When The Wind Blows - Offshore Wind Stung By Project Cancellations, But Progress Can Be Seen Too - RBN Energy

When The Wind Blows - Offshore Wind Stung By Project Cancellations, But Progress Can Be Seen Too | RBN Energy

It’s been a rough few weeks for the offshore wind industry, highlighted by Ørsted’s decision to cancel two high-profile projects in the Northeast: Ocean Wind 1 and Ocean Wind 2. The industry continues to be plagued by a host of problems around inflation, the supply chain and permitting, leading some developers to write-down losses and question whether their projects remain economically viable. But it hasn’t all been bad news, as other projects have been able to move forward and hit major milestones. In today’s RBN blog, we look at the recent cancellations, some key projects that have been approved or are advancing, and what we’ll be watching for over the next several months.

We’ve written a lot over the past couple of years about how the world’s ongoing effort to decarbonize isn’t going to be a straight line leading directly to abundant, carbon-free power and a net-zero world. The increased deployment of electric vehicles(EVs), the development of large-scale carbon-capture projects, and the creation of a clean hydrogen industry are all seen by proponents as important elements of a lower-carbon economy, but each faces its own headwinds to widespread adoption and long-term growth. And as we wrote in Part 1 of this blog series, it’s much the same situation for offshore wind.

Figure 1. U.S. Wind Energy Pipeline by Classification Status as of May 31, 2023.

Source: Offshore Wind Market Report

U.S. offshore wind development has been accelerating in recent years. The projects in the development pipeline (see Figure 1) totaled 52,687 megawatts (MW) of potential operating capacity as of May 31, 2023, according to the Department of Energy’s (DOE’s) annual Offshore Wind Market Report, up 15% from the previous year. That’s a significant annual increase — but it also comes with some pretty big caveats. Most of those 52,687 MW (blue bar to far left in Figure 1) are in relatively early stages of development, with just 42 MW (short red bar to far right) already operational and 932 MW under construction (yellow bar), together representing less than 2% of the total. In addition, most of the 6,915 MW added to the U.S. project pipeline over the past year was driven by activity that created three new lease areas in the Gulf of Mexico with an estimated capacity of 4,885 MW. But two of the three tracts available (representing a combined 3,226 MW) failed to attract any bids during a lease sale conducted in August by the Bureau of Ocean Energy Management (BOEM), even though major players like BP, Equinor and Shell had qualified to participate in the sale. The sole winner was RWE Offshore Wind, which secured the rights to an area off the coast of Lake Charles, LA, for $5.6 million, while two areas off Galveston, TX, received no bids. (All offshore wind projects in federal waters must navigate through the regulatory process that formally begins when state and federal officials initiate the leasing process to designate a wind energy area, or WEA. Projects move left to right through the stages noted in Figure 1, starting with Planning and ending with Operating. The 1,659 MW of capacity from the Lake Charles project moved from the Planning stage to Site Control after it was acquired in the lease sale. The 3,226 MW in the unbid areas remained in the Planning stage.)

More recently, projects already in the development pipeline have seen their prospects dimmed, if they were not outright canceled. Ørsted, which has been developing four offshore wind projects along the East Coast, said October 31 that it was cancelling two of them — Ocean Wind 1 and Ocean Wind 2 — citing a range of macroeconomic factors, including inflation, supply-vessel delays, supply-chain bottlenecks and rising interest rates. (Projects involving renewables can be very sensitive to changes in interest rates, given their generally high capital expenditures.) Ocean Wind 1 and 2 were New Jersey’s first offshore wind projects and each would have added more than 1,100 MW of capacity. The company said it intends to retain the lease area and consider its options as part of an ongoing portfolio review.

Figure 2. Offshore Wind Projects Under Development With NYSERDA: Source: NYSERDA

Earlier in October the New York Public Utilities Commission (PUC) rejected requests by Ørsted and other offshore wind developers to increase the strike price — the guaranteed price the developers would receive for the power produced — by anywhere from 27% to 65% for four projects in development offshore New York. The impacted projects include:

- Beacon Wind (1,230 MW; blue area in top right of Figure 2), a 50/50 partnership of Equinor and BP, planned for an area about 60 miles east of Montauk, NY, and 20 miles south of Nantucket, MA.
- Empire Wind 1 (810 MW; orange area middle of Figure 2) and Empire Wind 2 (1,260 MW; blue area in middle of Figure 2), also a partnership of Equinor and BP, planned for a site 15-30 miles south of Long Island’s Jones Beach and Kennedy Airport.
- Sunrise Wind (880 MW; orange area in top right of Figure 2), a 50/50 partnership of Ørsted and Eversource, planned for an area about 30 miles east of Montauk.

