The US offshore wind industry faces a moment of reckoning

Up and down the U.S. Northeast coast, the once-promising prospect of a burgeoning offshore wind power industry is facing a moment of reckoning. A wave of project cancellations, caused by periods of skyrocketing inflation, high interest rates, choked supply chains and financial troubles, have put hopes that the industry will play a major role in reaching decarbonization targets in serious doubt.

Now state and federal policymakers are grappling with how to respond. If they want to achieve even a fraction of the Biden administration’s goal of building 30 gigawatts of offshore wind by 2030 — a target most analysts say is out of reach — they’ll need to significantly increase their financial support to overcome cost increases and bolster an industry in turmoil. But this course of action presents a significant dilemma.

Northeast states from Massachusetts to New Jersey have made offshore wind a central part of their mandated decarbonization plans. But they’re also under heavy pressure to limit the impact of rising electricity costs. If state policymakers and regulators choose to provide more favorable terms for offshore wind developers, they risk driving utility bills even higher and having to face the economic and political consequences of doing so.

But energy analysts and environmental groups warn that the cost of failing to act could be much higher than the costs of intervening. Less offshore wind means more fossil-fueled generation, much of it relying on fossil gas, which can experience severe price spikes. And that calculation doesn’t include the climate change and human health costs of continued reliance on those dirty power plants.

Nor does it include the costs of delaying or disrupting the potentially positive impacts of investing in the manufacturing capacity, port facilities and labor force required to make offshore wind happen.

“If you don’t build it now, you’re forgoing the ability to create jobs and to clean up your generation mix,” said Mohammed Hamdaoui, vice president of renewables and power at research firm Rystad Energy. ​“You’re forgoing economic development and employment now.” Given the choice between paying more today to keep offshore wind on track and absorbing those costs in the future, ​“I’d rather have the benefits now.”

Despite this, it’s not clear that states have much room to maneuver to overcome the financial headwinds that have put their offshore wind goals in jeopardy, said Rob Rains, an analyst with Washington Analysis. He noted that lawmakers in New York and New Jersey, two states facing the cancellation of gigawatts’ worth of offshore wind projects, are also seeing declining public support for their offshore wind plans and the potential costs they could incur.

“The politics of decarbonization are getting trickier,” Rains said. ​“It’s becoming something more of a nice-to-have than a must-have — even as the impacts of climate change are accelerating.” While public opinion is largely behind renewable energy, utility customers also demand reliable and affordable energy, he said — ​“and that affordable part is getting harder.”

Fighting against the tide

The storm of bad news for Northeast offshore wind plans has been brewing for years. But it has come crashing home in the past several months — most recently in New Jersey.

This week, Danish energy company Ørsted, the world’s largest offshore wind developer, announced it is canceling its 2.25-gigawatt Ocean Wind 1 and Ocean Wind 2 projects off New Jersey’s coast, just months after receiving final approval for Ocean Wind 1.

The decision drew a rebuke from New Jersey Governor Phil Murphy (D), who said in a statement that Ørsted’s surprise decision to abandon the projects ​“calls into question the company’s credibility and competence.” He said the state would ​“review all legal rights and remedies…to ensure that Ørsted fully and immediately honors its obligations.”

New Jersey has pledged $1 billion of state funds to develop offshore wind port infrastructure. Earlier this year, lawmakers offered favorable tax treatment to Ørsted for Ocean Wind 1, in hopes that it could salvage a project they saw as key to fulfilling the state’s target of 7,500 MW of offshore wind by 2035.

Other states have made similar plans for major investments to support the development of the offshore wind industry. But they’ve been less generous to developers facing similar economic setbacks.

Since the summer, more than 3 gigawatts’ worth of projects in Massachusetts, Rhode Island and Connecticut have been canceled after state regulators declined to engage in negotiations to increase the price of the power those projects were slated to deliver. Now those states are scrambling to restructure procurements to meet mandates that include 5.6 gigawatts of offshore wind power by 2027 in Massachusetts and 2,000 megawatts by 2030 in Connecticut.

