After Challenging Year, Which Way Will Offshore Wind Blow?

It hasn’t been clear sailing for most companies working to build up the U.S. offshore wind sector, but the tide could be turning in their favor as solutions to past challenges help shed light on the path ahead.

Following a year of negative headlines with some of the industry’s biggest players booking billion-dollar impairments and backing out of wind projects, this year appears to be going smoother.

Offshore wind project solicitations—similar to what oil and gas folks call lease auctions—were conditionally awarded in New York, bringing relief to developers that sought to rebid contracts due to economics. New Jersey issued its fourth offshore wind solicitation. Avangrid Inc. and Copenhagen Infrastructure Partners’ Vineyard Wind 1, the nation’s first large-scale offshore wind farm, delivered power from its first phase to the New England electric grid. Companies revamped strategies.

“There is a sense that things are progressing a little bit more positively after a challenging period,” Peter Lloyd-Williams, senior offshore wind analyst for Westwood Global Energy Group, told Hart Energy. “But I think what we really have to wait and see is how much of that positive news can spread.”

A question is whether states with ongoing solicitations will be willing to pay slightly higher prices that are needed to push projects through.

“When you get, as you did in New York, a willingness to sort of work through some of the projects, work through some of the problems, both on the side of the developer and on the state, you can obviously start to move things forward,” Lloyd-Williams said. “And so, there’s a sense that maybe some of the problems were crystallized last year. Now, they’re more understanding what the solutions need to be.”

Obstacles were rampant. More often than not, supply chain woes, inflation, interest rates and costs were the blame. Building offshore wind farms is an expensive and lengthy process. Contracts signed years ago for equipment, services or delivery of energy to the grid no longer meshed with actual project costs due to rising costs and supply chain issues.

Offshore wind developers worldwide were affected. However, the situation was especially acute for the U.S.—which is near the beginning of its journey to lift its capacity to 30 gigawatts (GW) by 2030.

However, at present, U.S. inflation is easing and interest rates are falling, which could prove beneficial for developers that have to borrow funds to cover high upfront capex. States and federal governments are doing what they can to help, offering tax incentives and allowing companies to get out of pre-existing contracts.

‘Tremendous progress’

Speaking during a policy forum organized by the American Council on Renewable Energy, Bureau of Ocean Energy Management Director Liz Klein acknowledged the obstacles and sentiments that the industry might be dying before it even gets started.

Paraphrasing a well-known Mark Twain misquote, she said “reports of offshore wind’s death are greatly exaggerated. We have, in fact, made tremendous progress.”

She rattled off a list of statistics:

• Six approved projects in the Atlantic, including two under construction;
• Twelve competitive lease sales held, including four in the Biden-Harris administration totaling nearly $5.5 billion in high bids; and
• About $4.4 billion worth of investment in offshore wind manufacturing facilities and ports.

“It really is tremendous progress that I think is worth celebrating and noting. Now, that’s not to say that we don’t understand that the industry faces challenges,” Klein said. “We never expected smooth sailing. But these accomplishments show that we still have—wait for it—the wind in our sails as we navigate the choppy seas of progress.… So, we expect 2024 will be a significant year for offshore wind development. And I say that with a sense of really aggressive optimism.”

As many as four lease sales will be held this year—one each in the Gulf of Maine, offshore Oregon, the Central Atlantic and the Gulf of Mexico.

“The IRA [Inflation Reduction Act] is providing millions of dollars that will support all of these offshore wind efforts, from conducting the essential transmission analysis to providing loans that will support the manufacturing of critical offshore wind components,” Klein added. “With these historic advancements, our nation will be more resilient to the impacts from climate change, create good paying jobs and benefit underserved communities.”

While governments are taking steps to advance offshore wind, developers are doing the same.

Developers are optimizing projects, ensuring they are well-engineered, and having conversations with companies in the supply chain to essentially “squeeze out any of the fat that they can,” as Lloyd-Williams put it.

Getting projects on track will require reductions in construction costs, considering most of the project’s expenses come in the initial construction phase.

“You really have to control how much you spend on the initial buildout, because that is so determinative of project economics overall,” he said, noting U.S. developers faced problems because the cost base was higher for various reasons, including localization requirements and having less scale because the sector is not yet advanced.

Compliance with the Jones Act could also pose obstacles, forcing developers to pursue vessel workarounds involving barges for wind turbine installation, introducing technical and financial risks along with supply chain uncertainty, according to Lloyd-Williams.

While the Jones Act is not a major challenge today for offshore wind, given the low number of projects in the construction phase, it could become one in the future, he said.

