Inflation and Cost Worries Are Sinking Clean Energy Projects: Wind, Solar, Hydrogen, and Nuclear Affected but Oil & Gas Not So Much

 

     Orsted’s cancellation of two of its U.S. offshore wind projects is a tragic reminder that the costs of energy projects can swell to unfeasible levels if financial conditions warrant. Other offshore wind projects have been canceled similarly and more may follow. The inability to rebid amidst rising inflation and borrowing costs and supply chain problems were cited as the main reasons for the cancellation. The projects were bid on years ago before the pandemic and Russia’s invasion. Orsted wanted the chance to rebid. The state of New York recently turned down requests for companies to rebid their projects. New auctions were bid at higher rates. Ratepayers will foot the bill. Even with high subsidies the upfront costs of these projects are becoming prohibitive in the current economic environment. The Danish company said it would be forced to write off as much as $5.6 billion on the projects after considerable work has been done on them. New Jersey Governor Phil Murphy suggested that Orsted was a dishonest broker. The reality is more like they honestly don’t want to go broke! German wind turbine manufacturer Siemens Gamesa has been facing manufacturing issues, and regular losses, and is seeking government financial help. Clearly, the wind sector is in trouble. Costs for power purchase agreements have more than doubled since 2021. PPAs for solar projects have nearly doubled since 2021. Rising costs have slowed some of these projects. Siemens Gamesa also just announced plans to cancel a proposed $200 million wind turbine blade factory at the Port of Virginia to supply blades for nearby offshore wind projects. This is a snafu in U.S. plans to develop domestic supply chains for offshore wind. There is still hope that projects such as this will reappear when inflation drops but that will still delay deployment significantly which also slows U.S decarbonization plans. 

     Offshore wind is expected to be a savior for supplying the Northeast and New England with clean energy. Even before these announced cancellations, analysts were predicting that Biden’s goal of 30GW of installed offshore wind deployed by 2030 would fall short. I wrote a more detailed post in October about U.S. offshore wind problems.

     Another odd issue in the Northeast U.S. region is the potential retirement of the Everett, Massachusetts LNG import terminal sometime in 2024. It seems rather shocking to me. FERC, the North American Electric Reliability Corporation (NERC), and ISO New England are all warning that it would be dangerous to close the terminal since it is a major feature of the region’s resource adequacy plan to ensure winter power reliability. With pipelines soundly constrained into the region it is unclear what will replace the LNG. The usual culprits when pipeline gas is in short supply during cold snaps are LNG and fuel oil. With LNG out of the picture, the onus will be on fuel oil. Costs would be saved by not importing LNG from South America at a high cost. Costs for fuel oil have been high in recent months, much higher than much cleaner pipelined gas would ever be. New power lines bringing in (fuel oil-backed) hydroelectric power from Canada will help but the situation is uncomfortably tight. A gas shortage at a critical cold snap could be disastrous as gas is not just needed for electricity but also for heat. The desire for clean energy and the desire to phase out fossil fuels among policymakers seems to be getting ahead of the realities of reliability and the need to assure reserve margins. Shutdowns of nuclear plants were replaced by natural gas plants which further stresses the region’s gas system reliability due to inadequate pipeline capacity.

     Not only are wind and solar projects being scrapped, but it was just announced that the NuScale small modular reactor (SMR) nuclear project in Idaho will be scrapped. This is a shock since many years of work went into this project. As with the in-process wind projects, parts of it may be salvageable but it is still a huge and tragic loss. The Idaho project, called the Carbon Free Power Project, planned to deploy twelve SMRs at the plant, after the announcement in January that they received approval from the Nuclear Regulatory Commission which took many years (several years too long, many would say). Part of the cost issue is the high costs of permitting and other regulatory costs. This project especially, but also the canceled wind projects already received money from the government, so much of that taxpayer-funded money could be lost. In the case of the nuclear project, about $1 billion has been received. In terms of lost government money, these cancellations may rival clean energy bankruptcies such as that of solar manufacturer Solyndra. Inflation was also a big factor in the NuScale cancellation. They could not get enough buyers for the power to guarantee that it would be generated, presumably due to the costs they wanted to charge. Just as Orsted’s stock plunged after its announcement so too did NuScale’s stock plunge after its announcement. NuScale does plan to continue trying to develop SMRs in the U.S. and globally and the project is/was a first-of-kind project, which is always subject to such disappointments if it doesn’t make economic sense or has technical issues. Nevertheless, it is a considerable setback to SMR nuclear projects. The SMR pathway to commerciality is reliant on costs dropping after the technology takes off and gets deployed more. That pathway is now delayed. It now looks like SMRs won’t be commercialized until the 2030s instead of the late 2020s. 

