Here's What's Going Wrong in the US Offshore Wind Industry
Nov 22, 2023
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Chelsea Jean-Michel, an offshore wind industry analyst at BloombergNEF, sheds light on the current struggles facing the U.S. offshore wind sector. She discusses rising commodity costs, project cancellations, and the impact of high interest rates on financing. Comparisons with the U.K. highlight the U.S. sector's regulatory challenges and bidding complexities. Jean-Michel emphasizes the need for strong state policies and a diverse energy approach to overcome these hurdles and effectively contribute to decarbonization efforts.
The US offshore wind industry is facing challenges including higher borrowing costs and supply chain complications, leading to renegotiations or cancellations of projects.
Addressing the challenges in the US offshore wind industry requires exploring vessel solutions that satisfy Jones Act requirements, such as feeder barges and foreign wind turbine installation vessels.
Deep dives
Challenges facing the wind power industry
The wind power industry is facing challenges that include higher borrowing costs and higher component costs, leading to negative impacts on the industry. These challenges have caused offshore wind projects in the US to seek contract renegotiations or cancellations. The longer development timeline and macroeconomic environment changes have contributed to the growing difficulties. The impact of inflation, interest rates, and higher costs of capital on the levelized cost of electricity has increased the financial burden for the industry. However, it is expected that these challenges will be temporary, as the industry has experienced continuous cost declines in the past. Despite the current difficulties, wind power is an essential component of clean energy goals, especially in regions with limited sunlight, and it offers benefits such as high capacity factors and scalability.
Renegotiation attempts and supply chain complications
Developers in the wind power industry have attempted to renegotiate contracts, but so far, these attempts have not been successful. Renegotiation efforts in Massachusetts and New York have been declined, resulting in fines or project cancellations. Supply chain complications, particularly in regard to vessel availability and compliance with the Jones Act, have been major challenges. The Jones Act stipulates that vessels involved in offshore wind projects must be US-built, US-crewed, and US-flagged. However, limited availability of Jones Act-compliant vessels has caused delays and constraints, hindering offshore wind installation activities. Addressing these challenges requires exploring vessel solutions, such as feeder barges and foreign wind turbine installation vessels, while satisfying Jones Act requirements.
The importance of wind power and potential solutions
Despite the challenges, wind power remains crucial for clean energy goals, especially in regions with limited sunlight. Offshore wind farms offer higher capacity factors and scalability, making them valuable components of the energy transition. To address the financial pressures, the indexation of off-take contracts to inflation has been proposed to provide more protection for developers and contribute to long-term certainty. Additionally, cost efficiencies can be achieved through standardization of components, such as turbines, and streamlining the permitting process. While the complex and lengthy nature of wind power projects presents obstacles, continued cost declines and supportive government policies, including the Inflation Reduction Act, offer avenues for overcoming the challenges and achieving sustainable wind power expansion.
Future prospects and the role of wind power in energy transition
While the wind power industry currently faces challenges, it is expected to navigate through them and experience a return to cost declines. The bigness and complexity of wind projects, coupled with longer timelines, contribute to the significance of the industry. Wind power plays a crucial role in diversifying renewable energy portfolios, enabling flexibility in electricity generation, and alleviating price volatility. Its economic development potential and high capacity factors are key drivers for wind power adoption. Although challenges exist, wind power is a necessary and valuable component in achieving clean energy goals and transitioning to a more sustainable energy system.
The effort to decarbonize the US electricity grid involves a range of technologies and power sources. Solar is part of the solution, nuclear may also be a component. Battery storage is key. And so is wind — both onshore and offshore. While there are challenges throughout the process, the offshore wind industry in particular has seen a number of setbacks lately, with the Danish company Orsted having recently made headlines for pulling out of a project slated to be built off the coast of New Jersey. Challenges range from surging commodity costs to a scarcity of vessels, the bidding process for deals, and of course, the surge in interest rates over the last two years. On this episode, we speak with Chelsea Jean-Michel, an offshore wind industry analyst at BloombergNEF, to get a clear breakdown of the problems, the degree to which these challenges threaten the larger trajectory of the industry, and the efforts to decarbonize the grid.
