WIND

Challenges mount up for US offshore wind

Ørsted has announced $2.3bn potential impairments at its US offshore wind projects, while RWE won an underwhelming seabed leasing auction in the Gulf of Mexico. We look at the current challenges facing developers in the US offshore market.

RICHARD HEAP

September 7, 2023

  • US government backs Ørsted and Eversource’s 704MW Revolution
  • But Ørsted has warned of $2.3bn impairments in US offshore wind
  • RWE was sole winner, and one of only two bidders, in the Gulf of Mexico

The US Department of the Interior last month announced it was approving Ørsted and Eversource Energy’s 704MW Revolution Wind project off Rhode Island.

This is the fourth commercial-scale offshore wind farm approved by the DOI, which said the decision was important as the Biden administration seeks to deploy 30GW of offshore wind in US waters by 2030. It follows the 800MW Vineyard Wind 1 by Avangrid and Copenhagen Offshore Partners; Ørsted’s 132MW South Fork Wind; and the 1.1GW Ocean Wind 1, also by Ørsted.

But we can see this good news story as a slice of optimism in an otherwise tough month for the US offshore wind sector. The challenges for developers are growing.

We started 2023 by writing about rows related to the power purchase agreements (PPAs) at Avangrid’s 1.2GW Commonwealth Wind project and the 1.2GW Mayflower by Ocean Winds and Shell. In March, we looked at whale death conspiracy theories that developers are having to rebut; and, in May, we covered concerns from the US military about the impact of offshore wind projects on military manoeuvres.

And, in recent weeks, we have heard concerns related to potential financial returns at projects; the level of developer interest in emerging US markets; and the stability of PPAs that developers thought were locked in. We are still positive about offshore wind in the US, but we cannot ignore the huge challenges still to be overcome.
 

Ørsted’s $2.3bn warning

Danish utility Ørsted spelled out some of the challenges facing US offshore wind companies in an announcement on 29th August, where it said it expected to make impairments of $2.3bn on its US offshore wind projects. It named three reasons.

First, it said Ocean Wind 1, Revolution Wind and Sunrise Wind are being hit by supply delays, which Ørsted said could affect its ability to complete them on time.

Second, it said its negotiations with federal government about more investment tax credit (ITC) support for Ocean Wind 1 and Sunrise Wind were not progressing as it expected. Ørsted is seeking credits in addition to their existing 30% ITC support.

And third, it said interest rate rises were harming offshore projects, as well as some of its onshore projects. Rates have risen from 0% in March 2022 to 5.5% now, which increases development costs and reduces projects’ profit margins. Ørsted still plans to take final investment decisions on Ocean Wind 1, Revolution Wind and Sunrise Wind in late 2023 or early 2024, but it has not ruled out cancelling projects.

This is a threat worth taking seriously given that there are no quick fixes for most of its challenges, although Ørsted still sees a strong future for offshore wind in the US.

Ørsted has not been immune from PPA problems either. Utility Rhode Island Energy last month said it could not proceed with a PPA at Ørsted and Eversource Energy’s 884MW Revolution Wind 2 project off the coast of Rhode Island and Connecticut as the cost of electricity was too high. This will make it tougher to develop the project.
 

Underwhelming Gulf tender

We can also see the challenges for US offshore wind in the seabed leasing tender that the Bureau of Ocean Energy Management held last Tuesday for three sites in the Gulf of Mexico. We are used to these tenders being long, drawn out affairs.

However, this tender ended soon after it started as only two of the 15 pre-qualified bidders submitted bids, for only one of the sites. RWE has agreed to pay $5.6m for the rights to develop the Lake Charles site off the coast of Louisiana, which it said had potential for up to 2GW of offshore wind capacity.

This is an exciting addition to RWE’s portfolio. But it also cannot disguise that there were no bids for two of the three sites; and that the $5.6m raised by BOEM is well below the $4.4bn in the New York Bight tender, $757m in the California floating wind tender, and $315m in the Carolina Long Bay tender, all of which concluded last year.

The low returns in this tender are not wholly unexpected. The Gulf of Mexico is far behind the northeast and west coast in its readiness for offshore wind, which makes it difficult for winning developers to take projects to completion. Offshore wind also faces challenges including low power prices, competition with the large amounts of onshore renewables in Texas, and slower wind speeds than in those other regions.

Rival developers did not even see that it was worth submitting low bids for the sites so they could flip them to other companies later. We have become accustomed to long bidding wars for seabed rights, so this lack of interest gives pause for thought. We cannot ignore the economic headwinds facing US offshore wind companies.

The tender may also be a victim of the Inflation Reduction Act’s (IRA) success. The sheer volume of opportunities in the IRA may have shown firms that there are more cost-effective ways to develop renewables on land, without going into new areas.

That’s just a theory. What is certain is that offshore wind developers in the US are finding it tougher to develop profitable projects, even with the Biden administration’s support for the sector. The challenges for developers will not be easy to overcome.

We will discuss US offshore wind at our Financing Wind Offshore conference in Boston on 16th November. Click here for further details

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