The Biden administration’s ambitious plan to establish 30 gigawatts (GW) of offshore wind generation capacity by 2030 faces headwinds as key developers withdraw from projects, citing evolving market dynamics.
Initially met with enthusiasm and robust investor interest, offshore wind appeared to be smoothly sailing towards a sustainable energy future. Governments, buoyed by transition momentum, welcomed the sector, fostering a conducive environment for investors. However, unforeseen challenges emerged last year when the wind power industry grappled with fluctuating costs of raw materials and equipment influenced by central bank policies aimed at curbing inflation.
In November of the preceding year, the Department of Interior greenlit two large-scale offshore wind projects, Empire Wind 1 and Empire Wind 2. However, within a mere two months, developers announced the abandonment of Empire Wind 2, citing compromised commercial viability. Despite efforts by authorities to salvage the project by offering higher electricity prices, the developers chose to refocus their efforts on creating a more resilient project.
Equinor Renewables America’s Managing Director, Molly Morris, emphasized the significance of commercial viability, stating, “The Empire Wind 2 decision provides the opportunity to reset and develop a stronger and more robust project going forward.”
The decision to scrap Empire Wind 2 came on the heels of two major oil supermajors declaring combined writedowns of $840 million on various wind power projects in the United States. Analysts foresaw cancellations in the absence of higher prices, as the authorities at that time were unwilling to offer increased rates.
The core issue plaguing the wind power industry lies in the unanticipated rise in costs as central banks addressed post-pandemic inflation. Initially marketed as a cost-effective alternative, offshore wind projects faced budgetary challenges, prompting developers to reconsider their viability. As central banks fought inflation, costs escalated, and the affordability of offshore wind, previously considered a reliable and economical energy source, was called into question.
Developers, including industry giants like BP, Equinor, and global leader Orsted, secured deals with U.S. state and federal authorities during the Biden administration’s early transition period, capitalizing on the transition enthusiasm. Long-term fixed-price agreements were established based on the assumption of stable raw material and equipment costs. However, the subsequent surge in costs, particularly in offshore wind, raised concerns about the financial feasibility of these projects.
Faced with higher costs, developers had to choose between abandoning unprofitable projects and renegotiating for higher prices. BP and Equinor pursued the latter, but some states, like New York, initially resisted increased prices, cognizant of potential impacts on electricity bills. However, realizing the importance of offshore wind capacity to meet climate goals, New York later allowed developers to resubmit bids with adjusted prices.
This balancing act between climate policies and energy affordability is crucial for the future of offshore wind. The inevitability of sustained or increased costs in offshore wind projects poses challenges to their long-term feasibility. Some developers are already divesting from planned projects, anticipating uncertainties in government support and contract terms.
Last year’s developments prompted a decline in wind power stocks, and governments may intensify their support for offshore wind projects in 2024 to meet climate targets. However, keeping a vigilant eye on the affordability aspect remains crucial, as offshore wind endeavors should serve as a means to achieve a cleaner energy future without compromising economic viability.