was a wake up call for many people to realize that a whole chunk of Ørsted's business might just disappear.

Prices have fallen a lot in the last year and pandemic related supply chain issues have ameliorated quite a bit as well but basic inputs like steel are still some 40% higher than they were in 2019. And permitting is, of course, proving to the nightmare without end that it always is when trying to do a large, complex and controversial infrastructure in a litigious federal system.

Some of this must surely be laid at Ørsted's door. The firm is dramatically underperforming its peers like Vestas and it seems unable to even predict how many tax credits it will be getting from the US federal government.

It had originally predicted 40% for its Atlantic projects and now, thanks to local content requirements in the Inflation Reduction Act, that has already fallen to 30%.

That dovetails with our earlier point about US government policy trying to achieve too many conflicting goals. Do you want cheap renewable energy projects done quickly or do you want them made with locally produced supplies? You may not be able to have both....

But it also should be something Ørsted can handle. After all, when you are in the business of building large renewable sites then dealing with and projecting the policies of government must be one of your core competencies.

Unsurprisingly the uncertainty around if and when these projects will be finished has been a dampener on expectations around both the amount of renewable energy and its cost.

As Ørsted CEO Mads Nipper recently told Bloomberg News: it is “inevitable” that consumers will have to pay more for renewable energy. “And if they don’t, neither we nor any of our colleagues are going to build more offshore,” he argued. “It’s very simple.”

That was no doubt both a threat and a pitch for more tax credits and subsidies but it would appear to be working. A slate of US East Coast state governors have written to the federal government asking for more financial assistance.​

We don't know if they will be successful but the twists and turns that all of this creates is pretty tough to watch. It also raises some questions"

• Are these projects even viable?

• Will they truly help combat climate change? How?

• Is offshore wind ever going to be profitable in this region?

But taking a step back, it might be even more important to ask - if the government agrees to new demands for more tax credits (i.e.: money) and subsidies what is to stop the wind firms from demanding yet more in a few quarters' time?

We are quite literally already sending more good money after bad....

it seems difficult and even unwise not to expect more demands. Which sort of raises the biggest question of all: could this money not be spent elsewhere more productively elsewhere?

We don't know if that is the case but we think the real experts should likely be raising it. And they aren't. Perhaps we should be grateful to the Ørsted CEO for saying out loud what no politician is willing to admit.

Green energy and renewable power are great when they make sense and can come in at cost and with a viable business model no matter the changes to the overall macroeconomic picture.

However, if they can't then you should stop and really take a hard look at both the projects themselves and the overall concept you are trying to achieve.

If we are about to build a bunch of overly costly wind power white elephants on our seashore that will be around for decades then that is something we probably want to nail down ASAP.

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