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Offshore wind faces more financial turmoil in 2024
The offshore wind industry is hoping for a new boost in 2024 to combat the broken contracts, canceled wind farms and unmet targets that have characterized its last 18 months.
While experts say the nascent industry is rebounding after being hammered by inflationary costs and an immature supply chain following the pandemic, the enormous scale of building a new renewable sector in the U.S. from scratch still presents significant challenges. that could paralyze a key platform of President Joe Biden’s climate agenda.
“There is an adjustment going on in the industry that I read very clearly as we are trying to build an industry that we have no supply chain for,” said Eric Hines, an engineering professor at Tufts University who studies the offshore wind industry. “Our demand has outpaced not just the U.S. supply chain, but the global supply chain as well.”
The hurdles are coming to a head as Biden faces a difficult election year and aims to prove his climate bona fides to voters on the left, some of whom have criticized the administration for failing to deliver on 2020 campaign promises such as ending new oil drilling on public lands.
The Interior Department has 10 months to fulfill other White House offshore wind promises before Election Day, including pledges to approve 16 wind farms by 2025 and conduct lease sales in areas such as the Gulf of Maine.
But optimism for the industry is growing as inflation eases and interest rates trend lower. Additionally, states have increased enthusiasm as they seek contracts for a staggering 14 gigawatts of offshore wind power, despite harsh economic realities that have driven up prices for wind farm construction.
“I think the headlines are different for 2024,” said Theodore Paradise, an energy lawyer at K&L Gates. “We have better contracts, better deadlines and a better sense of the supply chain.”
With the administration and industry poised to make decisions in the coming months that will drive the future of the industry, here are three issues to watch with offshore wind in 2024:
How close will Interior get to Biden’s offshore wind goals?
If the Bureau of Ocean Energy Management (BOEM) wants to meet the White House’s mandates for offshore wind, it will need to pick up its pace in the coming months.
Biden wants environmental reviews of 16 offshore wind projects completed by the end of his first term, according to a 2021 executive order. That represents about 19 GW of offshore wind.
To date, BOEM has completed six reviews of proposed wind farms, a process that poses a major hurdle to building a project in U.S. waters. They include Vineyard Wind of Massachusetts, Rhode Island and Revolution Wind of Connecticut, Ocean Wind of New Jersey, Empire Wind 1 and 2 of New York, South Fork Wind of New York and the Coastal Virginia Offshore Wind project.
However, one of these approvals is debatable. Ocean Wind Developer Ørsted canceled the project in October due to economic headwinds.
Empire Wind 2, which was approved by BOEM in November, also flagged serious concerns about its viability due to inflation and supply chain issues. Developers BP and Equinor on Wednesday canceled the Empire Wind 2 contract with New York, although its developers stressed that the project is still active and they are seeking a better contract for its power.
Given the pace of approvals, many analysts say Biden’s goal of reaching 30 GW of offshore wind by the end of the decade is out of reach. Wood Mackenzie, a research and consultancy company, predicts around 15 GW installed by 2030.
Evaluating multiple massive offshore wind projects at high speed is a new role for BOEM. The agency has nearly a decade of experience advancing the industry by conducting lease sales, conducting research and analyzing the environmental impacts of proposed projects. But the first full approval of the project only occurred in 2021 with Vineyard Wind. Now it is expected to complete several projects at the same time.
“There’s a difference between advancing a lease area or a project and what they have now: scaling the entire operation,” said Catherine Bowes, senior director of strategy and advocacy at offshore wind group Turn Forward.
“I’m optimistic that they will be successful, but it’s certainly not out of the woods,” she said.
BOEM did not comment on this story prior to publication.
To facilitate an offshore wind boom, BOEM staffing has grown significantly since the Biden administration took office. He hired dozens of new employees and Congress granted his requests for millions more in funding for the Office of Renewable Energy Programs, which manages offshore wind energy.
The agency is working this year on the possibility of holding new lease sales in the Gulf of Maine and two other areas of the U.S.: the Oregon coast and the mid-Atlantic. Two of the three sales face unique difficulties locally, and all three require extensive planning by the Department of the Interior.
In Maine, lobster fishermen have mounted opposition to offshore wind energy development, and in Oregon, pro-renewable state leaders such as Senator Ron Wyden, a Democrat, sometimes expressed concerns about offshore wind energy moving forward without sufficient study of its impacts on the Pacific environment.
Will economic pressure ease?