And earlier this month, New York state regulators denied a last-ditch petition from Ørsted, Equinor and BP asking the state to increase the prices it would pay for power from a combined 4.2 gigawatts of offshore wind projects awarded in 2020. Without those projects, New York may not be able to meet its goal of 9 gigawatts of offshore wind by 2035 or stay on track for its mandate to reach 70 percent renewable generation by 2030.

Now, New York and New England states are scrambling to set up new bidding processes. But it’s unclear how much of the previously committed capacity can be rebid — and it’s almost certain that the new bids will be much more costly than the old ones.

All told, the hit to East Coast offshore wind project pipelines has been severe. According to clean energy research firm BloombergNEF, the cancellation of Ocean Wind 1 and 2 brings total U.S. offshore wind contract terminations to 5.5 gigawatts this year, or 25 percent of all signed offtake deals in the market so far — and that doesn’t include the projects for which rebidding may take place but under much tougher circumstances. Meanwhile, the cost of power from a government-subsidized U.S. offshore wind project has grown nearly 50 percent from 2021 to reach $114.20 per megawatt-hour in 2023, BNEF reported.

A long-building crisis for offshore wind

The high hopes and outsize investments that dominated the offshore wind sector leading up to 2020 have been undermined by what’s happened since then: the economic and supply-chain dislocations of the Covid pandemic; the global energy shock caused by Russia’s invasion of Ukraine; the broader inflation in costs of raw materials like steel; and rising financing costs driven by interest-rate increases set by central bankers in the U.S. and Europe to combat this inflation.

Offshore wind has been hit particularly hard, Rains said — a feature of its relative nascency as an industry and the somewhat inflated expectations for it to scale as rapidly as many government clean-energy targets have called for.

“I think offshore wind is trying to sprint when it’s really just starting to crawl,” he said. Only about 64 gigawatts of fixed-bottom offshore wind has been deployed globally to date, including 8.8 gigawatts deployed last year.

While the Global Wind Energy Council trade group forecasts that figure will rise to 447 gigawatts by 2032, that’s largely based on government mandates rather than assessments of the industry’s potential to scale up, Rains said. ​“The industry itself is not mature enough to satisfy that demand at the moment,” he added.

Offshore wind developers also incurred high costs as they won the rights to federal leases to develop off the shores of New England and the mid-Atlantic, noted Geoff Hebertson, senior analyst for renewables and power at Rystad Energy.

“At that time, there was a lot of excitement,” he said. For many of the biggest offshore wind developers that are also oil and gas companies, such as BP, Equinor and Shell, offshore wind was also ​“the best way for big oil to ​‘greenify’ their portfolios in an area where they have experience and scale” developing offshore energy platforms, he noted.

But since the record-setting prices for bids in 2022 to develop projects off the New York and New Jersey coasts, prices for offshore leases have crashed back to earth, most recently with the record-low bids to develop off the Gulf Coast, Hebertson noted. Meanwhile, ​“with the big bidding for all these rights, the scale of all these projects, you’ve got to recoup those costs somehow,” he said.

In its quarterly earnings call this week, Ørsted said it would write off as much as $5.6 billion in losses, much of it tied to the costs of canceling its Northeast U.S. projects. CEO Mads Nipper said during the call that the future of the company’s U.S. offshore wind plans will rely on ​“a reset of what offshore power needs to cost.”

Ørsted isn’t the only offshore wind developer encountering these problems. Last week, U.K.-based fossil fuel and energy giant BP announced it will face a $540 million ​“impairment” on its third-quarter earnings because of the likely cancellation of its New York offshore wind projects. Norway-based Equinor, BP’s partner on those projects, also booked a $300 million impairment.

The financial struggles extend back to the companies that make offshore wind turbines. Siemens Energy, a unit of industrial giant Siemens and one of the world’s largest wind turbine manufacturers, is seeking a bailout from the German government amid expectations of a €4.5 billion ($4.79 billion) loss this year. And General Electric, maker of the massive Haliade-X wind turbines capable of generating from 12 to 14 megawatts of energy apiece which are planned for use in many Northeast U.S. offshore wind projects, reported last month that its offshore wind division expects to lose $1 billion this year.

