Will energy industry end up swallowing higher prices for its big Bight of US offshore wind?

Everyone knew the New York Bight offshore wind lease auction was going to be big. The scale of the tender alone – 488,000 acres, with up to 7GW of capacity – dwarfed all previous acreage offers in the US.

But industry observers were not prepared for the high prices of the winning bids — sums of money that could have lasting repercussions on the nascent sector.

The federal government had set opening bids accordingly at $100 per acre – an amount that less than a decade ago would have won an offshore wind lease tender.

The stunning results “demonstrate just how valuable many developers view the US offshore wind market”, said Jean-Michel.

“This week’s offshore wind sale makes one thing clear: the enthusiasm for the clean energy economy is undeniable and it’s here to stay,” said Interior Secretary Deb Haaland.

Post-auction challenges

However, concerns have been raised that the record sums paid at the auction will drive up the costs of offshore wind and slow down the energy transition.

“What does that [the $4.4bn] do for the industry,” Hardy said. “It goes into federal coffers . . . Maybe it helps pay for Social Security or helps us defend a country in Europe that needs help. But it doesn’t help offshore wind.

“The price of offshore wind in New Jersey and New York just went up. I think it will slow the energy transition, or the offshore energy transition at least,” said Hardy as he called for a review of the system by the Bureau of Ocean Energy Management (BOEM), which manages auctions in federal waters.

Orsted — the world leader in offshore wind, which is already developing some of the largest projects planned in US waters — stepped away from the New York Bight round as prices rose.

“Today in 2022 that’s what it’s worth. We are confident that it is compatible with lower power prices for the customer.”

He says the prices paid in New York Bight should be benchmarked against other large global seabed auctions rather than early rounds off the US, which now look incredibly cheap.

“Yes, if you take the reference of 2018 [in] Massachusetts it’s a lot. No, if you take Round 4 [leasing in the UK early last year],” he says.

The 7GW or more to be generated out of the New York Bight are, for now, still only lease holdings — speculative investments in potential projects. The winning bidders have only purchased the right to propose a project on the lease site — and have no guarantee of approval, especially as in-depth environmental impact statements have not yet been prepared, nor are they guaranteed offtake, which goes through the states rather than BOEM.

The entire exercise — from auction through the approvals process to offtake agreement to final commissioning — requires a minimum of eight years and in the case of Vineyard and South Fork, well over a decade. Getting these leases approved and developed into spinning capacity to meet the 2030 deadline will take herculean effort.

BOEM’s head Amanda Lefton announced it would approve at least 16 construction and operations plans (COP) by 2025, setting up 19GW of capacity for construction, while BOEM and NMFS signed a memorandum of understanding late last year pledging to share resources including data and personnel to coordinate activities and get approvals going faster.

Regardless, “the overall environmental vetting process for projects is still on a slower time scale and is still as thorough as it should be”, observes Samantha Bobo Woodworth, senior wind energy analyst for IHS Markit, noting that any perception of speeding up the approval process at the expense of a thorough review would only expose the project to litigation risk.

Even still, litigation will more than likely find these projects. Despite the lengthy duration of Vineyard Wind’s approval time, it faces multiple lawsuits brought by fisheries and environmentalists claiming that approvals did not meet the requirements of the National Environmental Protection Act, the US’ powerful core environmental legislation, not to mention the Marine Mammal Protection (MMPA) and Endangered Species (ESA) acts, any of which could stop a $4bn project like Vineyard in its tracks.

And sluggish permitting is only the first of several potential bottlenecks facing the industry, with the lack of a local manufacturing or installation supply chain likewise able to derail the industry’s goals.

Supply chain struggles

The US has no offshore wind-specific infrastructure in place, so building these new large-scale projects off the east coast will require massive investments in equipment manufacturing, ports and vessels.

Developers have already committed billions of dollars towards investment in foundations, towers and blades manufacturing.

Equinor — developer of the Empire Wind 1 & 2 and Beacon Wind projects — is backing foundation and transition-piece manufacturing in upstate New York, and in December Maryland gained more than $1bn in supply-chain investment for its 1.2GW tender, the outcome of a bidding war between Orsted and US Wind. Both developers walked away from the auction with around 800MW of capacity – 400MW more than allotted by state law – with promises for investment in steel and cable makers, foundations and towers, all out of the Tradepoint Atlantic, the former home of Bethlehem Steel’s defunct, behemoth Sparrows Point steelworks.

Siemens Gamesa contracted for a $200m blade finishing factory at the massive Portsmouth Marine Terminal for Dominion Energy’s 2.6GW Coastal Virginia Offshore Wind (CVOW) farm with an eventual a capacity of 100 blades annually.

But even these are just the start of what will be needed for the massive buildout planned over the coming decade, and the US industry will likely be dependent on European suppliers for several years until supply chain catches up with demand.

For instance, last year Dominion signed nearly $7bn worth of contracts with suppliers for the CVOW project expected to be online by 2028, all of them European.

BOEM introduced local-content strategies in the New York Bight leasing round in order to spur investment in the local supply chain, opting for incentives rather than requirements to enable the market to figure it what works best for the US.

