Rising Prices Put U.S. Offshore-Wind Expansion at Risk

Offshore wind developers are facing financial challenges that threaten to derail several East Coast projects critical to reaching the Biden administration’s near-term clean-energy targets. According to industry experts, the challenges stem from the high cost of building offshore wind farms, as well as the lack of available financing. The situation is made worse by the fact that many of the best sites for offshore wind development are located in deep waters, which are more expensive to build in.

Despite the challenges, the offshore wind industry remains optimistic that it can meet the Biden administration’s targets. In particular, the industry points to the fact that the cost of offshore wind has fallen dramatically in recent years, and is expected to continue to do so. Moreover, the industry is confident that it will be able to secure the necessary financing to build the required number of offshore wind farms.

Supply-chain disruptions, rising interest rates, and inflationary pressures are making projects more expensive to build. As a result, some developers are looking to renegotiate their financing agreements to keep their projects on track.

The Biden administration has set a target for the U.S. to develop 30 gigawatts of offshore wind power by 2030. This would be enough to supply electricity to roughly 10 million homes. However, analysts say that this target will be difficult to achieve if cost and supply issues persist.

"We're seeing unexpected and unprecedented macroeconomic challenges," said David Hardy, chief executive of the Americas for Danish power company Ørsted A/S. Hardy noted that Ørsted is developing about five gigawatts of offshore wind projects off the coast between Rhode Island and Maryland.

Avangrid's stock is down 1.29%.

Iberdrola SA's subsidiary, Iberdrola Renewables, is a leading renewable energy company. It has a strong presence in the wind and solar power markets and is committed to providing clean, sustainable energy for the future.

The company is developing a 1.2-gigawatt project called Commonwealth Wind off the coast of Massachusetts. In December, the company asked the Massachusetts Department of Public Utilities to terminate its review of contracts the company negotiated with utilities serving the state. The company said it now intends to scrap the contracts and rebid the project next year to account for higher costs.

"We believe this will help us secure funding for the project," said Kimberly Harriman, Avangrid's senior vice president of state-government affairs and corporate communications.

Mayflower Wind Energy LLC, a joint venture between Shell New Energies US LLC and Ocean Winds, is developing another Massachusetts project. According to its regulatory filings, the company's contracts have been similarly affected and it plans to produce third-party analysis showing the challenges of financing the project. Mayflower Wind declined to comment.

Ørsted told analysts in November that it was not happy with the anticipated return on its U.S. projects, including Ocean Wind 1 off New Jersey. New Jersey utility company Public Service Enterprise Group Inc., which has a 25% interest in Ocean Winds, told analysts in October that it was reviewing its options and project costs before making a final investment decision. The company declined to comment.

The offshore wind industry in the U.S. has been delayed for a long time due to federal permitting. The Biden administration is now trying to speed up this process. Vineyard Wind LLC, a joint venture between Avangrid and Copenhagen Infrastructure Partners, is building the nation's first large-scale project off the coast of Massachusetts. They expect it to begin producing power late next year, which is about six years after they started the permitting process.

The global market for offshore wind farms is becoming increasingly competitive, as the U.S. and European countries race to build their own projects. This has put strain on the supply chain, as well as the availability of specialized installation vessels needed to transport and hoist massive turbines.

Samantha Woodworth, senior research analyst at Wood Mackenzie, said that there will be a lot of vessel sharing.

According to Ms. Woodworth, any delays to projects in the U.S. or Europe could have a ripple effect on other projects. WoodMac expects that these delays will cause the U.S. to fall 2 gigawatts short of the 2030 goal set by the Biden administration.

Dominion Energy Inc., a Richmond, Va.-based utility company, is building the only offshore-wind installation vessel under construction in the U.S. The vessel is expected in 2024 to service two projects under development by Ørsted and New England utility company Eversource Energy, and will then move to service a 2.6-gigawatt project Dominion is building off the coast of Virginia. This is a huge project that will create many jobs and help the environment.

Josh Bennett, Dominion's vice president of offshore wind, said the vessel is more than 60% complete. The company's $9.8 billion offshore wind farm remains on schedule and on budget, he said, largely because the company signed its supply contracts before the constraints emerged.

"The demand for offshore wind energy is growing rapidly," he said. "If you were to start an offshore wind project today, it would take you several years to complete."

The Inflation Reduction Act, passed earlier this year, contains tax credits for offshore wind developers and manufacturers, as well as support for transmission planning. Developers say they are studying how the bill’s provisions could be used to help stabilize their projects.

The U.S. is also pushing to begin developing offshore wind along the West Coast, an effort seen as key to achieving the 2030 target and other clean-energy goals. However, potential projects in this region come with regulatory complexities, deep-water technical risks and port space constraints, which has made developers hesitant to invest heavily in the region. The first-ever sale of California offshore wind rights in December fetched $757 million, compared with a $4.37 billion Atlantic coast auction in February.

Wind-turbine manufacturers have been struggling with supply-chain snarls and rising materials costs. Vestas Wind Systems A/S, one of the world’s largest turbine makers, reported lower revenue in the third quarter as a result of project delays and lower activity in the U.S.

Josh Irwin, Vestas North America's senior vice president of offshore sales, said that the amount of time it takes for developers to complete the necessary permitting steps remains a challenge for planning. He added that this is an area where Vestas is working to improve the process for its customers.

"The longer the interval between a project's original cost estimates and its actual implementation, the greater the opportunity for supply-chain costs to diverge from those expectations," he said.