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Financial Future Changing for Offshore Wind Energy Projects

Building a wind farm costs money. Building an offshore wind farm costs a lot more money.

The international corporations vying to build massive wind farms in offshore waters along the East Coast have deep pockets. But they also have shareholders, quarterly accounting, and a deeply conservative ethos when it comes to sinking millions of dollars into energy projects whose profits will be decades in coming. Those factors combined with the negative effects of supply chain slowdowns and inflation have led to a general cooling of enthusiasm recently among companies such as Orsted and Avangrid for their planned offshore developments.

The current economic climate has forced offshore wind energy developers to reassess their planned East Coast projects. Photo courtesy of WBUR.

Four offshore wind projects have been approved by the Bureau of Offshore Energy Management (BOEM) for the East Coast. Vineyard Wind, currently under construction, will feature 62 turbines about 15 miles off Martha’s Vineyard. This summer construction began on South Fork Wind, 12 turbines off Long Island, New York, about 35 miles east of Montauk Point. Ocean Wind I, the first of two Orsted projects in New Jersey, will build 98 turbines about 15 miles off Atlantic City and Ocean City. In addition, Revolution Wind, with 65 turbines, is planned for Rhode Island waters about 15 miles southeast of Point Judith.

The Inflation Reduction Act passed last year included incentives for offshore wind energy projects as part of the Biden Administration’s push to produce 30 GW of offshore energy by 2030. The law provides at least $370 billion in grants, tax credits, and other incentives for clean energy projects. It also gives credits to companies using U.S.-made parts, increasing demand, which has had the effect of driving up prices for those parts.

The problem is one of timing. The economic forecasts that led giant corporations to bid on East Coast offshore leases were made years, even decades ago. Threading a path through BOEM’s permit process takes years; so does negotiating a power purchase agreement with the nearby state. By the time construction of the Vineyard Wind project began this summer, Avangrid had spent years in planning and development.

The U.S. Department of Energy in a recent report detailed the changing economics for the offshore wind sector, noting that construction and operating prices, which had been steadily declining, shot up in the last several years due to inflation, supply bottlenecks, and higher financing costs. Two years ago, major offshore wind corporations were estimating development costs based on a projected cost of $77 per megawatt hour, according to an August article in BloombergNEF. This year, it’s $114.

Coastal states have declared their respective goals for offshore wind energy production, which now may be harder to achieve due to the changing economic landscape. Maine just set its procurement goal of 3 GW of offshore energy by 2030. New York wants to reach 9 GW of offshore wind energy by 2035 and has contracted for production of 4.3 GW thus far. However, developers of 95% of the contracted capacity are now trying to renegotiate contracts, according to BloombergNEF. Massachusetts’ goal is 5.6 GW by 2035; 3.2 GW have been contracted but developers are looking to renegotiate or cancel 75% of that contracted power.

Avangrid in July agreed to pay $49 million to terminate its power purchase agreement for its 1.2 GW Commonwealth Wind project off the Massachusetts coast. Shell and its joint venture partners agreed in September to pay more than $60 million in penalties to exit a contract for their 800-megawatt South Coast Wind project near Massachusetts. Companies are expected to rebid those projects at higher prices through the state’s procurement process.

In late August Orsted announced “U.S. impairments” of up to $2.3 billion, citing higher costs and supplier delays with its U.S. projects. In June Equinor and BP asked regulators at the N.Y. Public Service Commission to approve a 54% electricity price increase for their planned Empire and Beacon projects near Long Island.

The rush to be first to tap into the economic potential of U.S. offshore wind comes with a high level of risk. While offshore wind farms are more common in Europe and Asia, the industry is brand new in the United States. Thus those aiming to develop offshore wind must set up their own supply chains, thread through a novel set of regulations, secure financing, and negotiate energy contracts today with an eye to future profits. Increased inflation, higher costs to borrow money, the war in Ukraine and a pandemic seem to have thrown many corporations’ optimistic calculations into turmoil.

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