Danish wind company Orsted wants out of a pair of New Jersey offshore wind projects so badly that it’s willing to lose up to $5.6 billion. Only one year after the Inflation Reduction Act beefed up tax incentives for renewables, the United States now seems further away from President Biden’s goal of generating 30 gigawatts of offshore wind power by 2030. The company—which is 51 percent owned by the Danish government—effectively told shareholders that the U.S. wind market just isn’t a great place to do business, echoing its competitors. What went wrong?
It’s not the first time in recent weeks that a wind company has been willing to pay up to get out an American offshore wind deal. Shell and Avangrid have recently dropped U.S. wind projects as well. Energy analytics firm BloombergNEF finds that more than half of all offshore wind contracts in the U.S. either have been or are at risk of being canceled. This may well put the White House’s 2030 wind power generation goals out of reach. Having previously forecast that the U.S. would reach 23.1 gigawatts on that timeline, BloombergNEF slashed its projection by 29 percent last week. Senior wind analyst Atin Jain now predicts the U.S. will be just over halfway to Biden’s target by 2030, with 16.4 gigawatts in offshore wind capacity.
Despite the generous tax breaks provided by the Inflation Reduction Act, CEO Mads Nipper described Orsted’s U.S. projects as “the most painful part of our portfolio,” during a dour quarterly earnings call last Wednesday, citing rising supply chain costs, higher interest rates, and construction delays. BP’s head of low-carbon energy similarly called the U.S. offshore wind sector “fundamentally broken.”
To understand this pessimism, one needs to understand the basic economics of offshore wind. Like renewables projects more generally, offshore wind requires a big up-front capital investment followed by relatively low maintenance costs moving forward. Whereas a gas-fired power plant has relatively modest up-front costs, it then needs to keep buying gas in order to generate the electrons it sells. From the perspective of investors, the effects of a fluctuation in fuel prices balance out for plants that sell day-by-day to wholesale electricity markets: If prices are low, the gas plant makes less money selling power but spends less money buying it too. If prices are high, the gas plant spends more money but makes more money selling power.
But when it comes to offshore wind—an extraordinarily capital-intensive business—lower power prices aren’t offset by lower operational expenses. Instead, projects either generate lower returns or have more trouble paying down their debts. Investors have been accordingly wary of funding expensive projects that—if selling power wholesale—can’t guarantee steady returns.
To preempt that problem, offshore wind developers have used power purchasing agreements, or PPAs. These agreements, typically struck with electric utilities or big companies, allow them to lock in rates and promise reliable returns to investors. Offshore wind developers who have brokered PPAs over the last several years are now looking to renegotiate them amid rising costs of both supplies and financing. Project developers are having more trouble winning over investors as interest rates rise, i.e., as policymakers make it more expensive to borrow money. They also face rising supply chain costs, itself partially a reverberation of those rising interest rates.
Two years ago, the cost per megawatt-hour of power generated from offshore wind in the U.S. was estimated at $77. Today, it’s $114. Many wind developers have looked to renegotiate PPAs signed when costs were lower—and walked away if they’re turned down. This summer, for instance, Commonwealth Wind developer Avangrid—a wind-focused subsidiary of the Spanish power company Iberdrola—agreed to pay $48 million to back out of its PPA with National Grid, Eversource, and Unitil, in the hopes of securing more lucrative agreements down the road. There have been a spate of other contract cancellations since then. Last month, the New York Public Service Commission—the state’s utility regulator—rejected petitions from Orsted, Equinor, and BP to raise rates so high as to cost retail and residential customers an estimated $30 billion.
Developers have also looked to juice additional funds from federal tax credits, striving to earn more than the 30 percent baseline rebate offered by the Inflation Reduction Act. Orsted announced last week that it was moving forward with its Revolution Wind development, serving Connecticut and Rhode Island, on the expectation that it will earn a 40 percent “energy community” tax credit.
Offshore wind is a delicate and fundamentally bizarre business. Developers are predominantly foreign and even state-owned firms. Orsted, as stated, is majority-owned by the Danish government. The largest shareholder in Avangrid owner Iberdrola is the Qatar National Investment Authority; the central bank of Norway owns significant shares as well. The Norwegian government has a controlling two-thirds stake in Equinor, another major offshore wind player in the U.S. Amid rising interest rates, supply costs, and construction delays, these companies are now turning to policymakers and regulators in the U.S. to subsidize their costs, either through higher energy bills or bigger subsidies.
In other words, while White House messaging around its green industrial policy has emphasized wanting to build out domestic supply chains for clean energy, foreign companies are essentially making U.S. decarbonization contingent on the public’s willingness to shoulder their costs. As geographer Brett Christophers has argued, the viability of renewable energy may simply require generous, persistent subsidies, even if interest rates are kept low. After all, that’s exactly what the fossil fuel industry has received via more than a century of generous subsidies, diplomatic support, and state-led market coordination—in other words, industrial policy. That foreign and state-backed firms are so dominant in offshore wind also raises the question of why the U.S. hasn’t entered the ring directly, either as a project developer or financier. So long as offshore wind continues to be the product of U.S. public policy, why shouldn’t policymakers have a bit more say over how and where it develops?
