What about offshore in the USA? - WeMake Consultores

Large projects cancelled, developers who can’t make the numbers, the supply chain seeing their investments at risk, regulators unable to encourage business… it seems that in the last year it’s all bad news for offshore wind in the USA. How bad is the situation? What are the causes? Today we dive into the turbulent waters of offshore USA.

Let’s start with a brief overview of the most relevant events.

Cancelled projects

It has not been a good year for the offshore wind sector in the USA. In November, the bombshell exploded when Orsted announced the cancellation of two of its star projects in the USA: Ocean Wind I and II. A total of 2,250 MW were to be built off the coast of New Jersey and even before installation had begun, they had already caused more than €2,600m of losses for Orsted, the provision of another €1,000m in penalties and the departure of its main executives.

Cancelled PPAs

Equinor and BP recently announced that they were cancelling all agreements related to Empire Wind 2 (1200 MW) in order to “reset” the project.

Avangrid (Iberdrola) has also seen that its US projects did not work out and has cancelled the PPAs for Park City Wind (840 MW) and Commonwealth Wind (1,232 MW). These cancellations have cost Avangrid a total of $64m.

Just a few days ago, Orsted cancelled the PPA with the state of Maryland for its Shipjack Wind project (966 MW).

Not only are developers cancelling PPAs for being too low, but the state of Rhode Island decided in July not to go ahead with the Revolution Wind 2 PPA (1,000 MW) because it considered the cost to be excessive.

Factories cancelled

Siemens Gamesa announced in November that it was abandoning plans to build an offshore blade factory in Virginia. This factory was intended to supply blades to, among others, Dominion’s 2.6 GW mega project off the coast of Virginia.

What are the causes?

Basically, the costs have risen so much that no one is able to keep track of them. When the PPAs were signed, the developers made cost development estimates that have clearly not been met. When the time came to execute the project, it became clear that the revenues needed to cover the costs were much higher.

The developers have tried to renegotiate the PPAs with little success and have only been left with the option of cancelling the agreements by paying a penalty as Avangrid has done or even cancelling the project and incurring heavy losses as Orsted has done.

Are PPAs in the US so low?

No, in fact they are much higher than in Europe. As can be seen in the summary table of the DoE report on the US offshore market, there are many projects above $100/MWh at current prices.

It is striking that the cancelled Ocean Wind 1 is one of the projects with the highest PPA and yet Orsted has chosen to cancel it even though it is incurring millions in losses. This already indicates that the business case must have been very negative, so it is clear that the costs are skyrocketing and that the management of the project has probably not been the best.

In addition, it should not be forgotten that thanks to the Inflation Reduction Act (IRA), there is extra support for projects, support that is increased if local content requirements are met.

But even with the aid from the IRA the accounts do not work out. In fact, no new PPAs have been signed since June 2022 and most of those signed are being renegotiated (or cancelled, as we have already seen). States are also taking measures as the cancellation of projects jeopardises their energy planning and decarbonisation goals. One of the measures is to include inflation discount clauses in future PPAs.

The State of New York announced that it was going to re-auction the PPAs of its projects so that developers could update the prices.

And why are the costs so high?

Cost increases in the sector have been very significant globally. This has led to serious financial problems for manufacturers and parts of the supply chain. But unlike what we have seen in the onshore sector, where developers have managed to transfer much of the risk to the supply chain, we are seeing that in the offshore sector (and in the US in particular) it is the project developers who are suffering the cost increases.

There is no concrete data on cost increases but there are several important factors to take into account:

OEM price hikes

Probably when the developers made their cost estimates, they assumed that turbine prices would continue to fall indefinitely, but this has not been the case. Vestas, Siemens Gamesa and GE have already said that they have raised prices and are even renegotiating already closed contracts. This has undoubtedly affected projects in the USA.

Jones Act

The famous Jones Act stipulates that only US-built and US-flagged ships may transport material and people between domestic ports. This means that all ships used in the construction and maintenance of the parks have to be local. This is not new, but the costs of new ships were probably underestimated.

There are currently 8 ships available and another 28 announced or under construction. For reference, one of these boats can cost more than $500m and can take years to build.

High prices paid by developers

As can be seen in the table published by the DoE, the prices paid by the New Jersey and New York zones were very high compared to the rest of the zones.

It is no coincidence that these are the projects that are being cancelled and restructured.

Rising interest rates

In projects that are capital intensive, any rise in the price of money has a very large impact. Most US projects were conceived with the price of money at record lows and current rates.

What about the supply chain?

As usual, manufacturers and suppliers are suffering from delays and doubts in the market. The investments being made to set up a local supply chain are enormous and any delays or cancellations have a huge impact.

As an example, as a consequence of the cancellation of the Empire Wind 2 PPA, BP and Equinor have cancelled the offshore substation contract with Seatrium. But even more striking was the case of substructure manufacturer EER, which started manufacturing the Ocean Wind 1 monopiles at its New Jersey factory before the news of Orsted’s cancellation of the project.

And while Orsted will certainly have to pay EER part of the contract, the reality is that the factory will be underutilised until there is volume to fill the gap left by OW1.

OEMs have also seen their pipeline in the USA affected, especially GE and Vestas, which have seen two of their main projects cancelled.

Despite the bad news, the industry continues to invest in the offshore supply chain. In addition to the 28 ships mentioned above, investment in ports and factories is also being significant, totalling almost $1bn since June 2022. In addition, it is worth remembering that the IRA has introduced support for local manufacturing of wind components.

Is offshore mortally wounded in the USA?

No, not at all. All this bad news will lead to delays in projects and possibly the cancellation of less viable ones, but the sector will get through it. In fact, the pipeline of projects continues to grow (15% by 2023 according to the DoE) and as we have just seen, investments have not stopped. New areas such as the Gulf of Mexico are allocating development areas and floating offshore is starting up in California.

The first 2 series wind farms, Vineyard Wind 1 (800 MW) and South Fork Wind (132 MW), are under construction and will join the currently operating Block Island (30 MW) and CVOW pilot (12 MW). Vineyard Wind has already produced its first MWh as seen in this video while South Fork did so a few months ago.

As was the case in the early days of offshore in the USA back in 2005, the complexities inherent in the offshore sector may have been underestimated. In addition, the US market has some peculiarities that make it even more complex. Current projects are paying for the need to build a local supply chain at a time of rising costs and high interest rates. But there is no doubt that there is determination to have a strong sector, with support and involvement from institutions and a pipeline of real projects.