 Hydrogen fuel cell developer Plug Power expressed concerns that it may not be able to continue operations amidst supply chain disruptions and a high cash burn rate. Plug Power makes fuel cells for industrial electrified vehicles for Amazon and Walmart. The company cited "unprecedented hydrogen supply challenges" in the North American hydrogen market. They are seeking a $1.5 billion loan from the DOE but are not expected to get anything until next year. The company is working on other ways to enhance its liquidity position. Shares of the company have dropped 28% due to news of the cash problems. There is deep concern about the company’s lack of a detailed financial plan.  

     Meanwhile, oil & gas projects are being funded more and more with free cash flow and equity and less with reserves-based lending as Hart Energy reports. The fiscal discipline in the industry in the past few years focused on repaying investors when prices were high, turned out to be a good idea. The high oil and gas prices in 2022 in the U.S. were not a reflection of U.S. supply constraints, but a result of global price spikes tied to Russia’s invasion and the subsequent disruption in oil and gas markets. The discipline of not adding rigs to increase production was of course easier to achieve when production had been increasing for other reasons and was not really needed since there was no shortage in the U.S. That is one reason why the oil & gas industry is in decent shape even as oil and gas prices have dropped from 2022 highs. The general profitability of modern oil & gas plays makes hydrocarbons a more stable form of energy production, even with fluctuating and sometimes volatile product prices.

     Companies such as BP and Shell have decided to allocate less capital toward clean energy projects after their 2022 profits were bested by their peers that allocated less, namely ExxonMobil and Chevron. Pressure from investors to diversify away from oil & gas was apparently trumped by pressure from investors and other stakeholders to focus more on profit. They have to balance profitable oil & gas projects with much less profitable clean energy projects. In essence, for Big Oil, it is profitable oil & gas projects that are funding the less profitable clean energy projects.   

     Another clean energy project, Navigator CO2 Ventures'  Heartland Greenway CO2 Pipeline project was canceled in October citing the "unpredictable nature of the regulatory and government processes." The 1300-mile system of pipelines planned to collect CO2 in five states: Nebraska, South Dakota, Minnesota, Iowa, and Illinois, and store the CO2 in wells in the Illinois Basin in central Illinois. Some of the CO2 was also slated to serve as feedstock for E-fuels. A similar CO2 pipeline project by Summit Carbon Solutions remains viable but has been struggling with routing and permitting difficulties. There has also been much public opposition to the projects. In addition, the longer-term future of the ethanol industry, though easier to decarbonize than other industries due to the purity of combustion components, is in limbo due to competition from electrification. It is still viable, I believe, to decarbonize it since gasoline demand, which equates to ethanol demand since it is an added component of gasoline is still strong and is likely to remain strong in the near to medium term.

    

 

References:

Offshore Wind Firm Cancels N.J. Projects, as Industry’s Prospects Dim. Stanley Reed and Tracy Tully. New York Times. November 1, 2020. Orsted, Offshore Wind Firm, Cancels N.J. Projects - The New York Times (nytimes.com)

The U.S. Project Meant To Debut Revolutionary Nuclear Reactors Just Fell Apart. Alexander C. Kaufman. Huff Post. November 8, 2023.  The U.S. Project Meant To Debut Revolutionary Nuclear Reactors Just Fell Apart (msn.com)

Top energy regulator warns fossil fuel terminal shutdown could jeopardize heat for millions of Americans. Thomas Catenacci. Fox News. November 8, 2023. Top energy regulator warns fossil fuel terminal shutdown could jeopardize heat for millions of Americans (msn.com)

Haynes Boone: RBLs Continue to Cool as Source of Oil, Gas Capital. Patrick McGee. Hart Energy. November 8, 2023. Haynes Boone: RBLs Continue to Cool as Source of Oil, Gas Capital | Hart Energy

Plug Power collapses after 'going concern' warning from hydrogen developer. Martin Baccardax. The Street. November 10, 2023. Plug Power collapses after 'going concern' warning from hydrogen developer (msn.com)

Siemens Gamesa scraps plans to build blades for offshore wind turbines on Virginia's coast. Ben Finley. Associated Press. November 10, 2023. Siemens Gamesa scraps plans to build blades for offshore wind turbines on Virginia's coast (msn.com)

Cancellation of Navigator CO2 pipeline raises critical issues for several industries. Corey Lavinsky. October 25, 2023. S&P Global. Cancellation of Navigator CO2 pipeline raises critical issues for several industries | S&P Global Commodity Insights (spglobal.com)