Offshore Wind's Not Dead Yet

It's still growing because developers are finally getting real.

The odds of 30 gigawatts of operating US offshore wind by 2030 are at this point very likely less than my hometown Washington Nationals’ chances to win the 2024 World Series.

For those who aren’t baseball fans, neither is a non-zero number. But with a half dozen major projects on the Atlantic Coast shelved in recent months, the Biden Administration’s target for offshore wind deployment looks less and less unreachable. And that’s even if the president wins re-election later this year.

It would be a mistake, however, to conclude that US offshore wind development is dead. Rather, facts on the ground show it’s very much alive, and will continue to be regardless of who wins the White House in November.

The reason is simply that energy economics always ultimately trumps (no pun intended) energy politics. And while more than a few US offshore wind projects have fallen prey to rising project development expenses—especially the three-fold increase in borrowing costs—at least five big ones are either operating or will be in the next two years.

Moreover, two very deep pocketed global power appear to be gearing up for big US offshore wind investments: Brookfield Asset Management’s (TSX: BAM/A, NYSE: BAM) affiliate Brookfield Renewable (TSX: BEP-U/BEPC, NYSE: BEP/BEPC) and RWE AG (Germany: RWE, OTC: RWEOY).

RWE is already a large global player in offshore wind, its latest move buying a 4.2 gigawatt UK development portfolio from Vattenfall for roughly $1.2 billion. And the company last year proved it’s serious about US expansion, becoming a top five US producer of onshore renewable energy by closing the acquisition of Consolidated Edison’s (NYSE: ES) contracted wind and solar assets for $6.8 billion.

Last March, made its first foray into US offshore wind by partnering with Mid-South utility Entergy Corp (NYSE: ETR). The parties are now “analyzing the Gulf of Mexico offshore wind market,” with the goal of servicing the rising electricity needs of the region’s giant and growing petrochemicals sector.

Both RWE and Brookfield are strong candidates to take a minority financial stake in Dominion Energy’s (NYSE: D) 2.6 GW Coastal Virginia Offshore Wind facility. That project is still on track to enter service in 2026 as the first US offshore wind plant in regulated utility rate base. And provided Dominion keeps costs within current projections, it’s assured a handsome return on investment.

Of course, failure to control costs—and the general unwillingness of off-takers to pay more than previously contracted rates for output—is the primary reason why so many offshore wind projects have been at least temporarily shelved over the past year. And because of that, the value of offshore leases as well as projects still in development has plunged as well.

Last week, for example, utility EverSource Energy (NYSE: ES) announced a non-cash charge of $1.6 billion against its Q4 results. The reason: Management now expects to fetch far less from planned sales of 50 percent ownership stakes in three facilities under development with Orsted A/S (Denmark: ORSTED, OTC: DNNGY).

The EverSource sales are reportedly in “advanced stages” of “exclusive negotiations” with a prominent “global private infrastructure investor.” At least one of the projects—the 704 megawatt capacity Revolution Wind—is still going ahead with an in service date for 2025. And another, Sunrise Wind, has rebid its contract in New York with the apparent support of the state government.

But the EverSource writeoff—and Orsted’s EUR2.1 billion writedown of the same facilities—clearly show the disconnect between the cost of offshore wind now and what regulators and the utility customers they represent are willing to pay. And though there are ongoing negotiations between would-be developers and officials in five states—Connecticut, Massachusetts, New Jersey, New York and Rhode Island—there’s absolutely no guarantee any agreement will be reached to bridge the gap.

Nonetheless, there are several good reasons for offshore wind developers and their investors to be optimistic.

First, Avangrid Inc’s (NYSE: AGR) 800 MW Vineyard Wind 1 project is now in service, delivering low cost power to the Massachusetts grid. Granted that facility was nearing completion before inflation and rising interest rates spiked development costs. But it’s running is nonetheless proof these machines work. And thanks to a decade-plus of restrictive government policies, New England is chronically short on pipelines for shipping in cheap Appalachian natural gas. So every megawatt hour Vineyard produces is that much less high priced imported LNG consumers and business will have to buy.

The second reason is lack of pipeline capacity is going to keep supplies of natural gas tight up and down the East coast for years, even when the 303-mile Mountain Valley Pipeline finally starts shipping Appalachian gas to Virginia. That means, if offshore wind development costs can be made more predictable, developers will have an easy target to compete against for market share.

Third, development cost spikes are going to be progressively less likely going forward for several reasons. One is lower borrowing costs. The Federal Reserve has yet to pivot on interest rate policy. But as I pointed out in my Substack column a week ago, power companies’ long-term borrowing costs have already dropped by 1 to 1.5 percentage points. And that favorable trend should continue when the Fed actually begins lowering rates.

Dominion’s development plan for CVOW includes building a specialized construction ship. Having that infrastructure available starting next year means US developers won’t have to compete to lease ships from Europe or Asia, where offshore wind development activity is heavy and availability scarce.

Ability to contract a locally based ship will cut a big chunk out of current cost uncertainty for these projects. So will US located manufacturing of components, which is rapidly expanding under incentives from the Inflation Reduction Act of 2022 as well as the bipartisan Infrastructure Act passed the year before.

As for US energy politics, the presidential election could result in an administration considerably less favorable if not outright hostile to offshore wind development. But investors are well advised to remember the ultimately futile efforts of President Trump from 2017-2020 to halt the decline of coal-fired generation in the US.

Mainly, it’s the states that regulate utilities and other electricity producers. And there the ultimate criterion for what goes forward is always economics. The federal government can play with project permitting, just as the current administration has with oil and gas. But at the end of the day, state regulators will determine what gets invested in and what doesn’t. And if industry gets costs under control, offshore wind will remain very much in the mix.

Finally, it’s worth pointing out that while offshore wind has stalled in the US, it’s going full steam ahead in Europe, Asia and even South America. That means increasing global scale for production of components and provision of services, as well as multiple lessons learned to improve best practices.

There’s also a good case to be made that by delaying deployment, US developers will receive immense benefit from those lessons. And at the end of the day, that will mean more efficient facilities operating at a lower cost. Bottom line: Not reaching 30 gigawatts by 2030 may wind up being the best thing that ever happened to US offshore wind.