🔋Wind Woes
🔋Wind Woes
The offshore wind industry is now in turmoil, with experts taking the under on the 30GW government target - did we hit peak doom or is there another storm?
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Let’s check in on the wind industry shall we? In January I gave a brief summary of the offshore wind industry in the US and my outlook. The White House maintains a goal of 30GW of offshore wind capacity by 2030 and at the time I highlighted how costs were already a burden and multiple projects were running into trouble. I expressed skepticism that the goal could be achieved. Here we are 8 months later and from the news headlines things are looking even worse, not better. With just about 6 years left to reach their goal, does the US stand a chance in reaching their 30GW target?
I’ve literally put off publishing this article for weeks because so many new articles are coming out about it. Every week there is seemingly new news about wind costs, delays, losses, quality issues, damage, rejections, or other troubles relating to the offshore wind industry. Even articles suggesting offshore wind’s days are numbered are coming out from other prominent writers.
Based on the DOE Offshore Wind Market Reports from 2021, 2022, and 2023, the wind capacity expected to be installed by 2030 has continued to go up from 11.6GW to 12.9GW to 17.6GW as permitted projects get approval. This report comes out August each year, with 2023 being very recent. This years report suggests that there is ~33GW of additional offshore wind with a TBD commercial operation date as well. Some percentage of this may still be able to be completed before 2030, but most is likely is further down the pipeline.
If you simply extrapolate the linear increase in expected 2030 capacity from these reports into the future then it looks promising that the 30GW offshore wind goal will be complete. However, a more nuanced approach is needed. Estimates from two prominent energy organizations, 4C and BNEF, forecast the US will not reach that target, reaching 28GW and 23GW respectively. These are both downgrades from their forecasts made a year ago.
Analysts from numerous other independent organizations in the industry are also now in the camp that the goal will not be reached due to recent challenges. One of those agencies, Wood Mackenzie forecasts only 21GW by 2030.
In recent months soaring materials costs, high interest rates and supply chain delays have led project developers including Orsted, Equinor, BP, Avangrid, and Shell to cancel or seek to renegotiate power contracts for the first commercial-scale U.S. wind farms with operating start dates between 2025 and 2028. - Reuters
Some of the recent blows include developers paying millions to cancel projects in Massachusetts, financial issues in large players, and lack of interest in new offshore lease auctions. Developers themselves are saying that even with the Inflation Reduction Act (IRA) incentives, the projects still do not pencil out profitably.
Ørsted first stated that it faces $2.35 billion in impairments on its US portfolio, followed by their credit rating and outlook downgraded, and further followed by them seeking 48% rise in energy contract prices with threat of backing out of deals. This deal alone would cause residential electricity rates to increase by 2.5%.
Siemens energy, the worlds largest offshore wind producer is having quality issues in installed turbines leading to them not lasting as long as they should. In addition to lower lifetimes, the company faces billions in losses due to the faulty equipment.
Many of the cheap wind energy figures cited by governments are rosier than reality and easy to back out of by developers. They are not the actual price paid for facilities built and are misleading comparisons of cost, just like levelized cost of energy values you see. Governors of numerous northeast states have signed a letter asking for more federal support for the wind industry as the current federal spending initiatives does not provide enough to keep the industry afloat.
Overall, the world stands to see the number of countries with offshore wind nearly double by 2030. Unsurprisingly China leads the way in offshore wind capacity, however the UK leads in total pipeline capacity. As of late, the UK is running into some trouble of its own as the country found no bids for offshore wind at the latest auction. In the time following this news, the government itself is now watering down the countries climate goals. Sweden and Denmark are further examples of countries with struggling offshore wind industries.
Beyond the financial woes, recycling, community backlash, and environmental worries are further headwinds to the wind industry domestic and worldwide. Wind turbines are largely recyclable except for blades currently. While recycling efforts are ongoing, another large problem is the pileup of these large blades. With the turbines not lasting as long as projected, waste becomes an even more pressing issue. Beach communities keep voicing there opposition to offshore wind farms prominently in NJ and MA. Further there is growing suspicion that the anomalous increase in whale deaths on the east coast in recent years could be attributable to offshore wind. Mainstream is quick to dismiss the possibility with floods of articles proving the notion false, citing there is no causal evidence yet, and attributing the skepticism to disinformation. Since it is too soon for concrete evidence on the matter, it may or may not be surprising that environmental agencies like Greenspeace are seemingly nowhere to be found when it relates to these whale incidents and promptly deny any relation to offshore wind.
On a more positive note, Hywind is still boasting impressive capacity factors of 57.1% off Scotland’s coast, proving that that recent issues don’t automatically mean a technology is toast. Further, regardless of the issues and delays discussed, offshore wind is still set to see massive growth from current levels and is certainty not going away.
Conclusion
If the US wants to reach 30GW by 2030 it is going to have to cover the costs that the market is unwilling to pay, driving up the costs and increasing the federal deficit further. Is whether they reach the goal or not really important? Is this still good progress regardless of the outcome?
Unfortunately these questions are entirely subjective. However, if offshore wind was truly economical, developers would be making money. The fact is that higher production costs and interest rates are showing us the losses wind developers are having in real time. Many projects are being canceled or renegotiated and companies are asking for more subsidies. While those who view the solution through only wind and solar will see any capacity additions as progress and any roadblocks simply necessary to get through with more money creation, I see things a bit differently. I see a technology that is clearly uneconomical at the current juncture, being forced and incentivized forward through government intervention. This screams malinvestment of capital that the market could have put towards other uses. Hopefully the marginal emissions reduction is worth the higher electricity prices and deficit driven inflation that comes along with it.
The 30GW government target is ambitious and market disturbing. Utilities have jumped in to take advantage of the free money only to get faced with unforeseen costs leading to losses, lack of new interest, and cancelled projects. Most projections forecast steady rises and abating supply chain disruptions going forward. More importantly, they don’t include recession forecasts which is a massive factor in my opinion. Company earnings and overall demand decrease during a recession. Capital goods industries falter worse than consumer goods in recessions which doesn’t fare well for offshore wind. Therefore developers would have less financial inclination to start new projects if they even can afford it. With lower government revenues, the deficits needed to provide additional funding as developers are asking would explode even higher adding to the debt burdens and market dislocations I have been discussing in recent weeks.
None of my analysis even takes into account political changes in the US or overseas which could hamper climate efforts. While offshore wind remains one of the energy solutions going forward, I fear the industry faces even more hurdles ahead, especially the 30GW target in the US. Will the government step in again? Until next week,
-Grayson
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Can't help thinking the government should be putting this kind of emphasis towards nuclear (especially since it takes a fair amount of time to build out, even SMRs).
Inflation has affected all energy technologies, not just wind. Have you been watching global gas/LNG prices, or crude oil? Material & labour cost increases are real, as are interest rate hikes and higher cost of capital. Wind/solar PPAs and strike prices need to reflect these realities, in the same way that gasoline prices go up when oil rises and wholesale electricity prices rise when marginal natural gas generation becomes more expensive.