Equinor and BP said previously that the projects needed sustainable economics to proceed and that their outlook had changed in recent years. Ørsted said its project’s estimated return on investment (ROI) has dropped significantly since 2019 and that it would be unlikely to reach a final investment decision (FID) without an increase in the strike price. But the PUC ruled against the developers, citing its desire to preserve the competitive-bidding process for renewable energy resources (and also wary of setting a precedent for other developers seeking higher rates). The PUC said that if the increases had been approved, residential ratepayers would have seen their monthly bills rise by up to 6.7%; for commercial and industrial customers, the hike would have been as high as 10.5%. (As we noted in New York State of Mind, the state already ranks #10 in the U.S. for highest residential electricity rates.) The future of all four projects remains in doubt.

The PUC’s decision and other market headwinds have led developers to reassess their approach to offshore wind during their Q3 earnings announcements:

- Equinor took a $300 million pre-tax impairment on its U.S. power portfolio and said its projects remain hampered by inflation and supply-chain issues. It is still assessing the impact of the PUC decision on the Beacon Wind and Empire Point projects, it said during its Q3 earnings release on October 26.
- BP took a $540 million pre-tax impairment on the Beacon Wind and Empire Point projects, citing higher inflation and permitting issues. It said in its Q3 earnings release on October 31 that it was still assessing its next steps and working with its partners.
- Ørsted took a $4 billion loss on offshore wind through Q3 — including $2.8 billion from the now-canceled Ocean Wind 1 and 2 — and said it wants to renegotiate a new contract for Sunrise Wind with New York. During its earnings call October 31, it said its U.S. offshore wind portfolio was being impacted by inflation, project delays, and supply-chain issues. On the positive side, it also took FID on the 704-MW Revolution Wind project (more on that in a bit), which will provide power to Rhode Island and Connecticut. Revolution Wind is being developed via a 50/50 partnership with Eversource.
- Eversource said during its earnings call November 6 that it was including an after-tax impairment charge of $331 million for the first nine months of 2023 related to its offshore wind investments, including South Fork Wind (132 MW, yellow area in top right of Figure 2). The company said its future financial performance would be impacted by its ability to sell its 50% interest in three offshore wind projects under development (South Fork Wind, Revolution Wind, Sunrise Wind) as expected; investment tax credit qualifications (more on those in a bit) related to those three projects; and its ability to successfully rebid the Sunrise Wind contract at an increased value.
- In other developments, Avangrid said during its earnings call October 28 that it had terminated its power purchase agreements (PPAs) for Commonwealth Wind (Massachusetts) and Park City Wind (Connecticut), which allowed it to improve the economics of its offshore wind portfolio and avoid billions in write-offs. (On the positive side, it had good things to say about the progress of the Vineyard 1 project off Massachusetts. More on that below, too.)

It’s important to note that while the offshore wind industry is surely going through a rough patch, progress can be seen. Construction and operation of the Coastal Offshore Wind project — which would be the nation’s biggest wind farm at 2,600 MW — was approved October 31 by the U.S. Department of the Interior (DOI). It is the fifth commercial-scale project approved by the Biden administration, which aims to install 30 gigawatts (GW) of offshore wind by 2030. Located about 24 miles east of Virginia Beach, VA, the project is being built by Dominion Energy. DOI approval is the final step in the National Environmental Policy Act(NEPA) review process for the project’s construction and operations plan (COP). Dominion Energy must still receive a final COP approval from the BOEM, which is scheduled for January 29, 2024. ( Permitting issues and construction delays have been a recurring theme for all sorts of renewable projects, so it’s worth mentioning how long Coastal Offshore Wind has been in the development timeline. Dominion won the competitive lease for the area more than a decade ago — September 2013 — and expects construction and commissioning to happen in 2024-26.)

Vineyard Wind 1, the first commercial-scale offshore wind project to reach FID, installed the first of its 62 turbines in October. (The 30-MW Block Island Wind Farm off Rhode Island was the first offshore project to reach commercial operation in 2016, but with just five turbines, it’s not generally considered to be commercial scale.) Avangrid, which is developing the project along with Copenhagen Infrastructure Partners, said during its Q3 earnings call that installation is complete on two turbines and that the project remains on track to deliver its first power before the end of the year and achieve commercial operation by the end of 2024. Vineyard Wind 1, located 15 miles south of Martha’s Vineyard and Nantucket and 35 miles from mainland Massachusetts, will have a generating capacity of 806 MW once complete. Another project making progress is South Fork Wind, which recently had the first of its 12 turbines shipped to its offshore site, marking the start of final construction.

