A few years ago, the future of the U.S. offshore wind industry looked brighter than ever before.
The Biden administration was pushing an exceptionally aggressive timeline to build the nation’s first fleet of offshore wind farms. Companies were standing shoulder to shoulder with lawmakers dockside from Massachusetts to Maryland, promising good jobs, ship building, clean energy and climate action.
But that optimism has soured in recent months, with canceled wind contracts in New England, massive financial losses from major developers, stalled manufacturing plans, and calls on President Joe Biden from states like Massachusetts and New York to do more to save the industry from the economic storm.
The bad news was capped late last month when Ørsted, the nations’ largest offshore wind developer, canceled two massive wind projects in New Jersey — the first to go down amid inflation and supply chain pressures. Ripple effects continue to emerge, like Siemens Energy’s recent decision to not build a turbine blade manufacturing plant in Portsmouth, Va., that had been heralded by the state’s former governor.
“Few predicted that this market correction would be unfolding so severely like this,” said Sunny Gupta, principal at Gupta Advisory, during a recent press briefing by offshore wind advocacy group Turn Forward. “However, the reality is that this correction has been brewing for several years and was made exponentially uglier by the effects of black swan events.”
Those unpredictable events include historic inflation — driven by the pandemic and Russia’s invasion of Ukraine — that has hit the nascent offshore wind industry particularly hard. It has jacked up the cost to build wind arrays just as several projects were preparing to ink contracts with suppliers.
Making that situation worse is a domestic supply chain that is not yet ready for a sudden and massive boom of building in the United States. Companies have not yet reached a critical mass for manufacturing offshore wind towers, blades and rotors, or for building and operating the ships needed to install them at sea.
But the industry was already racing along at a pace experts weren’t sure would be sustainable. Now targets like Biden’s 2030 goal of installing 30 gigawatts of offshore wind are likely out of reach, according to most experts. The White House has not conceded that offshore wind growth may be too slow to meet the administration’s goals.
Still, both analysts and developers remain confident that this period of instability could also reset the offshore wind sector and refocus policy priorities on building an industry and supply chain that’s sustainable.
“We need to slow down a little bit in our growth,” Jan Matthiesen, director of offshore wind for the research and consultancy group Carbon Trust, said at the Turn Forward press briefing. “Give the supply chain some room to actually breathe and catch up.”
With U.S. offshore wind at a crossroads, here’s four questions answered.
Why are only some projects in trouble?
While it’s clear the entire offshore wind industry is facing significant headwinds, the impacts haven’t been equally felt.
A slew of projects have broadcast their vulnerability. In addition to the now-canceled Ocean Wind project, New York’s Beacon Wind, Empire Wind 1 and 2, and Sunrise Wind are on the ropes. Two Massachusetts projects, SouthCoast Wind and Commonwealth Wind, are paying million-dollar penalties to break contracts with utilities with plans to rebid in future state solicitations.
“It’s largely an issue of timing,” explained Tim Fox, a research analyst with ClearView Energy Partners. “Projects that bid into solicitations before macroeconomic factors arrived, but then had to secure contracts amid high interest rates and inflation, face serious headwinds.”
Some projects are barreling forward — like Vineyard Wind, a joint project of Avangrid and Copenhagen Infrastructure Partners off the coast of Massachusetts. The first large project permitted in the U.S., Vineyard is under construction with full operations beginning by next year. South Fork Wind, an Ørsted project off the coast of Rhode Island that will power New York, may go live even sooner.
A similar spirit of confidence is occurring in Virginia, where the utility Dominion Energy said last week that its 176-turbine Coastal Virginia Offshore Wind project is on schedule. Monopile foundations have already been delivered.
The troubles thrashing some offshore wind projects highlight some of the benefits that Virginia’s project uniquely enjoys.
It is the only project being developed in the U.S. solely by a regulated utility. Richmond-based Dominion is a monopoly in Virginia, though it also has customers across 14 other states.
That means its investments are paid for by electric consumers, with utility regulators approving a return on the investment as profit. Dominion has already fought, and won, for its right to proceed with a project that is costing roughly $2 billion more than it had planned.
“Dominion’s smart strategy has helped it avoid the same issues faced by its competitors. They are the off taker — they are able to pass on cost increases to consumers,” said Atin Jain, wind analyst at BloombergNEF.
He noted that Dominion secured supply deals with turbine manufacturers in 2021, before inflation drove up costs. The Coastal Virginia project will also be “huge,” with a capacity of 2.6 GW, enabling the company to benefit from economies of scale.
The project, which got final approval from the Interior Department last month, is also building its own ship, the Charybdis, to install its turbines.
Expected to be complete by early 2025, the $650 million vessel means the utility won’t have to fight with other developers over a limited number of installation vessels, said Søren Lassen, head of offshore wind research at Wood Mackenzie. Plus, Dominion will be able to pay off some of its investment in the ship by leasing the vessel out to other U.S. projects, he said.
What happened with Ocean Wind?
Much of the trouble faced by offshore wind projects in the U.S. over the last 18 months has revolved around how much states are paying companies for their electricity and whether it’s enough to keep the projects viable. But Ocean Wind has highlighted how serious gaps in the country’s nascent supply chain are undermining the industry as well.
“Supply chain complications with Ocean Wind were the main source of Ørsted’s impairments. This type of struggle has yet to be cited and discussed so openly for other projects,” said Chelsea Jean-Michel, wind analyst at BloombergNEF.
