Offshore wind industry hit by soaring costs, threatening future projects

Recent setbacks for the U.S. offshore wind industry, capped by the withdrawal Wednesday of two large projects in New Jersey, have cast the fledgling market in a more precarious light as developers rethink some of their projects due to rising costs.

Soaring prices for raw materials and higher interest rates have led major European developers to make difficult decisions about projects once hailed as the linchpins of state and federal goals for all-green energy. First-generation projects, including South Fork Wind for eastern Long Island and Vineyard Wind for New England, are moving forward, but others could fall victim to fixed-price contracts that have become unfeasible.

"Ultimately, offshore wind in the U.S. is fundamentally broken," Anja-Isabel Dotzenrath, head of gas and low-carbon for bp, which with Norway-based Equinor has contracts to build three offshore wind projects for New York and Long Island, told a conference in London on Wednesday, according to Reuters. Equinor and bp announced a combined $840 million in writedowns tied to U.S. offshore wind projects.

For Denmark-based Orsted, the world’s largest offshore wind developer, the news was worse. The company on Wednesday announced that it would cease plans to build two large wind projects destined for New Jersey, taking $4 billion in impairment charges, with potentially more to come.

“It is obviously some very tough decisions that we have already made, and have to make in coming months,” Mads Nipper, chief executive of Orsted,  told financial analysts Wednesday.

The news didn’t end there. Nipper said the company was giving new scrutiny to its entire U.S. portfolio of offshore wind projects, including Sunrise Wind, one of the biggest destined for Long Island at 924 megawatts, even while moving forward with Revolution Wind, 704 megawatts slated for New England, and South Fork Wind, 130 megawatts for Long Island’s East End.

Orsted was taking measures to “de-risk the exposure of the portfolio by reducing the number of projects that will be realized,” Nipper said.

Push to rebid project

Key to the decision will be whether Orsted can successfully rebid the project to New York State to receive a more favorable cost for its energy. Nipper, who previously placed odds of 75% in favor of a more favorable cost mechanism for Sunrise, on Wednesday lowered that probability to 50%.

Orsted spokeswoman Meaghan Wims, noting that Sunrise already had begun preliminary land-based construction in Brookhaven, said Sunrise remains an “active project.”

All of Sunrise Wind’s proposed 924 megawatts of power — enough for 600,000 of LIPA’s 1.2 million customers — are slated to connect to the LIPA grid at a substation in Holbrook, part of a plan that would see large Long Island fossil-fuel plants retired in coming years.

Meanwhile, Brookhaven Town negotiated a package of community benefits tied to Sunrise Wind that was projected to bring in more than $130 million to the town over the project’s 25-year life, mostly for allowing construction of a 17.5-mile cable from Smith Point to Holbrook. Among local contracts tied to Sunrise are a $200 million construction pact for building the cable and substation in Brookhaven, one awarded earlier this year to Melville-based Haugland Group.

Should Orsted decide to nix its plans for Sunrise Wind, Nipper told financial analysts, cancellation fees would amount to around $426.7 million. Eversource, a New England utility that is partnering with Orsted on several offshore projects, earlier this year said it was seeking a "clean exit" from offshore wind, Newsday reported, but it has yet to announce a buyer. Orsted already has taken writedowns on the value of Sunrise Wind amounting to $754 million, according to Denmark's new site, EnergyWatch. 

The series of announcements further hammered Orsted’s already pummeled share price, which is down more than 50% this year, and led Wall Street ratings firm S&P Global Ratings on Thursday to threaten a downgrade, according to Financial Times. 

Head-spinning developments

For offshore wind proponents on Long Island, which is preparing to receive the first installment of offshore wind energy from South Fork Wind in December or early next year, the series of setbacks over the past year has been head-spinning.

Taken as a whole, the setbacks “will make our transition to renewable energy more costly, at least for the short term, and more difficult,” said Gordian Raacke, executive director of Renewable Energy Long Island, an East Hampton environmental group that long has advocated for offshore wind. “And it potentially could mean there will be delays in meeting our climate goals.”

The problems started this fall with a Public Service Commission ruling last month that denied requests by Orsted and Equinor, another big developer with three projects planned for Long Island, to reopen their previously awarded contracts for energy to allow for increased costs tied to inflation, material bottlenecks and higher interest rates.

Raacke said he wasn’t surprised the PSC didn’t approve it. “When someone asks for a higher price, you’re not just going to say, ‘OK, go ahead,’ ” he said. Gov. Kathy Hochul’s administration has asked companies to provide more information about the factors impacting costs, and she could issue an expedited rebidding of the contracts in coming months.

Molly Morris, president of Equinor Renewables Americas, acknowledged that the U.S. offshore wind industry is “in a fragile state” at present, but said a possible rebidding process “is a step to get New York’s first offshore wind projects back on track.” Equinor and bp have submitted comments in response to a state request for information, she said.

“We continue to work toward realizing the potential of the Empire Wind and Beacon Wind projects to help meet state and federal goals for clean energy,” she said in a statement to Newsday. “Like other renewable energy project developers in New York and along the East Coast, our projects have faced substantial challenges related to inflation, supply chain disruptions and high interest rates.”

Optimistic view on wind power

Kevin Law, a former chief executive of LIPA who is chairman of the Empire State Development agency and an adviser to the governor on Long Island issues, said he believes the state will find a balance between too-high costs for wind energy and its goal of 9,000 megawatts of wind power by 2035.

“Because so many things are upside down, given rising inflation and interest rates, I think there’s a need for recalibration in the offshore wind industry,” said Law, a former Long Island Association chief, now executive vice president at Tritec Real Estate Co. “I don’t think any of that takes away from Gov. Hochul’s commitment to offshore wind and locating projects here and businesses that support the industry.”

Law noted that offshore wind is a more mature industry in Europe compared with the U.S., and that bumps in the road are to be expected.

“I still think there are tremendous opportunities for offshore wind for Long Island and New York state,” he said. “It may be a slower and bumpier ride than folks would like in the beginning, but in the long term, the industry can be very successful here.”

Hochul just last month announced three big new offshore wind projects in the third round of awards since the state announced plans to power the grid with the energy source in 2019 under former Gov. Andrew M. Cuomo. Hochul also announced $300 million to jump-start manufacturing of critical wind power components, chiefly in the Albany region.

Reliance on subsidies

Those who have questioned the viability of offshore wind said the recent setbacks exposed the inherent problems with a financial model that depends on federal and state subsidies, among other problems.

“This is all based on funny money,” said Bonnie Brady, executive director of the Long Island Commercial Fishing Association, whose members have opposed the wind farms chiefly because of their intrusion on fishing grounds.

“It’s all a scam,” Brady said of projects’ lack of viability without cost subsidies. “It’s always been about the money.”

But Neal Lewis, executive director of the Sustainability Institute at Molloy University, said too much already has been accomplished, and invested, for the state and Long Island to concede any ground on offshore wind.

“I’m still very optimistic about where offshore wind is going to go,” said Lewis, who advocated for the state’s first proposed project off Jones Beach 20 years ago. LIPA subsequently nixed that project on cost grounds.

“We have to hang in there and get through this difficult time right now,” he said, adding that could include the state making minor cost concessions to wind-farm companies.

“Paying just a little more to get offshore wind energy that will last for decades is the smart thing to do,” he said. “It’s absolutely reasonable for the state to step up and rebid the contracts, and realize there needs to be a little more in the equation” for wind-energy companies.

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.