Dominion Energy has first dibs on the one Jones Act-compliant offshore wind turbine installation vessel in the U.S. Charybdis is currently being built in Brownsville, Texas.

“It’s really about getting control of the initial cost going into the project, and then making sure that you’re happy with your offtake.”

Righting the ship

Considered a major player in U.S. offshore wind with projects in various stages of development offshore four states, Denmark-based Ørsted is clawing its way back from challenging offshore wind conditions experienced. In 2023, the company announced it would cease development of two 1.1-GW wind projects offshore New Jersey, adding cancellation fees to the approximately US$4 billion of impairment charges it booked in the third quarter. Higher interest rates, supplier delays and an unsuccessful request in New York to raise rates were among the reasons given at the time.

Following a portfolio review, Ørsted has refocused its U.S. offshore strategy and its capital allocation toward the most value-accretive markets, lowered investment and capacity targets and put in place a dividend holiday for financial years 2023 to 2025. The company is exiting Norway, Spain and Portugal and deprioritizing other markets, including Japan.

“We still believe that the U.S. holds attractive offshore potential, and we are for now zooming in even more specifically, primarily on the Northeast, exemplified not only by hopefully building three projects,” Ørsted CEO Mads Nipper said on the company’s latest earnings call. That includes the 924-megawatt Sunrise Wind project being developed with Eversource off New York and the 4-GW Lease Area 500 off New England and New York.

Ørsted withdrew its offshore wind renewable energy certificate for the Skipjack project offshore Maryland as it looks for the “most value-creating track forward.” It successfully exited an old contract for Sunrise Wind off New York and was able to lock in better prices, being named one of the two conditional winners of the state’s fourth offshore wind solicitation.

“We are happy to see that not only has New York and New Jersey shown auction outcomes with realistic prices for offshore power, but we’re also seeing that the last three auctions, that either have been conducted or have been launched, do have inflation protection between award and FID [final investment decision], which is critically important for our sustained commitment to the U.S. offshore market,” Nipper said.

Looking forward, thoughts will be on political support, federal incentives, the permitting regime and offtake prices, he added. “Overall, a focused portfolio in the U.S. offshore but still a belief that this is a market that offers attractive opportunities that we will obviously very selectively look into.”

BP also wrote off most of its initial investment into U.S. offshore wind on two projects—Beacon Wind and Empire Wind—with then partner Equinor, which also took an impairment late last year.

BP CEO Murray Auchincloss said integrated delivery models are more important for the company than a power purchase agreement-like model, which is more suitable for Empire.

“So, it was time to divorce ourselves [from Empire and] let Equinor carry forward with that. They want to do that,” Auchincloss said. In exchange, BP received land it can monetize along with the 2.5-GW Beacon Wind that can be integrated.

“We’re the No. 1 gas trader in the United States, No. 2 or 3 in power. We see the capacity to absorb that into that book and create some interesting value,” he said. “We will take our time to do this. We’re not in any rush,” Auchincloss said. “The U.S. really needs to build out. And of course, we’ll bring in partners, et cetera over time.”

‘Optimally positioned’

Bringing in a partner was exactly the move made by Virginia-based utility Dominion Energy, which is developing the 2.6-GW Coastal Virginia Offshore Wind (CVOW), to reduce offshore project risk. CVOW is the largest offshore wind project being developed in the U.S.

Dominion sold a 50% non-controlling interest in the approximately $10 billion project, which will feature 176 turbines and three substations off Virginia Beach, to Stonepeak to help pay for construction cost. The transaction, expected to close by year-end 2024, could improve Dominion’s estimated 2024 consolidated funds from operations to debt by about 1% and reduce its overall financing needs during construction. The deal marked the conclusion of a business review.

“Throughout our robust and competitive offshore wind process, we had multiple high-quality strategic and financial potential partners deploy significant operational, regulatory, commercial, financial and legal resources to thoroughly diligence every aspect of the project,” Dominion Energy CEO Bob Blue said on the company’s most recent earnings call. “And the consensus independent feedback was that the Coastal Virginia Offshore Wind Project is optimally positioned to be delivered on time and on budget and is supported by enthusiastic and committed suppliers and partners.”

Despite the obstacles, there is still a business case for offshore wind in the U.S. and elsewhere.

As the nation embraces renewable energy to reduce greenhouse-gas emissions, offshore wind can further diversify the grid.

Its high nighttime wind speeds can help balance overall electricity systems, Lloyd-Williams said, picking up where solar leaves off. Plus, it creates jobs.

“And that’s not something that’s unique to U.S. states. You see it everywhere in terms of Japan, the U.K., Norway,” he said. “The idea of this sophisticated maritime, construction industry is quite appealing.”