Why America's offshore wind revolution will be slower and costlier

The news had followed a steady drumbeat of losses and project cancellations, including BP’s reported $540m impairment charge on its 3.2GW of New York capacity with Equinor that led its green energy head Anja-Isabel Dotzenrath, to declare the US industry “fundamentally broken”.

“The way the policy works, the supply chain build-out, permitting, is not catching up with the growth of this sector,” Dotzenrath said, adding that the US sector needs a basic reset to address the time lag between signing power deals and project delivery, and indexing for inflation.

Research consultancy BloombergNEF said in a recent industry note that Orsted's scrapping of its projects brings “total US offshore wind contract terminations to 5.5GW this year, or 25% of all signed offtake deals in the market so far”.

“Developers face deteriorating project economics driven by high interest rates and inflation in capital and operating expenses,” BNEF said.

BNEF raised its estimated levelised cost of electricity (LCOE) for the sector this year by almost 50%, to $114.20MWh.

State of flux

He said despite project impairments and cancelled offtake contracts, “New York state announced the results of their latest solicitation round, illustrating developers are still keen on moving forward.”

This new capacity will come in significantly costlier, though, if New York offers an example.

The state recently awarded 4GW of capacity in its round 3 for around $150/MWh that Portuguese firm EDPR’s CEO Miguel Stilwell d'Andrade called an “interesting data point” that may serve as a “benchmark for the sector”.

EDPR is joint venture (JV) partner with Engie in Oceans Winds, which is teamed with Shell in the now cancelled 1.2GW SouthCoast Wind project formerly slated for Massachusetts.

“We were able to step out of that contract [with Massachusetts] with a relatively small penalty, now we can rebid into the auction and get a higher PPA price and be able to move forward with the project, that is the intention,” said Stilwell d'Andrade.

Caught in the middle

Signe Sorensen, senior research analyst at Danish sector consultancy Aegir Insights, puts SouthCoast among the unlucky first wave of commercial-scale projects and they got their PPAs between 2019 and 2021.

“Projects that we know for certain have pulled through are generally slightly ‘older’,” she said.

South Fork, Vineyard Wind 1, and Revolution Wind, were all awarded power purchase agreements (PPAs) in 2018, placing them “slightly ahead of the curve with regards to the macroeconomic situation pressuring the projects that got their PPAs later on,” she said.

Orsted announced financial close on the 704MW Revolution Wind project split between Connecticut and Rhode Island, confirming it will proceed.

Both South Fork and Vineyard are currently under construction in the Massachusetts and Rhode Island wind energy areas (WEAs).

Coastal Virginia Offshore Wind (CVOW) unique status as the only US project under development by a regulated utility, Dominion Energy, allowed it the certainty to lock in nearly $7bn in supplier contracts in 2021 before the onset of inflation.

The contract came in below rates offered for the cancelled projects in Massachusetts and the same as Orsted’s 860MW Skipjack 1.2, which the Dane says is possibly up for the chopping block.

US Wind declined to comment.

Four states have open offshore wind solicitations totalling over 10GW, including Connecticut (2GW), Massachusetts (3.6GW), New Jersey (up to 4GW) and Rhode Island (1.2GW).

These projects are likely to come at much higher price points but will still struggle with slow permitting and a delayed supply chain.

Permitting risk

“The time from winning an offshore wind lease to commissioning an project is likely too long,” said S&P’s Murray, noting it can take as long as five years.

“As we have seen a lot can happen to costs in the space of 3-5 years and developers are looking to reduce their risk exposure to rising costs by getting their projects online as soon as possible,” he said.

The federal government is aiming to speed up the process and BOEM has approved three offshore wind projects this year (including the Ocean Wind 1).

While billions is pledged towards US manufacturing and port infrastructure, the nascent industry is still struggling to bring capacity online amid market uncertainty.

Delayed supply chain

“OEMs are keen to invest but they are not making final investment decisions for new manufacturing facilities until they have secured orders from developers and some developers are not putting orders in until they have offtake agreements that make their projects economically viable,” said Murray.

Aegir's Sorensen said this results in greater reliance on the global capacity, “which is also under pressure, leading to more competition for limited capacity in the supply chain and therefore likely affected construction schedules”.

Moreover, “it may be harder for projects to unlock the extra 10% investment tax credits (ITC) add-on from local content,” she noted.

The US Inflation Reduction Act (ITC) includes 30% ITC for offshore wind projects, with 10% added for meeting domestic content requirements. The early-stage projects have struggled to meet made-in-America requirements due to the lack of manufacturing capacity.

On the weight of these challenges, BNEF has already downgraded its 2030 forecast by 29% to just 16.4GW, down from 23.1GW as recently as June, calling Orsted's New Jersey project cancellations a “deadly blow” to President Joe Biden's administration's 30GW goal.

Nevertheless, analysts remain optimistic that the industry will find its stride and continue to attract global developers as greater electrification of the economy and decarbonisation efforts will spur ongoing growth.

“The need for offshore wind to decarbonise the electricity sector, which is forecasting considerable growth, is too great and there aren’t other obvious resource alternatives in many parts of the US,” said John Dalton, president of consultancy Power Advisory.

“I continue to believe the US is going to have a vibrant offshore wind sector,” he added.

“The opportunity in the US is too great for the global industry to ignore.”