Energy Resource Resurrected

Surprise: It’s not nuclear power.

It’s Easter in the West. And it’s also spring in the Northern Hemisphere, the time of renewal. So it’s appropriate to talk about an energy resource that appears to be resurrecting itself: Offshore wind.

It’s been about two months since Orsted A/S (Denmark: ORSTED, OTC: DNNGY) slashed its 2030 power generation development target 27 percent, largely by gutting offshore wind development in the US. The 50 percent Danish government-owned company also ousted upper management, announced plans to fire 800 workers, wrote off nearly $6 billion in losses and axed dividends at least through calendar year 2025.

Orsted responded to spiking development costs for offshore wind facilities especially in the US—and regulators’ initial reluctance to pass those onto consumers in rates. More than half the increases are from higher borrowing costs. And with the Federal Reserve not yet pivoting to lower interest rates, there’s little sign of relief on that front.

Nonetheless, just weeks after Orsted ripped the band-aid off its money-losing strategy, US offshore wind is reviving. What’s changed: Simply, state regulators are effectively passing higher costs into power sales contracts. As a result, offshore wind economics are again favorable and development is going forward.

First to move was New York. Regulators had balked at renegotiating contracts with developers over the past year, causing several projects to be cancelled.

But in late February, they selected Orsted’s 924-megawatt capacity Sunrise Wind project to negotiate a new 25-year contract. Also owned 50 percent by utility EverSource (NYSE: ES), Sunrise had been considered shelved. But last week, the project won final approval from Biden Administration regulators. And the owners announced a final investment decision to build, with a projected in service date of 2026.

EverSource will sell its 50 percent ownership in Sunrise to Orsted, presumably once a final contract with New York is in place. But the utility figures to get plenty of mileage from investing in transmission to connect to the New York power grid from its location 16 nautical miles south of Martha’s Vineyard, Massachusetts. And resulting rate base growth will keep its long-term earnings and dividend growth target of 5 to 7 percent on track.

The resurrection of Sunrise is also be a plus for Southwest Gas Holdings (NYSE: SWX), as the project involves its Centuri construction division. That unit will be spun off as a separate company later this year. And the revival of Atlantic coast offshore wind construction should increase investor interest, hence the post-spin value.

Next up: Connecticut, Massachusetts and Rhode Island. The states previously balked at renegotiating contract rates for several facilities facing soaring costs. In fact, Avangrid Inc (NYSE: AGR) was forced to pay $16 million last year to exit previous deals, so it could stay eligible for future offshore wind auctions.

Offshore wind setbacks are likely one reason why Avangrid’s 81.61 percent owner Iberdrola SA (Spain: IBE, OTC: IBDRY) is offering to buy the rest from the public. But the company is once again getting, issuing bids along with Orsted to develop essentially the previously cancelled offshore wind projects for the three states, who are now collectively seeking 6.8 gigawatts of new capacity.

At this point, there are only two commercial scale offshore wind facilities operating in the US. The largest by far is Avangrid/Iberdrola’s 800 MW Vineyard 1 facility, already connected to the New England grid and now ramping up output to reach a target of full capacity by next winter. The smaller is the 132 MW South Fork Wind off the Long Island coast. That one is also a 50-50 project for EverSource and Orsted, with EverSource selling its ownership to focus on transmission.

And prospective costs remain the biggest concern for ongoing projects, perhaps especially for Dominion Energy’s (NYSE: D) Coastal Virginia Offshore Wind. That facility is now 50-50 owned between the utility and private capital firm Stonepeak. It also has a $9.8 billion development cost cap, beyond which expenses can’t be passed onto consumers but must be eaten by shareholders.

CVOW’s current estimated LCOE—levelized cost of energy—when completed is actually less than what Dominion had projected a year ago. The company earlier this month affirmed 92.4 percent of total project costs have been locked in, with the rest heavily reserved. And it affirmed a delivery date of “late 2024/early 2025” for the construction vessel Charybdis it’s building in Texas.

The really good news for Dominion’s project—as well as others now once again moving forward—is actual construction times appear to be shrinking. South Fork, for example, began construction in 2022 and started operations in 2023. Also state and federal authorities are intent on streamlining the permitting process, at least raising the possibility that what’s been in the past a multi-year process could be cut down to a matter of months.

That would greatly increase the appeal of these projects, even as they’re getting a lift from falling global wind turbine prices. But there’s an even bigger spur for US offshore wind development: The strain on power grids from the massive surge in electricity demand from data centers.

Rising capital spending is the most important takeaway from American utilities’ most recent guidance updates. In fact, the rate of growth is accelerating rapidly: The PJM (Pennsylvania/Jersey/Maryland) grid operator has now issued a 10-year load growth forecast more twice its previous estimate.

Contrast that to the previous decade, when electricity demand was largely flat. Most forecasts for this decade up until recently have been for efficiency to drive declines.

That’s all out the window now. Accelerating demand from AI-enabled data centers is forcing industry to lock in more power production capacity by whatever means. And surprise: That also means reviving offshore wind projects.