Economic Watch: Offshore wind faces headwinds in the U.S.-Xinhua

Economic Watch: Offshore wind faces headwinds in the U.S.

Source: Xinhua

Editor: huaxia

2024-05-11 20:13:45

by Nie Shangyou

HOUSTON, May 11 (Xinhua) -- Offshore wind energy is facing a harsh economic reality in the United States, according to industry leaders at the just concluded Offshore Technology Conference (OTC) held in Houston, U.S. state of Texas.

"2023 has been a tough year for offshore wind," said Troy Patton, chief operating officer for the North American division of Danish company Orsted, in a keynote titled "The Future of Offshore Wind" during the OTC annual conference, which ran from Monday to Thursday.

"A number of contracts were canceled last year, with penalties," Patton told Xinhua after his presentation. These include Orsted's Ocean Wind I and II offshore New Jersey, totaling 2.2 gigawatts (GW) generation capacity.

Orsted, a world leader in offshore wind energy, reportedly wrote off 4 billion U.S. dollars in 2023 due to project cancellations in the United States. Penalties were levied for breaching supply contracts.

British oil giant BP also sold its 50 percent stake in two offshore wind projects, Empire Wind 1 and 2, offshore in Long Island, New York, to Norwegian oil company Equinor.

In return, BP took over 100 percent equity in Beacon Wind to supply power to the U.S. state of Massachusetts. BP reportedly took a 1.1-billion-dollar tax write-off for 2023 and said it would not rush to progress the Beacon Wind project.

These cancellations followed three other project cancellations for the eastern U.S. states of Massachusetts and Connecticut, totaling 3.2 GW. The developers called them no longer financially feasible, citing high inflation for material and equipment, higher interest rates and insufficient supply chain development as crucial factors leading to the cancellations.

The U.S. East Coast has been regarded as an ideal location to accelerate offshore wind development and help reduce dependency on coal-fired power plants. Three key factors behind the success of an offshore wind project are shallow-water continental margins for installing the foundation for the wind turbines, proximity to coastal populations and economic centers, and availability of supporting value chain service providers such as ports and manufacturing.

However, offshore wind projects are capital-intensive long-term projects, experts said, noting that energy providers and consumers need to agree on financial terms years ahead of time before the offshore wind developers and their financial backers can confidently make a final investment decision.

Another critical factor is that offshore wind projects have to compete against power provided by traditional sources. Despite the financial incentives offered by the Inflation Reduction Act introduced by the Joe Biden administration in 2022, some projects still cannot compete against power generated by cheap and abundant natural gas in the United States.

Data from the latest IEA report showed that average gas price in the first quarter of this year was 8.7 dollars per million British thermal units (Mmbtu) in Europe, 9.3 dollars Mmbtu in eastern Asia, but only 2.7 dollars Mmbtu in the United States.

The setback comes as several new offshore wind farms just began generating electricity, such as Vineyard Wind for Massachusetts and South Fork Wind near Long Island in New York, both involving Orsted. Before these new projects, the United States only had two small-scale demonstration offshore wind projects as of 2023.

In the Gulf of Mexico, the U.S. government held the region's first auction to lease offshore areas for wind development last year and only one of the three proposed areas received bids. The Gulf Coast faces competition from traditional oil and gas and onshore wind since Texas has the nation's highest wind generation capacity at 47.8 GW, or about 28 percent of the national total, according to the Energy Information Agency, part of the U.S. Department of Energy.

Currently, there are 11 offshore wind projects along the U.S. East Coast, with a total capacity of 13.7 GW, though only 7.3 GW or 54 percent have offtake agreements in place, according to recent estimates presented by Patton. Offtake agreements must be in place before the developers can make final investment decisions.

One attendee of the four-day OTC echoed the sentiment that the U.S. offshore wind industry is in its infancy and might have grown too fast in the past several years, contributing to the current setback.

The first offshore wind farm was installed in 1991 in Denmark. As a pioneer for offshore wind, European companies, including Orsted, Shell, BP, TotalEnergies, Equinor and EdF, are trying to utilize their experience to help develop the U.S. offshore wind industry thanks to the financial incentives from the U.S. Inflation Reduction Act.

In 2021, the Biden administration announced an ambitious plan to deploy 30 GW of offshore wind capacity to power 10 million homes by 2030 as part of the White House's overall climate initiative.

Industry watchers are skeptical that the 30 GW by 2030 target for offshore wind farms can be achieved, given the years required to build such farms.

Despite the setbacks, OTC participants showed strong interest in offshore wind technology development and deployment, with multiple dedicated sessions such as innovative discussions on combining offshore wind with green hydrogen generation.

Another hot topic is floating offshore wind, which is used for coastal areas without shallow water seabeds and tends to be even more expensive than conventional offshore wind farms built on fixed foundations.

According to Patton, floating offshore wind "will probably take at least another decade to become reality."