U. S. Offshore Wind Project Woes and Challenges Going Forward

 

     U.S. offshore wind projects have been struggling through much of 2023. Higher interest rates, inflation, supply chain challenges, and uncertainty about incentives have led several U.S offshore wind developers to face impairment charges that could kill the projects or more likely lead to rebidding power purchase agreements (PPAs) and increasing future power costs for ratepaying consumers. Orsted, Avangrid, SouthCoast, Equinor, BP, and others have been warning that projects may now not be viable at previously negotiated terms. The wind developers are calling for contract changes, but the utilities are saying that adjusting contract prices would set a bad precedent for future solicitations. According to Utility Dive (and New York State Energy Research and Development Authority (NYDERDA)): “Clean energy developers have been asking utility regulators across the U.S. to provide relief from inflation including in California, Connecticut, Hawaii, Indiana, Maine, Maryland, Massachusetts, Michigan, New Jersey, New Mexico and Rhode Island, according to NYSERDA” Thus, the financing and economic viability issues are likely not confined to offshore wind or even just wind, but likely encompass onshore wind, solar, and battery storage projects as well. As shown below, rising costs for solar have been on a similar though slightly less drastic trajectory.

     Eversource Energy faced Q2 impairment charges of about $250 million when it sold its 50% stake in its Atlantic Coast offshore wind projects to partner Orsted in late May 2023. By late August, Orsted was threatening to abandon U.S. offshore wind projects unless PPAs were re-negotiated. In July a project involving Orsted and Eversource offshore Rhode Island was cancelled. Spanish utility Iberdrola (Avangrid) paid about $49 million to cancel a project offshore Massachusetts in July. Even with high fees for several project cancellations, those fees are often less than 1% of total project costs. Eversource Energy, National Grid, and Unitil agreed to terminate the PPA with Avangrid that was negotiated in September 2021 and signed in April 2022, before interest rates and cost of capital climbed. Avangrid had been wanting to re-bid the project since late 2022. 

By early September Orsted was threatening to abandon its U.S offshore wind projects unless the Biden administration could offer more subsidies and ease domestic content requirements. If Orsted abandoned the projects, it would threaten the Biden administration's goal of 30GW of offshore wind capacity by 2030. Orsted proposed a grace period of 3 to 5 years, presumably for the domestic content requirement. The Inflation Reduction Act provides more than 30% in federal subsidies for these projects. Orsted CEO Mads Nipper warned that offshore wind plays are currently ‘uninvestable.’ He also noted that the company lost $8 billion in value from investor selloffs, much of it due to impairments in the U.S. offshore wind sector. Inflation has also been cited as the reason for canceling a U.K. offshore wind project by Swedish developer Vattenfall AB. While offshore wind has higher wind speeds, is generally more reliable, and can produce much more power than onshore wind, the upfront costs are 2-5 times higher. The high upfront costs of renewables projects in general make them more sensitive to borrowed capital costs so interest rates due to inflation will affect them more than say, natural gas power plant projects, where some of the major costs such as fuel are not paid up front.    

     Zero Hedge’s Tyler Durden notes Bloomberg reports that U.S. offshore wind project costs have risen by 57% since 2021. Inflation in component costs, labor costs, and rising interest rates have all contributed. The results are increasing numbers of canceled or renegotiated deals. Those renegotiated deals will affect consumers. NYSERDA predicted an increase of 4% or $4.67 per month in ratepayer’s utility bills from renegotiations alone. That is an increase from already higher than national average power costs. He notes that nearly 10GW in U.S. offshore wind projects are at risk. Bloomberg New Energy Finance (BNEF) reported that the levelized cost of electricity (LCOE) for offshore wind increased from $77.3/MWh in 2021 assuming a 30% ITC to $114.2/MWh in 2023 assuming a 40% ITC. Thus, even with added incentives, this is a 48% increase over two years. In fact, as the graph below shows the increased costs due to capex/opex rises and interest rates were nearly 5 times the additional tax credits.    

 

U.S. is Far Behind Europe and China in Offshore Wind but Catching Up Won’t Be Fast

     The current economic challenges in the fledgling U.S. offshore wind sector will further slow U.S. offshore wind development. There are many needs for the sector in addition to more stable financing and none of the required changes will happen fast. There is a need to develop domestic supply chains, domestic manufacturing, make ports suitable, ships to move components, changes in shipping rules, and skilled labor. The IRA includes a 10% tax credit for domestic content in U.S. wind but more factories, raw materials (including less readily available rare earth elements (REEs)), and skilled labor are needed. Simply put, inflation and its result, the higher cost of borrowing, is slowing the energy transition at a time when the IRA and other incentives have intended to speed it up. Thus, the benefits of all these incentives will likely be burned up in the higher upfront costs of project development. Reuters reports: “Around 2,100 turbines and foundations, 6,800 miles of cable, 58 crew transfer vessels and four to six turbine installation vessels are required to meet President Biden's 2030 offshore wind target, the National Renewable Energy Laboratory (NREL) said.”

     The simple fact is that offshore wind in the U.S. is new, with just 30MW of capacity in actual operation from two projects, even though thousands of MW of capacity are in various stages of development.

 

 

As the table below shows, just less than 1GW is actually under construction, and final investment decisions (FIDs) pre-construction were at 0 as of May 2023.

