The costs associated with U.S. offshore wind projects have risen by 57% since 2021 due to inflation in components and labor costs, as well as rising interest rates, leading to a large number of canceled or renegotiated deals.
The recent cancellations of major offshore wind projects have erased billions of dollars in planned spending and put at least 9.7 additional gigawatts of offshore wind projects in the U.S. at risk.
Despite the financial crisis in offshore wind energy, the Biden administration is persevering with its goal of achieving 30 GW of offshore wind energy capacity by 2030.
A financial crisis is unfolding in the offshore wind power industry. The ultra-efficient and reliable form of clean energy production is an essential component of all of the world’s possible decarbonization pathways, but soaring inflation costs have undercut the sector’s growth and left major projects dead in the water just when their output is most needed. A major policy shift is in order, but the public and private sector are at loggerheads as to who should have to pay for the increasingly expensive development plans.
The massive scale of offshore wind turbines – which stand taller than skyscrapers – plus the strength and consistency of wind at sea – make offshore wind a no-brainer for the global green energy transition. Offshore wind-power potential off the coast of the mainland United States alone is estimated at 4.2 terawatts – nearly four times the entire capacity of all types of generation operating today. It’s an unfathomable amount of energy. But there’s a big problem: offshore wind currently costs about two to five times more than onshore wind.
“The expense associated with a typical US offshore project, before bonus tax credits related to the Inflation Reduction Act, has increased by 57% since 2021,” Bloomberg recently reported, citing figures from BloombergNEF.
“Inflation in the cost of components and labor explain about 40% of that and the rest is tied to rising interest rates.”
This means that any developers who signed long-term development contracts before the sharp increase in costs must now either re-negotiate their deals or walk away from them entirely.
“Energy coming from these projects is desperately needed,” Helene Bistrom, the head of Vattenfall’s wind business, was recently quoted by Fortune.
But, she continued, “with new market conditions, it doesn’t make sense to continue.”
This month has seen a disastrous number of canceled and abandoned offshore wind deals which “erased billions of US dollars in planned spending” in the final week of July alone, according to Fortune. Spanish utility Iberdrola SA agreed to pay $48.9m in fines to cancel a wind power contract off the coast of Massachusetts. In Rhode Island, Danish developer Orsted A/S’s bid to produce offshore wind power was rejected due to rising operational and development costs. And a plan for a wind farm off the shore of the United Kingdom has also been culled by Swedish state-owned utility Vattenfall AB, who – you guessed it – blamed inflation. “Together, the three affected projects would have provided 3.5 gigawatts of power — more than 11% of the total offshore wind fleet currently deployed in the waters of the US and Europe,” reports Fortune. And at least 9.7 additional gigawatts of offshore wind projects are at risk of cancellation in the United States alone.
The current trend in offshore wind power marks a shocking turnaround from what has been a sharp and virtually unceasing decline in renewable energy costs. Since 2008, wind and solar prices have dropped by nearly 70%, and new onshore wind power is the cheapest form of clean energy production in the United States today. “Offshore wind is an outlier though because, unlike onshore wind and solar power, it was still at the high end of the cost curve before this financial shock,” reports Bloomberg. This means that investing in offshore wind must be the project of governments, rather than the private sector. In the long term, offshore wind is an essential investment for meeting climate goals, but in the short term it’s an economic failure.
The Biden administration is pushing ahead with its ambitious goal of achieving 30 GW of offshore wind energy capacity by 2030. Just last month, the United States Bureau of Ocean Energy Management’s (BOEM) announced three new Wind Energy Areas (WEAs) off the coasts of Delaware, Maryland, and Virginia. Together, the areas could potentially host 4 to 8 gigawatts (GW) of clean energy production. But there’s still the big question of financing.
Indeed, the 30 GW by 2030 plan is looking more far-fetched by the minute. So far, the country has installed about 0.1% of that goal, and as much as one-third of the planned projects are currently in dispute according to energy analytics firm ClearView.