Europe started building wind farms in the 1990s. Above, wind turbines in the North Sea. COURTESY OF VESTAS WIND SYSTEMS
The new, more urgent age of American offshore wind started at the tail end of Barack Obama’s presidency, when the BOEM began leasing more large ocean-bed parcels for wind development. The agency has now approved leases on more than 2.7 million acres of ocean bottom, an area equivalent to a square more than 60 miles on each side.
It’s what happens after leases are signed that has stalled the process. The gap between when offshore wind developers secure rights and when the first steel enters the water can run many years. The Montauk project that just placed its first turbine won its lease in 2013, and has since been navigating various approval processes. To get a project off the ground, developers have to wait for states to hold bidding processes to supply power to regulated utilities. After that, the permitting process to lay cables and protect marine life can take years, not to mention the possibility of legal challenges. In that period, developers face considerable inflation risks.
Companies now caught in the inflation trap are almost all from the other side of the ocean. The projects being developed along the East Coast may have American-sounding names like Commonwealth Wind, but they’re backed almost entirely by European companies that pioneered the modern wind industry and have been working on it for decades. Outside of General Electric (GE), few large U.S. firms are involved. Denmark’s Orsted is the market leader, and its stock the purest play on wind development. Utilities from several European countries have also invested heavily through U.S. subsidiaries.
Companies such as BP, Shell, and Equinor, known for oil production, have lately turned to offshore wind to decarbonize their energy mix in the face of government and investor pressure. With high cash flows from fossil fuels in the past few years, those companies plowed large investments into offshore wind.
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As competition rose, bids on acreage in one section of the ocean off New York skyrocketed last year. Several European companies, including joint ventures involving TotalEnergies (TTE) and Shell, paid more than $700 million each for sections of the ocean bottom. The parcels contained less acreage than farms other companies had leased for less than $10 million prior to the pandemic, according to Freshney, the Credit Suisse analyst. “The cost just went through the roof,” he says. “It was a bubble.”
Other costs soared, too, because of inflation pressures that have also hurt other industries. Steel is much pricier than it was prior to the pandemic, for instance. A consultant hired by the wind developer on Shell’s Massachusetts project estimated that costs have risen more than 20% since 2019, and rising interest rates have added more financial stress. “This is not an industry that is in a healthy and mature state,” the report said. Another problem: The supply chain to build wind turbines is nowhere near ready to handle the influx of projects. Installation capacity is at 20% of where it needs to be, according to a study by energy consultant Wood Mackenzie.
Now, states are trying to manage the fallout. Offshore wind projects backed by Shell, BP, Iberdrola, and several others have already said they need to renegotiate the contracts, with the implicit—and sometimes explicit—threat that they could pull out. The new terms will have to be more lucrative for project developers, with electricity prices probably linked to inflation.
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Regulators now face a “huge problem from a ratepayer’s perspective,” said Ronald Gerwatowski, chairman of the Rhode Island Public Utilities Commission, at a recent hearing about offshore wind. Developers can essentially hold regulators hostage by threatening to walk away from already-permitted projects unless rates are hiked.
Already, some states have agreed to change policies in a way that could lead to more-expensive rates. In Maryland, a new law shifts some of the federal Inflation Reduction Act’s support from consumers to wind developers. Previously, Maryland law said 80% of the federal benefits had to go to the consumers.
New Jersey’s legislature also just passed a law that will redirect federal tax money to Orsted to complete an offshore project known as Ocean Winds 1 that will supply enough power for 500,000 homes. Those funds were previously expected to go to electricity consumers. Republicans opposed it, with state Sen. Edward Durr calling it a “huge handout at the expense of New Jersey utility customers,” one that could cost up to $1 billion. Orsted tells Barron’s that the bill denied each New Jersey ratepayer only about $2.40 per year, and won’t result in a real hike in electricity rates.