The ripple effects of offshore wind’s financial woes in 2023 continue this year – at least so far.
A day after BP and Equinor announced on Wednesday that they would cancel the Empire Wind 2 contract in New York, Seatrium – the construction company contracted to build the $250 million Empire Wind 2 substation – said its agreement was also cancelled.
The company blamed “significant macroeconomic conditions” affecting the Empire Wind project.
Additionally, the manufacturer contracted to build Empire Wind 2’s turbine foundations, Sif, announced last week that its contract has been cancelled.
But analysts say the outlook for offshore wind may already be improving.
“We have likely reached a peak in interest rates, and with inflation slowing, this should, in theory, alleviate project financing stress,” said Stephen Maldonado, research analyst for North American wind energy at Wood Mackenzie.
Maldonado noted that states are also increasingly including inflation protections in their offshore wind contract offerings, which addresses “one of the killers of recent project cancellations.”
Hines and Tufts said offshore wind will likely be more expensive for a while, a natural result of the sudden increase in demand compared to the limited supply chain for U.S. offshore wind construction.
“I think in 2024 there are a lot of people who are anxiously waiting, and maybe even anxiously waiting, what will the prices be?” Hines said. “That will happen this year. And we won’t know how this will play out until it does.”
New York, Massachusetts and New Jersey are among the states seeking new offshore wind projects and placing protective measures in their contracts, such as allowing inflation adjustments to contracted prices, to mitigate financial uncertainty.
“We are confident in the future of the offshore wind industry in Massachusetts,” said Lauren Diggin, spokeswoman for the Massachusetts Department of Energy Resources.
Diggin said the Vineyard Wind project off the coast of Martha’s Vineyard, which sent its first power to the grid last week, “shows that it can be done, and our request lays the groundwork to get more projects up and running.”
Additionally, Massachusetts, Connecticut and Rhode Island last year announced a tristate procurement process that will be selected in 2024. The deal is an incredible shift in thinking for cross-state offshore wind development, said Paradise, the attorney.
Regional planning has long been seen as the next phase in the maturation of the U.S. offshore wind industry because it can reduce the cost of construction projects and their connection to the grid, boosting regional transmission planning and grid upgrades.
Can the supply chain grow?
The U.S. offshore wind supply chain reached a turning point in 2023: There were not enough companies ready to build offshore wind farms, prices were high, and projects competed for limited supplies.
Ørsted’s Ocean Wind projects in New Jersey have been canceled — the only projects canceled entirely in the U.S. due to economic conditions so far — in part due to a lack of ships available to install offshore turbines, according to company executives. A delay in obtaining a ship meant redoing existing construction contracts at much higher costs, the company said in November.
“It’s a little contradictory,” Hines said, adding, “If you want a supply chain, you have to demonstrate that there is enough industry and demand to support that supply chain. But if we create demand, and now we have deadlines, and we can’t meet those deadlines because we don’t have a supply chain, then that means local demand was created without an adequate investment base behind it.”
A National Renewable Energy Laboratory study that Hines contributed to in 2023 found that achieving 30 GW of offshore wind by 2030 requires US$22 billion in investment in the supply chain. This would represent a boom in shipbuilding, blade-making plans, foundation construction and cable installations. But the country is nowhere near that level of public and private investment, experts say.
There are only two facilities in the U.S. that build the key components for offshore wind — the Nexans cable facility in South Carolina and a monopile factory in Paulsboro, New Jersey — said Sam Salustro, vice president of strategic communications at Oceantic. Network.
“We have a lot on paper. Those are the only two that, frankly, still have open ground,” he said.
At a dead end, the offshore wind industry’s challenging year has also undermined investment in the supply chain, hampering its growth when it’s needed most, Salustro noted.
The U.S. is at a disadvantage in the supply chain business security that offshore wind requires compared to other markets globally, he said. While the 2023 economic challenges witnessed in the US have also been felt in more mature global markets, Salustro said Europe’s maturity as a promoter of offshore wind energy means it will likely have weathered the recession better.
More than ever, the US is playing catch-up at a critical period in the construction of the offshore wind industry. In 2024, the largest offshore wind project approved to date, Dominion Energy’s Coastal Virginia Offshore Wind project, is beginning construction.
“We have always been concerned about the need to build out the U.S. supply chain as much as possible,” Salustro said. “It is doubly imperative that we make the most of this period of time to get the investments, the production on the ground, the shipbuilding on the ground, to build the ports we need.”