- Biden’s “Inflation Reduction Act” is pushing inflation and interest rates so high that offshore wind development is slowing.
- Subsidies in the law are proving inadequate to attract and keep developers without contract renegotiations and higher approved prices.
- Price increases of around 50 percent to already expensive offshore wind are hurting politicians’ plans both in the United States and in Europe.
President Biden’s climate legislation, the Inflation Reduction Act (IRA), passed solely by Democrats, may be making it more difficult for companies to invest in offshore wind by actually producing more inflation—something the bill was supposed to reduce as its title claims. While the law provided an estimated $370 billion in grants, tax credits and other incentives for climate and “clean” energy projects, the funds are proving insufficient for rising inflation and borrowing costs. Estimates regarding the costs incurred by taxpayers due to the bill are as high as $1.2 trillion as the tax credits in the law are not capped and the Biden Administration is loosely interpreting conditions for those credits, driving their costs up.
Just two years ago, offshore wind developers were making plans based on a projected cost of $77 per megawatt hour; now the cost is up to $114 per megawatt hour. Danish wind company, Orsted, said that it is prepared to walk away from projects unless it gets more government aid, having announced a potential $2.35 billion price increase in its U.S. projects. Orsted told utility regulators that it would not be able to make a planned final investment decision to build its proposed 924-megawatt Sunrise Wind project unless its power purchase agreement was amended to factor in inflation. Orsted’s warnings include issues with the provisions of the president’s Inflation Reduction Act where incentives are higher for companies sourcing U.S.-made parts. However, the domestic supply chain has not been able to catch up, mostly due to China’s dominance and Biden’s anti-mining policies that are driving prices higher.
Orsted is just one of several energy firms trying to build new offshore wind farms in the United States, but the issues are spanning the entire industry, raising questions about the future of the fleet of offshore wind projects that U.S. President Joe Biden touts. Biden wants the United States to deploy 30,000 megawatts of offshore wind by 2030, up from just 41 megawatts now. Offshore wind is a key part of his plan to decarbonize the power sector and revitalize domestic manufacturing. His administration and Democrats in Congress passed lucrative subsidies aimed at helping companies to achieve his goals. But even with regulatory rules and subsidies in place, developers are facing a whole new set of issues.
The U.S. offshore wind industry developed much more slowly than in Europe because it took years for the states and federal government to provide subsidies and draw up rules and regulations governing the industry, slowing leasing and permitting. Further, the technology’s high costs, even before the supply chain and inflation issues, at more than twice those of onshore wind and natural gas generating plants, were a deterrent. However, under Joe Biden, government policies started to line up in the industry’s favor and offshore wind developers unveiled a host of new project proposals, mostly off the U.S. East Coast. There was only one bid in a recent lease sale in the Gulf of Mexico, and 5 bids off the Pacific coast. Even in the U.K., a subsidy auction for new renewable energy projects did not attract any offshore wind bidders, despite Britain’s goal for 50 gigawatts of offshore wind capacity by 2030, up from around 14 gigawatts currently.
There are two small offshore wind projects in the United States in operation. The first is Orsted’s five-turbine Block Island wind farm off Rhode Island that was economically feasible due to the island’s expensive generating costs from floating diesel generators. But, even the Block Island project had its problems with cracks at the base of four turbines and its offshore cable not buried deep enough, increasing the cost of operation. The second offshore wind project in operation is the first two test turbines of Dominion Energy’s Coastal Virginia Offshore Wind project.
But, the COVID-19 pandemic slowed supply chains and increased the cost of equipment and labor, making new projects far more expensive than initially projected. German wind giant RWE and Sweden’s Vattenfall said prices have risen 40 percent. While the offshore wind industry expected steep cost declines similar to those for onshore wind and solar that had occurred over the past decade, they instead saw steep cost increases, throwing project financing and development into disarray. Developers are looking to renegotiate contracts with higher prices, which will ultimately fall onto consumers.
To try to control inflation, the U.S. Federal Reserve increased interest rates, increasing financing costs. Because many contracts for offshore wind projects have no mechanism for adjustment in the case of higher interest rates or costs, some developers have paid to get out of their contracts rather than build the offshore wind turbines and face years of losses or low returns. In Massachusetts, two offshore wind developers, SouthCoast Wind and Commonwealth Wind agreed to pay to terminate deals that would have had capacity totaling around 2,400 megawatts. Norway’s Equinor and its partner BP want a 54 percent increase for the power produced at three planned offshore wind farms – Empire Wind 1 and 2 and Beacon Wind.
In New York, proposals to increase prices in existing offshore wind and onshore renewable energy contracts could increase residential electric rates by 2.5 percent and 1.5 percent, respectively, a combined $4.67 a month, according to the New York State Energy Research and Development Authority. The Public Service Commission of New York is considering petitions to adjust contract terms for 91 renewable energy projects totaling 13.5 gigawatts. New York plans to get at least 70 percent of its electricity from renewable energy resources by 2030 and have 9 gigawatts of offshore wind by 2035. On average, offshore wind developers are seeking a 48 percent increase in their contract prices to $167.25 per megawatt hour. According to the petitions, renewable energy developers faced unexpected inflation, supply chain constraints and a jump in interest rates since they entered into the contracts. Failing to update the prices for wind and solar contracts could kill the projects and lead to delays in meeting state “clean” energy targets.
The offshore wind industry is not satisfied with Biden’s IRA subsidies. Bonus incentives for using domestic materials and for siting projects in disadvantaged communities are too hard to secure, according to developers, and they are crucial to making projects work in a high-cost environment. The credits are each worth 10 percent of a project’s cost and can be claimed as bonuses on top of the IRA’s base 30 percent credit for renewable energy projects – bringing a project’s total subsidy to as much as 50 percent. Equinor, France’s Engie, Portugal’s EDP Renewables, and trade groups representing other developers pursuing offshore wind projects are pressing officials to rewrite the requirements, and warning of lost jobs and investments.
Conclusion
The cost of offshore wind has escalated due to inflation, soaring interest rates, and insufficient IRA subsidies, according to developers. Developers either want their project contract prices renegotiated or a cancellation of the project, even if they have to pay fines to do so. The result is that Biden’s offshore wind goals might just be a “clean” energy dream.