 

 

According to the U.S. Dept of Energy’s Offshore Wind Market Report: 2023 edition, released in August with data through May, two independent market forecasts by Bloomberg New Energy Finance and 4C Offshore shown below indicate that 30GW of capacity by 2030 won’t happen, with the forecasts showing 23GW and 26GW respectively. The report did not seem to address the increased costs of borrowing. While Utility Dive reported that 17GW of wind was ‘under construction’ the US DOE’s 2023 report during the same time period showed just 932MW under construction. The DOE shows other project statuses as well, so I think their definition of ‘under construction’ better reflects actual construction rather than just paperwork and site control development. Utility Dive does give a note that explains their methodology: “Wind farms under construction are listed once their developers release specifics on their size and location.” Thus, the DOE’s numbers reflect actual construction vs. possible/probable construction. Utility Dive does note that there are 16 offshore wind farms representing 17.9GW of capacity under development that are expected to be operational through 2028, although that remains to be seen.

Source: U.S. DOE. Offshore Wind Market Report, 2023 Edition.

Global offshore wind targets show that China/Southeast Asia and Europe will continue to dominate.

 Source: Forbes. Offshore wind targets around the world outpace U.S. ambition. 2035 REPORT 3.0

In total cumulative wind capacity installed it is China that leads the pack, followed distantly by the U.K, which is in turn followed distantly by Germany. The rest of the world follows these three countries distantly. Thus, China currently has 900 times the installed offshore wind capacity as does the U.S.

Source: U.S. DOE. Offshore Wind Market Report, 2023 Edition.

New manufacturing facilities will be required to support a domestic offshore wind industry in the U.S. These are currently being developed but will also take time. 

 

 

Source: Forbes. Manufacturing facilities required to support U.S. offshore wind buildout domestically. 2035 REPORT 3.0, POLICY PRIORITIES

 

     

 The bottom line is that federal and state goals for offshore wind in the U.S. by 2030 are not likely to be met with typically optimistic BNEF forecasting only 77% progress by 2030. Energy writer Rober Bryce, who has long derided wind energy as too expensive, too resource intensive, and not energy-dense enough compared to other available energy sources, has been tooting his “I told you so” whistle. He is perhaps too pessimistic since inflation won’t be around forever and costs will likely come down at some point in the future. He also derides the effects of wind turbines on birds and whales, specifically the possible effects of high-decibel sonar mapping on whales. While I agree with Bryce that his N2N, or natural gas to nuclear strategy is a good one, we will still need more wind and solar. However, the overreliance on wind and solar in energy transition models is so impractical that it can be considered irrational. Much of that impracticality is economic impracticality due to modeling overly based on wrong assumptions and hype. 

References:

As Orsted, others seek up to 71% hike in clean energy contract prices, NYSERDA warns of rate increases. Ethan Howland. Utility Dive. August 31, 2023. As Ørsted, others seek up to 71% hike in clean energy contract prices, NYSERDA warns of rate increases | Utility Dive

Orsted Threatens To Abandon U.S. Offshore Wind Projects. ZeroHedge. OilPrice.com September 9, 2023. Orsted Threatens To Abandon U.S. Offshore Wind Projects | OilPrice.com

Wind Blows: Excellent news for ratepayers, birds, bats, landscapes, and whales as offshore and onshore wind projects get scuttled. Robert Bryce. October 4, 2023. Wind Blows - Robert Bryce (substack.com)

Offshore wind news and policy: Tracking the latest US developments. Diana DiGangi and Jasmine Ye Han. Utility Dive. June 6, 2023. Updated October 12, 2023. Offshore wind news and policy: Tracking the latest US developments | Utility Dive

Avangrid moves to cancel Park City offshore wind contracts on heels of SouthCoast termination. Emma Penrod. Utility Dive. October 4, 2023. Avangrid moves to cancel Park City offshore wind contracts on heels of SouthCoast termination | Utility Dive

Eversource sells 50% stake in offshore wind lease to partner Ørsted as it seeks a buyer for 3 other sites. Stephen Singer. Utility Dive. May 26, 2023. Eversource sells 50% stake in offshore wind lease to partner Ørsted as it seeks a buyer for 3 other sites | Utility Dive

PPAs rejected for Avangrid, Orsted-Eversource offshore wind projects. Diana DiGangi. Utility Dive. July 20, 2023. PPAs rejected for Avangrid, Orsted-Eversource offshore wind projects | Utility Dive

There Is A Financial Crisis Brewing In Offshore Wind Energy. Tyler Durden. Zero Hedge. August 3, 2023. There Is A Financial Crisis Brewing In Offshore Wind Energy | ZeroHedge

It’s Time For The U.S. To Chart A New Path For Offshore Wind. Michelle Solomon. Energy Innovation. Forbes. August 1, 2023. It’s Time For The U.S. To Chart A New Path For Offshore Wind (forbes.com)

Offshore Wind Industry Hits Rough Waters Amid Rising Costs. Haley Zaremba. Oil Price. Business Insider. October 3, 2023. Offshore Wind Industry Hits Rough Waters Amid Rising Costs | Markets Insider (businessinsider.com)

Cost crunch prompts mass rethink of US offshore wind contracts. Eduardo Garcia. Reuters. September 13, 2023. Cost crunch prompts mass rethink of US offshore wind contracts | Reuters

Offshore Wind Market Report: 2023 Edition. U.S. Dept. of Energy. August 2023. Offshore Wind Market Report: 2023 Edition (energy.gov)

Soaring Costs Stress US Offshore Wind Companies, Ruin Margins. Atin Jain, Bloomberg New Energy Finance. August 1, 2023. Soaring Costs Stress US Offshore Wind Companies, Ruin Margins | BloombergNEF (bnef.com)