Not all of the U.S. Northeast offshore wind projects now underway have been shelved. Ørsted and partner Eversource, a New England utility, plan to move forward with the $4 billion Revolution Wind project off the Rhode Island coast. The 1.5-gigawatt Atlantic Shores Offshore Wind project, a joint venture of Shell New Energies U.S. LLC and EDF Renewables North America, is still continuing off the coast of New Jersey. And the 2.6-gigawatt Coastal Virginia Offshore Wind project being planned by Virginia-based utility Dominion Energy won federal approval to move forward this week.

Meanwhile, some smaller-scale projects are beginning construction, including the 800-megawatt Vineyard Wind 1 project off the Massachusetts coast and the 132-megawatt South Fork Wind farm off the east end of Long Island.

But to make up for the gigawatts’ worth of canceled contracts, states will need new projects to fill in the gaps. New York and New Jersey are planning new procurements in the relatively near future, while New England states announced plans last month to create a joint-procurement structure they hope will bring down costs by combining their offshore wind demands into consolidated blocs.

Still, nobody expects that those projects will be able to hit anything like the low price points of projects bid before the industry’s crisis.

Repricing vs. rebidding

Late last month, New York approved contracts to buy power from three offshore wind projects from new market entrants RWE, TotalEnergies and Copenhagen Infrastructure Partners.

However, those projects, when up and running, will come with an average price of $145 per megawatt-hour of power — much higher than the average of $90 per megawatt-hour set by the projects from earlier rounds. This underscores the fundamental shift in the economics of offshore wind development over the past few years — because it’s gotten much more expensive to build these projects, developers must raise prices for the power they’ll deliver once they’re built.

The same economics apply to the repricing mechanism that offshore wind developers asked New York regulators to approve, Rystad’s Hamdaoui noted. Under the plan rejected by New York regulators, offshore wind projects had sought price increases that, on average, were slightly higher than those set in the latest round of new contracts the state chose, he pointed out. That makes sense — after all, both sets of projects are facing the same dire economic circumstances, regardless of when they were initially bid — ​“so there’s some logic” to the repricing request, he said.

Still, state policymakers and regulators rely on competition between developers to drive down the costs of new clean energy projects and are leery of giving developers more money without subjecting them to new competitive bidding processes. That’s why New York state’s Public Service Commission voted unanimously to deny the petition brought by offshore wind developers last month asking the state to raise the prices they’d already agreed on.

“By rejecting this relief, we signal to every vendor that our contracts, our commitments are worth the paper they are written on,” Public Service Commission chair Rory Christian said just before the vote.

Last week, New York Governor Kathy Hochul (D) ordered an expedited bidding process to replace the gigawatts’ worth of offshore wind contracts that are likely to be canceled. But that doesn’t mean that prices will be any lower than what the latest round of bids was able to achieve. Nor is it guaranteed that a new procurement round will be able to bring back the same scale of development as is now facing cancellation.

“I think it still remains to be seen whether that’s a feasible route for developers of at-risk projects,” said Fred Zalcman, director of the New York Offshore Wind Alliance, a coalition of project developers, environmental NGOs and labor groups. ​“I think they are, as noted in the petitions, facing some pretty significant financial milestones upcoming.”

And there could be broader costs to electricity buyers and society at large associated with forcing all of the projects seeking repricing to go through a lengthy and uncertain rebidding process instead. That’s because these projects have already spent years lining up suppliers and workers and making plans to invest in supporting infrastructure like the specialized ships needed to install turbines in ocean waters. Forcing them to restructure their plans to compete in a new round of bidding could scramble those plans.

All of this could add years more to offshore wind projects that typically take from six to 10 years to move from winning development rights to actually being built — and every year of delay comes with energy, environmental and social costs, Zalcman said.

These impacts are hard to predict with any certainty. But the New York State Energy Research and Development Authority (NYSERDA), which is responsible for managing the state’s clean energy procurements, warned in a filing with the New York Public Service Commission that they could ​“significantly slow progress” toward meeting the state’s clean energy mandates ​“due to project delays, cancellations, and increased uncertainty.”

