Offshore wind industry hit by inflation and interest rates

Joe Biden’s administration has based much of its renewable energy ambitions on offshore wind. Already in 2021, the president has set a goal of increasing the capacity of American offshore wind energy by 700 times by the end of the decade. Companies around the world have invested billions in building an offshore wind industry here, virtually from scratch.

But the one-two punch of inflation and high interest rates has hit the sector hard, and offshore wind developers are racing to adapt.

Walking through the harbor of New Bedford, Massachusetts, Klaus Moeller feels like a child in a toy store. In this case, the toys are larger than a football field.

“You see the blades, that’s my favorite part of the turbine,” said Moeller, Vineyard Wind’s CEO, pointing to a giant metal rack holding three blades, each 117 meters long. They will soon be ferried to the sea and bolted to wind turbines twice the height of the Statue of Liberty.

“Each turn of the blades energizes the house for a day,” he said. “It’s amazing technology.”

Construction of Vineyard Wind I, a 62-turbine project located about 25 miles south of Martha’s Vineyard, began in late 2021. When completed, it will be the nation’s first operational utility-scale offshore wind farm and will power more than 400,000 homes , according to the company.

However, over the past two years, building offshore wind projects has been a challenge for other developers. Companies face higher borrowing costs due to the billions of dollars needed for these projects. Inflation hit the price of materials, including the hundreds of tons of steel in each turbine.

Moeller admitted that the reason for building Vineyard Wind I is partly a matter of luck. “When you look at the macro and what’s happened, we’ve kind of gotten ahead of the wave,” he said.

The Vineyard Wind Fund was ready before interest rates rose. The timing of other projects was not so fortunate.

“2022 and 2023 have certainly been challenging years,” said Michael Brown, CEO of Ocean Winds North America. In 2021, Brown’s company struck a deal to sell power to the Massachusetts grid for $75 per megawatt hour for the next 20 years.

However, before the project was scheduled to begin, the Federal Reserve began raising interest rates in an attempt to curb inflation.

“The basic cost of financing has doubled,” Brown said. With potential revenues tied up for two decades and construction costs skyrocketing, the project became unprofitable — not only was it a loss-making business, but it was losing money significantly. Losses amounted to hundreds of millions of dollars.”

The company terminated the contract with the state. And he wasn’t alone. Over the past two years, more offshore wind farm proposals have been submitted than construction has started.

“These are extremely challenging conditions for these projects,” Brown said. “They are incredibly expensive.”

But Brown says the tide is turning as the industry changes course to cover these expenses and revive its prospects. For example, states and utilities stopped setting fixed electricity prices for 20 years; new requests for offshore wind allow for some inflation adjustment as costs change.

This flexibility is “huge,” Brown said, “because it allows us to eliminate the uncertainty factor from our offering.”

Ocean Winds has submitted a new bid to build an offshore wind farm to serve the New England power grid.

The federal government is also streamlining the permitting process for offshore wind energy and offering tax breaks under the Inflation Reduction Act. Collectively, these changes will enable more projects to be implemented and make them cost-competitive with other energy sources by the end of the decade, says Kris Ohleth, executive director of the Special Initiative on Offshore Wind think tank.

“Overall, we will be on track,” Ohleth said. “We have a path.”

While Ohleth believes the industry is currently in recovery, she warns that could change in November. “The (Donald) Trump administration, if given a second term, will focus on renewable energy, especially offshore wind energy.”

Trump said he would halt offshore wind energy on day one by executive order. “Therefore, companies are monitoring the situation very closely and will make investment decisions depending on the outcome of these elections,” Ohleth said.

Back at the port of New Bedford, Klaus Moeller, a native of Denmark, said there’s something often missing in the U.S. economic and political debate about offshore wind: It’s a mature technology.

“When I looked at the ocean as a child, I saw wind farms,” he said. “We’ve seen it work for decades…without any major problems.”

About 12,000 turbines operate in the waters off the coast of Europe and Asia. In the USA, there are only a few dozen people so far.

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