WORLD - Offshore Wind's Bizarre Global Problem

Danish wind company Orsted wants out of a pair of New Jersey offshore wind projects so badly that it’s willing to lose up to $5.6 billion. Only one year after the Inflation Reduction Act beefed up tax incentives for renewables, the United States now seems further away from President Biden’s goal of generating 30 gigawatts of offshore wind power by 2030. The company—which is 51 percent owned by the Danish government—effectively told shareholders that the U.S. wind market just isn’t a great place to do business, echoing its competitors. What went wrong?

It’s not the first time in recent weeks that a wind company has been willing to pay up to get out an American offshore wind deal. Shell and Avangrid have recently dropped U.S. wind projects as well. Energy analytics firm BloombergNEF finds that more than half of all offshore wind contracts in the U.S. either have been or are at risk of being canceled. This may well put the White House’s 2030 wind power generation goals out of reach. Having previously forecast that the U.S. would reach 23.1 gigawatts on that timeline, BloombergNEF slashed its projection by 29 percent last week. Senior wind analyst Atin Jain now predicts the U.S. will be just over halfway to Biden’s target by 2030, with 16.4 gigawatts in offshore wind capacity.

Despite the generous tax breaks provided by the Inflation Reduction Act, CEO Mads Nipper described Orsted’s U.S. projects as “the most painful part of our portfolio,” during a dour quarterly earnings call last Wednesday, citing rising supply chain costs, higher interest rates, and construction delays. BP’s head of low-carbon energy similarly called the U.S. offshore wind sector “fundamentally broken.”

To understand this pessimism, one needs to understand the basic economics of offshore wind. Like renewables projects more generally, offshore wind requires a big up-front capital investment followed by relatively low maintenance costs moving forward. Whereas a gas-fired power plant has relatively modest up-front costs, it then needs to keep buying gas in order to generate the electrons it sells. From the perspective of investors, the effects of a fluctuation in fuel prices balance out for plants that sell day-by-day to wholesale electricity markets: If prices are low, the gas plant makes less money selling power but spends less money buying it too. If prices are high, the gas plant spends more money but makes more money selling power.

But when it comes to offshore wind—an extraordinarily capital-intensive business—lower power prices aren’t offset by lower operational expenses. Instead, projects either generate lower returns or have more trouble paying down their debts. Investors have been accordingly wary of funding expensive projects that—if selling power wholesale—can’t guarantee steady returns.