By Ivan Penn, Stanley Reed and Brad Plumer
A few years ago, interest in offshore wind energy was so strong that developers proposed spending tens of billions of dollars to plunk hundreds of turbines the size of skyscrapers in the Atlantic Ocean from Maine to Virginia.
But several of those projects have recently hit the skids after executives miscalculated the impact that the pandemic and rising interest rates would have on supply chains. The industry has found it much more difficult to manufacture, transport and erect wind turbines than it had expected. Just two dozen or so turbines have been installed in U.S. waters, compared with more than 6,000 in Europe, which has been building offshore wind farms for decades.
As a result, the cost of offshore wind energy will be higher than anticipated, and its climate and economic benefits will, in some cases, arrive years later than expected.
Some wind farms may be delayed. Others may never be built.
To date, Eastern states have awarded contracts to build roughly two dozen offshore wind farms with 21 gigawatts of electric capacity, or enough to meet the needs of more than 6 million homes. But developers have canceled or asked to renegotiate rates for nearly half that capacity. Analysts are downgrading expectations: About 15 gigawatts of offshore wind will be installed by 2030, according to BloombergNEF, a research arm of Michael Bloomberg’s financial data and information company. That’s about one-third lower than what it had expected as recently as June. Europe has already installed about 32 gigawatts of offshore wind capacity.
Orsted, a Danish company that has built around two dozen offshore wind farms, mostly in Europe, has canceled two giant arrays planned for waters off New Jersey and is reconsidering two more intended to serve New York and Maryland. The company said it would be writing off as much as $5.6 billion. BP, which paid $1.1 billion for a 50% stake in the Norwegian energy company Equinor’s U.S. offshore wind portfolio in 2020, recently wrote off $540 million of its investment.
States like New York and Massachusetts are scrambling to save projects — and appear to be acknowledging that they will need to pay higher prices for the electricity generated by offshore turbines than they had expected.
“The U.S. offshore wind market is still in its infancy, and some states might have been trying to run before they could walk,” said Atin Jain, a senior associate at BloombergNEF. “Now they’re getting more realistic about the challenges facing developers, and that’s going to help in the long run.”
Energy executives say the industry is learning from its mistakes and making investments that should pay off in the coming years. Dominion Energy, a large utility based in Virginia, is moving ahead with a massive wind farm and is spending $625 million on the first U.S.-built ship capable of hauling the more than 300-foot-long blades and other components for wind turbines out to sea.
“We needed to have confidence in our schedule,” said Robert Blue, Dominion’s CEO. “One way to have confidence is to have a vessel,” he added.
‘The world looked totally different’
Orsted, the world’s leading offshore wind developer, gained traction in the United States by buying a Rhode Island company called Deepwater Wind for $510 million in 2018. Deepwater had the only operating U.S. offshore wind farm and owned a portfolio of proposed projects.
It was a heady time. Developers were eager to crack a new market and they rushed to sign contracts to provide electricity from offshore arrays under development at rates that assumed little or no inflation. They did not expect a lot of turmoil.
That turned out to be a bad bet. Under former President Donald Trump, a long-standing critic of wind turbines, the federal government held up permits. Then the pandemic wrecked supply chains, making parts more expensive. Later, the Federal Reserve sharply raised interest rates to tame inflation, driving up borrowing costs.
Now companies were stuck with the prospect of building multibillion-dollar projects to supply power at prices that no longer made sense.
“The world looked totally different,” Mads Nipper, Orsted’s CEO, said last month, speaking of 2018 and 2019, when the company won a contract to build the first of the two New Jersey projects, Ocean Wind 1, that it has since scrapped.
A final blow, Nipper said, came in the past few months when it became clear that a ship that the company had booked to install the foundations that anchor the huge turbines to the sea bottom in 2024 would not arrive on time. This snafu threatened potentially huge cost increases.
Instead, the company walked away, but it had already run up huge losses.
“I am very doubtful that they will ever recover to what we thought” was ahead two or three years ago, said Anders Schelde, the chief financial officer of AkademikerPension, a Danish pension fund.
Like other companies, Orsted is now focusing on its more promising U.S. deals while trying to renegotiate or shelve others.
“The developers are going to have to choose which of the projects are viable and which are not and proceed accordingly,” said Eamon Nolan, a partner at the law firm Vinson & Elkins who specializes in energy.
The industry also faces a chicken-or-egg problem: One reason that offshore wind projects are expensive is that the United States lacks a robust domestic supply chain. But manufacturers cannot justify building large factories if they don’t know whether there will be enough demand.
“When there are a lot of project cancellations, that weakens the case for domestic manufacturing,” said Josh Irwin, senior vice president of offshore sales at Vestas, a Danish company that is the world’s largest turbine manufacturer. “We’re still in wait-and-see mode.”