The headwinds facing the build-out in American waters are real, yet there are three key actions that can be taken now to get the sector on course to meet the Biden administration’s 30GW by 2030 national goal, writes John Dalton
Recent months have revealed the new reality facing offshore wind development in the west. In the US Atlantic, developers of the Commonwealth, Southcoast, and Park City projects all negotiated terminations of their power purchase agreements (PPAs) on the grounds that their fixed price contracts no longer provided an adequate return in spite of the increased tax incentives offered by the Inflation Reduction Act. Last week, developer consortia that encompass Orsted, Equinor and BP, which had petitioned for significantly higher PPAs, were turned down by the New York State Public Service Commission, the state’s regulatory agency, despite earlier support for increases from the New York State Energy Research & Development Authority which is handling auctions for the Empire state.
Nor are these issues confined to the US, with Swedish utility Vattenfall recently putting the brakes on its Norfolk Boreas project in the North Sea due to rising costs, a decision that was still reverberating in the UK as its AR5 Contract for Difference auction for offshore wind was boycotted by developers for a strike price universally deemed too low.
Rampant inflation, supply chain constraints exacerbated by Europe’s refocus on energy independence and security as a result of the Russian invasion of Ukraine and dramatic increases in power prices and climbing interest rates have dramatically increased the cost of offshore wind. While current high interest rates are viewed by many as transitory and the rate of inflation is subsiding, the mismatch between the production capacity of the supply chain and demand is likely to be sustained. Through this lens, offshore wind looks like only being available at higher prices for the foreseeable future.
Reducing risk premiums
Hand wringing – though understandable – isn’t useful. From the US standpoint, there are a number of actions that can be taken to reduce the price of offshore wind. The first is to reform procurement processes to reduce the risk premiums that offshore wind developers need to embed in contract pricing, including adding inflation adjustment mechanisms to PPAs so that changes in commodity prices that drive project costs are reflected in contract prices. New York, New Jersey, Massachusetts, and Connecticut have implemented such inflation indexes in their procurement processes, with last of these states recently factoring in changes in interest rates as part of its inflation adjustment mechanism.
"Hand wringing – though understandable – isn’t useful. From the US standpoint, there are a number of actions that can be taken to reduce the price of offshore wind."John Dalton
A second more important and more difficult reform is to reduce the development time for projects, focusing in particular on the number of months between bid submission and final investment decision when offshore wind developers face the greatest risk. The critical issue is to cut the time required to complete the required permitting processes. Environmental concerns must be addressed and stakeholders heard, but the required permitting timeframes need to be tightened.
A third initiative is to de-risk connection of offshore wind projects to the onshore grid. The costs and timing of interconnection are among the most significant risks faced by offshore wind projects. BP-Equinor indicated that unanticipated increases in transmission interconnection costs for their Empire Wind 2 project in New York would have the knock-on effect of a 4% increase in the contract price. Developing points of interconnection (POIs) that can be used by multiple developers is one risk mitigation strategy. In its current request for proposals for 3.6GW Massachusetts has identified two alternative POIs for which it has sought federal funding support that can be used by offshore wind developers.
At the same time, a priority in the US must be accelerating development of the domestic offshore wind supply chain. Doing so would enhance confidence in the pace of progress in American waters and could be supported by 1/ renewing federal and state commitment to offshore wind project schedules, 2/ establishing procurement schedules that provide visibility regarding the likely future pace of project investment, and 3/ updating procurement targets to reflect greenhouse gas emission reduction and clean energy goals.
There are no silver bullets that will allow US offshore wind projects to offer prices in line with those available several years ago – prices that virtually ensured offshore wind was a centerpiece of coastal state decarbonization strategies. However, with the appropriate changes to de-risk offshore wind project development meaningful price reductions can be achieved that will get development of the sector back on course.
• John Dalton is President of Boston, US-based energy consultancy Power Advisory
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