🔋Cold Wind Blows
Rising interest rates are the policy objective to reducing inflation which should be good for wind power, however this is causing a snafu in the funding market for wind farm projects.
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In March of 2021 the Biden administration announced goals to add 30GW of offshore wind capacity to the grid by 2030. This came in addition to other climate driven targets in areas such as solar panels, batteries, and electric vehicles. More recently, following another White House statement aiming for a more specific 15GW of floating offshore wind, a report suggests that along the US coastline there is the potential to harness 2.8TW of floating offshore wind potential alone. This is merely a theoretical number that would cover the entire US’s electricity needs and will never get reached. It’s important to note though that there is the geographical potential for nearly unlimited offshore wind capacity in the United States.
Floating wind turbines may seem like a strange and foreign idea, especially considering they are much larger than the already large onshore turbines. They are specially designed to handle large waves and inclement weather. Projects off the coast of the UK have handled the harsh conditions rather well over the last 5 years boasting a capacity factor of 54%. Below is the graphic of different turbine designs. The cost of each turbine is largely dependent on the ease of construction in addition to the manufacturing and raw material costs. Locations where turbines can be built on land are much cheaper than those which require construction at sea, a feature not limited to floating rigs.
Where do the slated offshore wind projects stand and how many are there currently? There are currently two operational offshore wind farms in the US totaling 42MW total which is basically zero considering the goal. There are a few larger farms actively under construction near New York and Massachusetts already. There is currently 11.6GW of active, approved, or permitting wind farms that are slated before the 2030 timeframe and more in the site control and planning stages. This is just under half of the White House’s goal of 30GW. EIA reports that 35GW total capacity is planned which would meet the 2030 goals.
Mayflower (2400MW) and Commonwealth Wind (1232MW) are some of the larger wind farms slated for the 2028 time frame. These projects have recently run into some issues which will delay their progress. Due to rising interest rates, the economics of the projects have come into question, causing the developers to have second thoughts and attempt to renegotiate.
When interest rates are low, everything seems cheap. Debt is very inexpensive and nearly inconsequential to take on. Meanwhile, the sharp rise in interest rates have drastically shifted the cost of capital higher. Projects that seemed to be economical are not anymore in all areas of the economy. Compare this to a homebuyer, who suffers similarly to businesses funding projects. The same priced house costs nearly double in the current environment. This is in conjunction with higher energy costs, which also eat into the profitability of large scale projects that require machinery and raw materials. We are in a different economic environment and starting to see things slip through the cracks.
It is a common theme to see the price of renewables touted as the cheapest forms of energy. In reality, renewables often add costs and fragility to the grid which is seen in many parts of the US and in Europe. Even as storage technology catches up, there are additional costs to consider like transmission and energy storage for solar and wind. In wind’s case, in addition to these factors, reports show that additional manufacturing capacity of steel, turbines, towers, blades, cables, ports, testing facilities, and vessels are required for the wind industry to grow. Using the framework of cheap capital, one could give the benefit of the doubt to the writers that this is a reasonable proposition. In todays environment, assuming interest rates don’t slide back to zero, these other projects are going to find funding difficult as well, not to mention the higher raw material costs associated with wind turbines.
The government has already provided incentives for these projects in spending bills like the Inflation Reduction Act in addition to other forms such as extra research funding in an attempt to get the cost per MWh to $45. When the market does not find the money to fund these projects, the government may step in more than they already have if they are truly determined to see them through. Another report suggests that certain projects require extensive infrastructure to be built where there is not adequate shoreline for construction like in California. A port comparable to the New Jersey Wind port costing $400million would cost over $1.3billion off the coast of the Diablo Canyon nuclear plant for example.
Wind power projects are running into challenges and raising questions more close to if it really is one of the cheaper forms of energy, rather than how fast can we build them to reach the 2030 targets. The reality of the 2030 goals for offshore wind are shaky in my opinion. Wind turbine, port, and other costs are becoming a real burden to energy developers given the challenging new economic environment. Even concerns about wildlife and the ugliness of wind farms have been raised as concerns. Renewable energy has been hitting roadblocks seemingly around every turn lately with costs, supply chains, trade disputes, environmental concerns, and more. Overall my next decade view is that money won’t be as easy and without consequence as it was over the last decade and will make for a more challenging environment for renewables like offshore wind. Will offshore wind find its groove past this hurdle? Is it really worth building wind over say a nuclear powerplant providing energy at higher capacity factors? Until next week,
-Grayson
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I guess you mean 45$/MWh, no?
For a comparison of on vs offshore it could make sense to normalize the costs by the capacity factor. 56% are already great numbers for renewables.
Regarding the infrastructure costs, a changing energy system needs an adjusted grid. For the fossil power plants we already have that grid, but we needed to build it as well in the first place, which was of course as well linked to costs. So blaming renewables for needing infrastructure investment is a bit short sighted in my opinion.
Great piece again 👍