The United States is about to expand its offshore wind ambitions into brand new territory. Next week, the Biden administration is set to hold the first-ever auction for offshore wind leases in the Gulf of Mexico, opening up large swaths of water between New Orleans and Houston to potentially gigawatts’ worth of renewable energy development.
The August 29 auction comes at a deeply ambivalent moment for offshore wind. On the one hand, there’s unprecedented interest in the emerging U.S. industry, which has high potential but so far generates enough electricity to power just 20,000 American homes. On the other hand, developers are facing dire financial conditions that are threatening the viability of several major offshore wind projects.
Offshore wind is expected to be a major piece of the U.S. clean energy mix, particularly in densely populated regions and coastal areas with outsize electricity demand. The technology could potentially meet up to 25 percent of the country’s power needs by 2050 — without substantially impacting wholesale electricity costs, according to a recent study by the University of California, Berkeley. But first, the U.S. has to figure out how to overcome industry challenges and get the turbines it plans to build up and running.
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Construction on the nation’s first two commercial-scale wind farms is well underway off the coasts of New York and Massachusetts, and the federal government recently greenlighted two more major projects near New Jersey and Rhode Island. Meanwhile, California, Maine and now Oregon are making progress toward deploying “floating” wind turbines in deep coastal waters.
The U.S. pipeline of offshore wind farms in the planning, permitting or construction phases reached a total of 40 GW last year — nearly a thousand times greater than the nation’s current installed capacity of 42 megawatts (0.042 GW). The stunning jump, which the new lease sale will likely add to, is thanks in large part to ambitious state and federal goals for the electricity source, including the Biden administration’s aspiration of deploying 30 GW of offshore wind nationwide by 2030.
Turbine blades arrive for deployment in the South Fork Wind Farm near Long Island. (rsted U.S.) But a barrage of economic and logistical headwinds is battering the industry, raising the risk that the U.S. will miss these targets for deploying offshore wind projects this decade and beyond, analysts say.
Recent supply-chain constraints, rising material costs, higher interest rates and permitting delays have all made it more expensive and less profitable to put towering turbines in coastal waters. Companies are struggling to maintain the financial agreements they signed years ago when market conditions were much more favorable, all while the domestic industry continues to hit new milestones.
Offshore wind isn’t alone in feeling the squeeze. The pace of U.S. solar power and onshore wind installations has also slowed due to supply-chain bottlenecks and backlogged power grids. But owing to the sheer scale of offshore wind projects — which can cost over $1 billion and take more than a decade to develop — the turbulent conditions are dealing a particularly big blow to the perpetually up-and-coming industry.
“The trends that the entire market is dealing with are felt more acutely in offshore wind,” said Benjamin Koenigsberg, who focuses on renewable energy project finance for Norton Rose Fulbright, a global law firm.
Walking away from PPAs
As companies confront the reality of soaring costs and lower returns on investment, several major players are pushing to renegotiate — or outright cancel — the offtake agreements they previously made to supply clean electricity from offshore turbines to onshore power grids.
A power-purchase agreement (PPA) is a long-term contract that electric utilities sign with power supplies that specifies, among other things, the rate utilities will pay for the electricity and how much of the supply they’ll use. Offshore wind developers need to sign these agreements relatively early in the planning process, in order to secure funding they need to cover the costs of getting wind farms spinning.
But a lot can change in the years after the ink dries on contracts.
“The price that developers had negotiated for that PPA contract is no longer profitable to develop, because the costs have gone up, and the cost of raising the finance for the project has gone up,” said Alon Carmel, an offshore wind expert at PA Consulting Group, a London-based consultancy.
At the same time, he added, companies are paying markedly higher prices at auctions to lease swaths of seabed for future development — a sum that, in the United States, developers must pay entirely upfront.