Lease holders in the New York Bight can reduce operating licensing fees by half with the inclusion of at least four locally sourced components from BOEM’s list of eight categories — including assembly and manufacture of nacelles, towers, blades, foundations and transition pieces, as well as inter-array and export cables and substations. Lease winners must also submit a detailed plan for how they are going to invest in the US supply chain while also entering into project labour agreements (PLA) with local unions.

“BOEM believes that the incentives will positively affect developer behaviour and foster local supply-chain development,” the federal agency states in its memorandum on the auction, especially “considered in the context of other incentives, such as those offered by the states”.

The American Clean Power Association (ACP) sees $120bn in investment and economic activity generated by the US offshore wind industry over the next decade, while the Special Initiative for Offshore Wind at the University of Delaware expects $109bn.

Ports — size matters

Made in America

Vessels are another looming bottleneck.

The 1920 Jones Act forbids non-US flagged or crewed vessels from calling in consecutively at any two harbours or “points” in US waters, including oil wells and wind turbines, necessitating the production of a local fleet capable of servicing the offshore wind industry.

Crew transfer and service vessels are now being built, but the lack of US-flagged wind turbine installation vessels (WTIVs) are a particular concern.

As foreign-registered WTIVs will not be allowed to dock at ports to collect the super-sized turbine and foundation components, US-flagged feeder vessels such as self-powered barges will have to ferry them from shore to the project site — compounding the challenges of installation at sea and increasing risk and costs.

Transmission gridlock ahead?

Arguably, the biggest challenge facing the US offshore wind build-out is not vessels or ports, but getting the power to population centres.

Transmission investments in the US suffer from a lack of coordination and connectivity between regional grids and managing entities such as ISOs (independent systems operators); an approval process narrowly focused on cost and need rather than policy objectives; and an arduous permitting process replete with Nimbyism, litigation risk, delays and cost overruns.

However, the first steps towards streamlining and improving these processes — and reducing transmission costs — are under way.

A plan by mid-Atlantic regional transmission operator PJM to enable states to incorporate policy objectives such as offshore wind into network upgrades has been approved by the Federal Electricity Regulatory Commission —­ paving the way for multiple offshore wind farms to use the same electricity infrastructure to connect to the onshore grid, rather than separate cables for each project.

Ratepayer impacts

With offshore wind developers paying record-breaking prices for leases in the New York Bight, there is a concern that this huge upfront expense will increase projects’ levelised cost of energy, and consequently require consumers to pay high offtake prices in order for developers to make a profit on their investments.

“The higher prices of these leases could flow down to ratepayers,” observed Jean-Michel. “Companies proposing projects sited in the New York Bight will likely bid higher prices for their projects in order to cover the cost of the more expensive lease.”

The US Department of Energy’s Office of Energy Efficiency & Renewable Energy concurs, noting, “higher lease prices could increase the delivery price of offshore wind”.

New York is looking to procure 2-4.6GW of offshore wind power output through its round three tender set to happen in the second quarter of this year, and the number of players competing for offtake may work to drive down bids.

Bidders into the procurement auction may include new lease winners in the New York Bight, as well as lease winners off Massachusetts’ earlier, much cheaper leasing rounds.

“With so many developers in play, New York Bight winners will have to compete not only against themselves, but also with projects sited on past, cheaper leases,” said Jean-Michel. “The increase in players could lead to more competitive pricing in state solicitations.”

Future rounds

Analysts and industry insiders are still debating whether prices seen in the New York Bight auction prices will continue into later leasing rounds.

High prices will “become part of the [US] market dynamics, for sure,” says Joris Veldhoven, commercial and finance director Shell New Energies-EDF joint venture Atlantic Shores, which paid $780m for a 79,000-acre lease.

IHS Markit’s Woodworth agrees, noting the rising prevalence of oil majors and large-scale financial firms entering the market amid a dwindling supply of US leases as BOEM focuses on “developing its existing [wind energy] assets rather than pushing for more acreage”.

“We will continue to see aggressive competition in additional lease areas going forward,” she said, noting “it would not be surprising to see another billion-dollar bid” in California.

Others, however, note key market differences in future leasing rounds that may put downward pressure on pricing.

New York and New Jersey have legislated offshore wind targets, clear frameworks for procuring capacity, and have already made progress towards meeting their goals, Jean-Michel notes, while neither North Carolina nor California have set a clear route-to-market, despite state support for offshore wind.

“Top that off with floating foundations required off California and you're looking at riskier markets that could translate to lower bid prices for leases,” she observed.

The relatively high number of upcoming leasing rounds and BOEM’s publication of its leasing roadmap may also slake market demand. With the Carolinas and California leases up for grabs this year, BOEM may lease off more than 13GW worth of acreage in 2022 alone.

Whether future leases reflect the New York Bight or not, offshore wind is already a high-stakes game, and high lease costs are only the beginning of what are typically multi-billion-dollar ventures.

“It’s not just the acquisition of the lease that is costly,” notes Veldhoven. “These are big, big energy projects. Significant investments are needed in these early years by mature developers to develop these leases — it's not for the faint hearted.”