‘Reality setting in’ as costs soar for offshore wind 

Offshore wind developers in the US and beyond are taking steps to counter the impacts of inflation on project economics, including through a renewed focus on pursuing returns over market scale, a leading sector analyst told Recharge.

Westwood Global Energy Group in a new report on the inflation challenge reckons the global sector could face a $280bn costs-hit over the next decade.

The report found that inflation has spiked sector costs by some 20% in the last two years, resulting in projects in the US and other markets being delayed and even withdrawn and offtake contracts renegotiated as developers adjust.

“The reality is starting to set in at this stage,” David Linden, executive director of energy transition at UK-based Westwood, told Recharge. “The players are going to have to refocus a little bit on returns and less about just more gigawatts. Quality above quantity,” he added.

Higher costs came from all directions, Westwood found, led by commodities such as steel. Some 44% of respondents to its industry survey saw commodity prices jack up 11-20% since 2021, with a third saying costs had risen even higher, up to 50% in some cases.

Higher materials costs have a large impact on project development as capex comprises at least 50% of overall lifecycle costs for an offshore wind farm, according to the US National Renewable Energy Laboratory (NREL).

Nearly 90% of respondents said that labour costs had risen as much as 20% but few companies said they would reduce headcount, which could indicate “continued intention from management to expand in the offshore wind industry”, the report noted.

The study added that as most industry players struggled to recruit and retain professionals, the lack of layoffs possibly reflected “competition to fill to existing roles”.

Meanwhile, two thirds of survey respondents said financing costs had gone up at least 20%, while another third said they had risen as much as 50%.

US offshore wind in the spotlight

The offshore wind costs crunch is in particularly sharp focus in the US, where developers are battling to get the nation’s pioneering projects in the water under very different economic circumstances to those seen a few years ago when they were planned and sanctioned.

NREL sees capex financing costs comprising some 15% of total costs, and higher interest rates were cited by struggling US developers, Iberdrola-controlled Avangrid and the Shell-Ocean Winds joint venture (JV) behind SouthCoast Wind.

Both are attempting to withdraw projects won in Massachusetts’ third procurement round that they say are no longer financeable by the terms of existing power purchase agreements.

Rising vessel costs were also a strong concern for the global sector, but with only two arrays currently under construction, this is less of an immediate issue for the US.

A resurgent offshore oil & gas sector will also compete for industry vessels in the US.

“The impact won’t be as big in the initial phases, because it’s already all contracted and being built,” said Linden.

“It’ll impact later on when you’re trying to get hold of vessels that in the US sector have found other things to do.”

Core markets

Some developers have responded to inflation by retreating to core markets, such as Mainstream Renewable Power, which exited both Japan and the US this past spring to focus on more advanced European and South American sectors.

Orsted America’s CEO David Hardy recently revealed that the developer will forego competing in expanding California and Gulf of Mexico sectors to concentrate on the Northeast and Mid-Atlantic states where excellent resources are matched with compelling economics and strong policy support.

Delaying or reconfiguring projects is another common response to inflation, Westwood found.

Major developers such as Orsted and German energy firm RWE, which won acreage in both the New York Bight and California, have wide-spanning portfolios that provide “global optionality”, according to Linden.

“You can afford to take a bit of a delay in some areas, because you can accelerate others,” he said.

Orsted’s Hardy told investors that the global giant would reconfigure its 1.15GW Ocean Wind 2 array to ensure value creation, which could mean “project delays, different technology, or other value adding activities”.

Investment tax credits

Investment tax credits (ITC) in the US’ Inflation Reduction Act (IRA) are also important to ensuring the feasibility of the first tranche of US projects, but Linden stressed that their significance varies.

The IRA offers an ITC of 30% off capex costs assuming projects satisfy labour standards.

Adders of 10% can be earned through development in so-called ‘energy communities’ – struggling industrial and coal-sector brownfield districts – as well as use of domestic content.

“That’s the analysis that each project is going to have to do based on its timelines,” he said. “Some of these projects have already made orders and secured pricing, so they’re good.”

More pain is expected for the industry, as 98% of survey respondents anticipate inflation to continue.

Financing this capex gap could pose challenges for the industry, Westwood noted, saying: “Present indications are that consumers may ultimately be required to make up the difference”, either through higher offtake prices or added, taxpayer funded subsidies.

Whether higher costs could dent government interest in offshore wind or if the industry is sufficiently entrenched remains “an open question”, Westwood noted.

“Industry players will be closely watching how a period of cost inflation affects a sector that has been defined by falling costs for some time,” the report forecast.