Big Board Alerts

September 15, 2023
Offshore Wind’s Rough Summer, Explained

Some big offshore wind projects have recently run into the challenges of rising interest rates and delays in getting key components, and developers say some projects no longer make financial sense.

It’s a messy situation, and it threatens to undermine the future of offshore wind as a major and affordable source of electricity for the clean energy transition.

But don’t panic just yet. Rather than saying that projects can’t happen, companies are saying they need to renegotiate agreements. The result is likely to be delays and an increase in costs for consumers, which is not ideal—but far from a catastrophe.

“If governments want to ramp up offshore wind capacity fast enough to meet their longer term offshore installation goals and longer term climate goals, then they’re going to have to be happy to pay higher prices when the costs of delivering these projects increase,” said Oliver Metcalfe, head of wind energy research for BloombergNEF.

Some specifics:

Orsted, the global leader in offshore wind, said late last month that it may write off more than $2 billion in costs tied to three U.S.-based projects that have not begun construction. The Denmark-based company said it may withdraw from the three projects (Ocean Wind 2 off of New Jersey, Revolution Wind off of Connecticut and Rhode Island, and Sunrise Wind off of New York) if it can’t find a way to make them work financially.
The U.S. government held an auction last month for offshore wind leases in the Gulf of Mexico and attracted almost no interest from developers. One company, RWE of Germany, made a bid for one of three lease areas and won due to a lack of competition. No companies bid on the other two lease areas. Analysts said companies were reluctant to bid because the states on the Gulf do not have requirements to buy offshore wind, which reduces the opportunity for companies to sell electricity from projects there.
Vattenfall of Sweden, another leading offshore wind developer, in July stopped work on its Norfolk Boreas wind farm off of the United Kingdom, citing rising costs. The company said this month that it is considering all options in the U.K. market, which presumably would include selling the projects to another developer, but Vattenfall is not providing much detail on its process.
The U.K. government held an auction this month for new offshore wind project contracts and received zero bids from companies. The lack of bids was because the contracts were to pay an amount that wind developers say is too low considering the challenges of high interest rates and the rising costs of some parts.

Mads Nipper, Orsted’s CEO, outlined his company’s reasoning in an Aug. 30 call with analysts.

“Let me be clear that we will continue to carefully assess all of our options related to our awarded U.S. projects to ensure that we make the most financially responsible decisions,” he said. “As we’ve communicated earlier, we are willing to walk away from projects if we do not see value creation that meets our criteria.”

The three Orsted projects are suffering from bad timing, with leases and financial terms that were agreed upon shortly before U.S. interest rates began to rise to levels that severely cut into the projects’ anticipated profitability.

Orsted also is dealing with problems obtaining supplies, including delays from its supplier that makes the tower foundations that get installed on the seafloor.

The company is pursuing a variety of options with the federal government and state governments; state regulators or legislators could take action to change the agreements, which could include increasing the amount that utilities would pay for electricity from the projects.

On the federal side, Orsted wants to qualify for as high of a tax credit as possible under the Inflation Reduction Act. The law provides a 30 percent investment tax credit, and also has the potential for additional credits of up to 10 percent each if a project’s components qualify as “domestic content” or if the project is located in an energy community. (An energy community includes places with a history of employment in fossil fuel industries, including places with shuttered coal mines or coal-fired power plants, among other factors.)

Orsted has said it is confident that Revolution Wind will qualify as being in an energy community, but other than that is waiting for guidance from the government on the level of credits.

If states modify their agreements in response to Orsted’s concerns, consumers likely would end up paying more on their utility bills. For perspective, the current agreement between New Jersey and Orsted for Ocean Wind 2 leads to a projected monthly cost of $1.28 for a household, which wouldn’t begin until the wind farm begins generating electricity near the end of this decade.

The costs of offshore wind have plummeted in recent years, but they are still higher than onshore wind, utility-scale solar and the most efficient natural gas power plants. The hope of governments and developers is that the growth of the industry will lead to a long-term decrease in costs.

States have plenty of reasons to negotiate with Orsted rather than see the company walk away from the projects. Several states, including New Jersey, have laws with development targets for offshore wind and timelines for meeting them. And, the states are competing with each other to attract onshore jobs to support the industry.

The three Orsted projects in jeopardy have a total capacity of 2.7 gigawatts. This is a little more than one-tenth of the 23 gigawatts of U.S. offshore wind capacity that BloombergNEF has previously said is on track to be online by 2030.

If Orsted walks away from the projects, the company would still hold the leases. It’s not clear what would happen next.

In the near term, the U.S. offshore wind industry will soon be celebrating completion of Vineyard Wind 1 off of Massachusetts. The 806-megawatt project is the first large offshore wind farm in the country, joining smaller projects off of Rhode Island and Virginia. (I’ve previously described it as an 800-megawatt project, but the developer now lists the higher number.)

On Tuesday, the developer announced that wind turbine installation has begun in the waters about 30 miles south of Cape Cod, with barges carrying gigantic parts out to sea for assembly.

The project should be operational sometime next year.


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