And while New York declined to adjust the strike price for the four previously mentioned offshore projects, just a couple weeks later the New York State Energy Research and Development Authority (NYSERDA) moved forward with contracts for three other offshore projects that would add 4,000 MW of capacity. Projects included in the agency’s third competitive offshore wind solicitation were Attentive Energy One (1,404 MW; blue area in bottom middle of Figure 2), to be developed by TotalEnergies, Rise Light & Power, and Corio Generation; Community Offshore Wind (1,314 MW; blue area in bottom middle of Figure 2), to be developed by RWE Offshore Renewables and National Grid Ventures; and Excelsior Wind (1,314 MW; blue area in middle of Figure 2), to be developed by Vineyard Offshore.

So, what do the developments over the last few weeks mean for the offshore wind industry? We can think of two areas worth monitoring:

- The issues around the supply chain, permitting and inflation seem to be universal when it comes to offshore wind. And with New York declining to renegotiate its contracts with offshore developers — even at the risk of those projects falling through — it stands to reason that those developers are likely to be at least somewhat less aggressive in their bids to win future contracts. The Community Offshore Wind project was approved with a strike price of $145.07 per megawatt-hour (MWh), well above the rates originally set for Beacon Wind, Empire Wind, and Sunrise Wind, which ranged from $107.50/MWh to $118.38/MWh.
- Tax credits available under the Inflation Reduction Act (IRA) may become increasingly important to offshore wind developments. The IRA makes tax credits of 30% available to renewable energy developers if they follow prevailing wage and apprenticeship requirements with an adder worth another 10% if they use domestic materials (similar to how the credits around EVs are structured), plus another 10% if the projects serve “energy communities.” Ørsted, which recently took FID on the Revolution Wind project planned for offshore Rhode Island and Connecticut, had previously said that it needed tax credits of around 40% to move its projects forward. (The project will connect to the grid in a section of Rhode Island designated as an energy community because its census tract connects directly to another census tract in Massachusetts that had one or more coal-fired generating units retired, which should qualify the project for a higher credit amount. An interactive map showing the areas available for the energy community tax credit bonus can be found here.) Some developers have complained that it can be hard to qualify for the IRA’s credits, but with project economics getting more challenging it’s likely that developers will do all they can to meet the requirements.

Every developer prominently mentioned in today’s blog has scaled back the scope of their offshore wind investments and/or set long timelines for projects under development. How much is that going to continue? Earlier this year Eversource sold its 50% stake in a lease area offshore southern New England to Ørsted, its partner in the project, and has plans to sell its 50% stake in three other projects under development. It’s certainly possible that others feeling the same headwinds could make a similar choice, or simply elect not to move some projects forward. We’ll be monitoring the pace of project development and how offshore developers continue to adapt to a less-friendly environment.

“When the Wind Blows” was written by David Bowie and Erdal Kizilcay and appears as the first song on the soundtrack album for the 1986 animated film When the Wind Blows. Released as a single in October 1986, the song went to #44 on the U.K. Singles chart. The lyrics are based on the film’s tale of a rural English couple’s attempt to survive a nuclear attack and its aftermath. Personnel on the record were: David Bowie (vocals, production) and Erdal Kizilcay and David Richards (production).

When the Wind Blows Soundtrack Album was recorded during the winter of 1985 in London. It features tunes written by Roger Waters and performed with his Bleeding Heart Band, along with artists David Bowie, Genesis, Hugh Cornwell, Squeeze, and Paul Hardcastle. Bowie was originally slated to provide the majority of songs for the album, but decided to pass so he could focus on his upcoming LP at the time, Never Let Me Down. The soundtrack album was released in May 1986 along with the film directed by Jimmy Murakami.

David Bowie (David Jones) was an English singer, songwriter, musician, and actor. He is regarded as one of the most influential artists of the 20th century. He released 26 studio albums, nine live albums, 26 compilation albums, two soundtrack albums, eight EPs and 128 singles. He has sold more than 140 million records worldwide. Bowie was featured in 37 motion pictures and television shows. He won four Brit Awards, six Grammy Awards, four Ivor Novello Awards and four MTV Video Music Awards. He was inducted into the Rock and Roll Hall of Fame, Songwriters Hall of Fame, has a Lifetime Achievement Grammy Award, and a star on the Hollywood Walk of Fame. Bowie died in January 2016 in New York City at the age of 69.