NYSERDA also warned that this would ​“create the risk of further increasing costs to projects and to ratepayers,” prolong New York’s reliance on fossil fuels, delay economic benefits associated with building an offshore wind industry in the state and hurt its ability to tap the ​“scarce” offshore wind supply chain.

“We clearly tried to make the case” that forcing developers into a position where they must either rebid projects or abandon them ​“is going to wind up ultimately costing ratepayers more money,” Zalcman said. ​“But that argument did not win the day.”

Nor will the disruptions of canceling and rebidding such massive offshore wind projects end with the developers themselves, he added. The contracts at risk include commitments from developers to invest in facilities at the Port of Albany and South Brooklyn Marine Terminal, and they have lined up agreements with labor unions eager for the jobs these projects would create.

“The objective here is to build a new industry,” he said. ​“What’s potentially lost is not just megawatts, but the whole momentum — these projects have spent years getting to this point and have commitments to manufacturing and labor and local communities, and ports and vessels.”

Looking for help from the federal government

In New York, ​“the quandary the developers now face is, based on the filings, these projects are no longer” economically viable, Zalcman said. Now they ​“need to figure out whether there’s some combination of federal tax credit relief and/​or going through a rebid process that can salvage these projects, or as much of them as possible.”

Offshore wind developers have been actively lobbying the Biden administration to structure the tax credits under the Inflation Reduction Act in ways that they say could make or break the viability of struggling projects. The major climate law passed last year offers tax credits of up to 30 percent of their investment if they meet prevailing-wage and apprenticeship requirements, which most of the offshore wind developers are relying on.

But the law also offers an additional 10 percent tax credit for projects using domestically produced content — a measure that may be difficult for offshore wind projects to meet given the industry’s preponderance of foreign-made components and materials, Ørsted and other developers have said.

The law offers another 10 percent tax credit for projects located in ​“energy communities” — census tracts where coal, oil or fossil gas infrastructure has caused environmental harms, or where closing coal mines or power plants has led to lost jobs and declining tax revenue. Ørsted has said that the viability of its Revolution Wind project in Rhode Island relies on winning this additional tax credit by virtue of connecting its power to an energy community. But it’s unclear if tax-credit guidance from the U.S. Treasury Department will uphold that interpretation.

Other offshore wind developers are hoping that their investments in manufacturing and port infrastructure could allow them to qualify for additional tax credits. Anne Reynolds, the Alliance for Clean Energy New York’s executive director, noted that the Albany and South Brooklyn communities targeted for offshore wind investments qualify as disadvantaged communities.

New York is also exploring the potential for the U.S. Department of Energy’s Loan Programs Office (LPO) to offer low-cost debt financing to bolster projects that promise to reduce power-sector carbon emissions. But it’s unclear whether any of the developers in question have begun the process of applying for that loan program or what the results might be.

Justin Guay, director for global climate strategy at the Sunrise Project, noted that the European Union last week unveiled a wind power package that includes structures to offer loan guarantees from the European Investment Bank. ​“We can and should give the wind industry preferential access to government-supported or subsidized loans via LPO, not just for the wind project itself but all associated infrastructure costs including transmission,” he said.

But while state policymakers seek out federal aid to resuscitate their offshore wind plans, they must also contend with on-the-ground political realities, Washington Analysis’ Rains said. East Coast state residents are frustrated with rising electricity costs, he said — and that gives offshore wind opponents a potent line of attack against offering developers higher prices commensurate with their higher costs.

The costs of building new offshore wind farms will be passed onto utility customers in the form of a few extra dollars per month on their bills, but only after the projects are complete and delivering power years from now. That makes discussion of the cost of these projects somewhat abstract compared to the forces that are driving up utility bills today.

Meanwhile, the rising utility bills now angering East Coast customers have been caused by surging natural-gas prices over the previous winter, not by the cost of building new clean energy resources, Rains noted.

Even so, reaching state climate targets will require investments, and those investments will come with costs, he said.

“There are no near-term breakthroughs likely” for states trying to reach targets for gigawatts of offshore wind, Rains said. And with typical offshore wind projects taking anywhere from six years to a decade to move from proposal to completion, ​“delays in meeting these mandates are pretty much inevitable right now.”