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U.S. Offshore Wind Projects Hit by Surging Costs

The Biden administration wants to build 30 GW of offshore wind generation capacity by 2030. To this end, the federal government has been holding tenders for offshore wind farms and has boasted serious interest among capacity developers. Now, those same developers are dropping projects and leaving.

For several years, it all seemed like smooth sailing for offshore wind. Governments were fans, there were plenty of investors willing to bet on this form of future energy, and business was good.

That changed last year when the wind power industry, both off- and onshore, discovered that costs for raw materials and equipment are not static. Like many other industries, wind power struggled with the effects of central bank monetary policies aimed at reigning in inflation-and their plans changed.

In November last year, the Department of Interior announced the approval of two large-scale offshore wind power projects-Empire Wind 1 and Empire Wind 2. Less than two months later, the developers of the project said they would scrap Empire Wind 2, citing its compromised commercial viability-despite authorities' efforts to keep the projects going by offering higher prices for the electricity they would generate.

"Commercial viability is fundamental for ambitious projects of this size and scale," said the head of Equinor Renewables America, Molly Morris, as quoted by the FT in early January. "The Empire Wind 2 decision provides the opportunity to reset and develop a stronger and more robust project going forward."

The two oil supermajors decided to scrap Empire Wind 2 after announcing combined writedowns of $840 million on wind power projects in the United States. At the time, analysts predicted that cancellations would follow-because at the time, the authorities refused to offer higher prices.

Therein lies the key to the problem that is plaguing the wind power industry. Many companies-including BP and Equinor, and global wind power leader Orsted-rushed to close deals for offshore wind farms with various U.S. state and federal authorities to take advantage of the transition enthusiasm and generosity that the Biden administration ushered in when it took office in 2020.

Wind power was marketed as cheaper than alternatives-except solar-and, as such, the best bet possible for the future of energy as a replacement for gas and coal. Deals were struck for long-term electricity supply at fixed prices agreed between the developers and the local authorities. These prices were based on the assumption of basically static raw material and equipment prices.

When central banks started fighting post-pandemic inflation, however, costs changed. Costs rose. And wind, especially offshore wind, stopped being so cheap. In fact, offshore wind has never really been cheap but it was in the past couple of years that this became obvious and impossible to ignore.

Faced with these higher costs, offshore wind developers had to either scrap the projects that had become unprofitable and not worth building or ask for higher prices. BP and Equinor did the latter, but the state of New York refused to pay more-for a time. The reason it refused was that it realized this would saddle its citizens with higher electricity bills-when wind and solar were being advertised as cheaper than cheap.

That initial refusal, however, was reversed by another state agency that offered BP, Equinor, and all other wind developers to resubmit their original bids for the projects with new prices. In other words, the state apparently decided that it was better to saddle its citizens with higher electricity bills than lose the planned offshore wind capacity it needs in order to hit its target of sourcing 70% of its electricity from low-carbon projects by 2030.

It is in this prioritization of climate policies over energy affordability that offshore wind's hopes lie. Costs are not going down any time soon. On the contrary, if offshore wind activity picks up, prices will go higher still. And developers would need even higher prices for their future output to make their projects make business sense. The question then would be for how long governments would oblige.

In anticipation of the answer to this question, some developers are quitting, the Wall Street Journal reported last week. A number of companies are selling their stakes in planned offshore wind projects and leaving. Others are waiting for new contract terms like the ones New York offered BP and Equinor-and even that was not enough to make them stay with the project.

Last year, these developments caused a rout in wind power stocks. This year, governments will probably ramp up their support for offshore wind power projects to avoid falling short of their climate policy targets. Keeping an eye on the affordability aspect of these projects, however, might be a good idea. The offshore farms, after all, are not an end in themselves. They are supposed to be a means to a cleaner-rather than leaner-energy future.

By Irina Slav for Oilprice.com

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Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More