Mads Nipper, CEO of Ørsted, told investors in a call earlier this month that Ocean Wind faced a multiyear delay in securing a vessel. Offshore wind installation vessels are a critical pinch point in raising the U.S. industry. The issue is exacerbated by a federal law meant to protect American mariner jobs that requires ships to be U.S.-flagged when moving goods between domestic ports.
The vessel delay for Ocean Wind would have had the costly ripple effect of forcing the company to redo its other construction and supply contracts, according to Nipper.
“We would be in a situation where we would need to go out and recontract all or a very large scope of the project at expectedly higher prices,” he said.
Ørsted also blamed high interest rates and has expressed regret for investing heavily in Ocean Wind early in the process.
Ocean Wind is just one of five projects that have won federal permitting approval so far — and until last month, it appeared to be moving forward alongside the country’s first suite of wind projects, despite expected delays. In an effort to offset rising costs, the project had secured a deal with New Jersey lawmakers to reap federal tax credits that otherwise would have been passed on to ratepayers.
But Ørsted has been grappling with high interest rates, the downgrading of its credit rating by Moody’s Investors Service, and a power contract with New York that the company says will not cover the cost of the associated wind project. The disinvestment of Ocean Wind was a way for the company to improve its financial position, experts said.
“This was not a decision that Ørsted wanted to take but was forced to take,” Lassen said.
Ørsted is also behind several other U.S. offshore wind projects still in development. This month, the company confirmed its commitment to Revolution Wind, a 704-megawatt joint project with Eversource to power Connecticut and Rhode Island, and it is developing Skipjack Wind off the coast of Maryland.
The company is also in joint ventures with Eversource to develop Sunrise Wind in New York and South Fork Wind off the coast of Rhode Island. South Fork, a 12-turbine array, is under construction.
Are more projects going to be canceled?
Ocean Wind is the first project to see a full cancellation due to recent economic factors, but experts say it might not be the last, as other projects also struggle with the same inflation and supply chain issues.
The projects most at risk may be in New York, where developers unsuccessfully sought renegotiated power prices with the state earlier this fall, said Fox with ClearView.
Equinor and BP are developing three of those projects: Empire Wind 1 and 2, and Beacon Wind. Ørsted’s Sunrise Wind is the fourth. All say their costs have swelled by as much as 50 percent due to inflation.
“I would call those contracts at risk, because I think they’re likely to cancel,” Fox said.
But developers haven’t yet stepped out of the ring. In Massachusetts, Southcoast Wind and Commonwealth Wind sought renegotiated contracts and were denied by the state. But those projects say they still hope to rebid in the state’s next solicitation for wind projects. Similarly, offshore wind developers in New York may also still rebid the projects in future state solicitations.
“They’re going to take a hard look at whether they can repeat the projects. I think a lot will depend on timing and the, you know, the requirements of the bid process,” said Fred Zalcman, director of the New York Offshore Wind Alliance.
Zalcman said there is some risk that the new bid process will be hard for projects. For example, New York will require minimum amounts of U.S. steel for offshore wind farms, and it’s not clear that projects already in development could secure that.
“The longer this thing drags out, the lower the odds that these projects, or some portion of these projects, can be salvaged,” he said.
But experts still remain bullish on the industry over time, particularly in the northeast Atlantic. That’s because states have doubled down on their offshore wind commitments, despite developers warning that projects could fail.
In New York, for example, Democratic Gov. Kathy Hochul released a plan to expedite large renewable projects, after the state’s Public Service Commission rejected calls from offshore wind developers to renegotiate contracts with higher prices. Hochul’s plan also aims to “backfill any contracted projects which are terminated.”
“Political momentum should not be underestimated,” said Wood Mackenzie’s Lassen, pointing to California, Maine and Maryland increasing their offshore wind targets during this period of economic uncertainty. “I think now that the dominoes are starting to fall in the other direction.”
What’s next for the larger industry?
Today’s offshore wind crisis is an opportunity for a reset for the U.S. industry, if states and companies are sensitive to its lessons, experts said.
Matthiesen at Carbon Trust said the government bidding process puts a premium on the least-cost option. But that strategy — which aims to make offshore wind more affordable for customers — puts cost pressure all the way down the supply chain, he said.
The procurement process needs to place a premium on the other advantages of offshore wind, he said, like resiliency.
Wood Mackenzie’s Lassen said the industry’s last 18 months will result in developers more slowly rolling out projects, delaying them, or potentially canceling some. But he warned that time alone may not solve the country’s supply chain problems so much as punt them down the road.
If states continue to accept new projects with similar start dates to delayed projects, developers of both will be competing at the same time for limited supply chain resources. That future demand bottleneck could be made worse by today’s slowdown in projects, which will likely slow the expansion of the U.S. supply chain.
“The oxygen of the supply chain is orders. It’s volumes,” Lassen said. “If you don’t give them that when they need it, which is right now, [that makes it difficult for] them to go out and make the investments in the vessels, factories that would allow you to be ready [in the future].”
Gupta of Gupta Advisory, who was formerly head of new market development at Ørsted North America, said U.S. policymakers need to realize that the country is competing in a larger market over investments. Echoing developers, he said some of the federal tax credits in the Inflation Reduction Act were written in a way that could cut projects out of significant benefits.
“If companies are asked to make very large, very risky commitments to the U.S. market all at once, or otherwise they get nothing at all, we’re not going to like the answer to that question,” Gupta said. “We need to be a little more self-aware of where the U.S. stands in the global offshore wind industry’s pecking order.”