Energy Musings - January 5, 2024
The opening line of A Tale of Two Cities sums up the first week of 2024 for the offshore wind industry. "It was the best of times, it was the worst of times." This will be a challenge for Joe Biden.
Foundations for Vineyard Wind in place in August 2023.
State House News Service
And You Thought 2023 Was All About Offshore Wind!
Although we spent a lot of last year discussing the economic troubles of the domestic offshore wind industry, you would have thought that turning the calendar page would have had us focusing on other energy markets. But within days of 2024’s opening, here we are talking about offshore wind again.
As we start this election year, the offshore wind industry is struggling to show how well it is doing in meeting Joe Biden’s green energy agenda – we will talk about that later. Developers have got to get those environmentalist voters onboard with Biden’s re-election effort because their futures could be at risk with a different administration.
Last year was not good for Biden’s green energy agenda. The electric vehicle push was slowing during the second half of last year, which had auto manufacturers pushing back their EV investments. Consumers are snapping up hybrid vehicles rather than EVs, supporting Akio Toyoda’s claims of hybrids being the better option for drivers. Toyota’s fourth quarter sales increased 15.4% by volume, but its hybrid sales soared 60.9%.
Multiple offshore wind projects were canceled last year, as many onshore renewable projects were rejected by the public. Several solar power and e-bike battery companies went bankrupt or are in dire financial straits. Even California’s green push has stopped subsidizing solar installations to the consternation of environmentalists. With a $68 billion budget deficit, California can no longer subsidize green energy as much as in the past.
Will 2024 prove as monumental a year for the offshore wind sector as last year? The press releases for the two events so far this year describe the best and worst for the industry.
The Best of Times
Avangrid, Inc., a member of Spain’s Iberdrola Group, and private equity company Copenhagen Infrastructure Partners are jointly developing Vineyard Wind 1. The 806-megawatt, 62-turbine wind farm is located 15 miles south of Martha’s Vineyard. According to a January 3 press release, the first turbine undergoing commissioning sent five megawatts of power to the New England grid at 11:52 PM the prior night. Is it still sending power? Our email to Avangrid has not been answered, but the press release talked about further testing being needed. Sounds like that was a one-shot deal to generate publicity.
The press release claims this power is the first to come from a commercial-scale U.S. offshore wind project. However, Ørsted and partner Eversource claimed the same thing in early December when they sent some power from their first turbine in the South Fork Wind farm off Long Island to the New York grid. Funny, we haven’t heard anything more about the power output ramping up. But the bigger question is how Avangrid could have missed that announcement. Maybe there is a backstory we don’t know yet. Or maybe they thought the public missed the earlier news.
Block Island Wind in Rhode Island waters holds the title of the nation’s first operating offshore wind, having begun operations in late 2016. However, the 5-turbine, 30-MW Block Island Wind farm, along with the 2-turbine, 12-MW Coastal Virginia Offshore Wind project, while operating, are not considered commercial projects. That is probably a proper designation because BIW’s operating performance has had a more checkered history than its boosters will acknowledge. While its high power cost is still positive for residents of Block Island, for mainland ratepayers, when that power arrives it costs 10 cents per kilowatt-hour more than Rhode Island Energy customers are paying.
The Worst of Times
The bad news for the offshore wind industry also came on January 3. BP p.l.c. and Equinor ASA announced they had terminated their Offshore Wind Renewable Energy Certificate Agreement with the New York State Energy Research and Development Authority for their Empire Wind 2 project off New York Harbor. According to the Equinor press release:
“The decision recognizes commercial conditions driven by inflation, interest rates, and supply chain disruptions that prevented Empire Wind 2’s existing OREC agreement from being viable.”
Last fall, despite support from the NYSERDA, the New York Department of Public Utilities rejected the project’s request for a significant increase in their OREC price. BP/Equinor wanted its OREC to go from $107.50 per megawatt-hour price to $177.84. The 65.4% increase was too much for New York ratepayers in the judgment of NYDPU.
In light of the economic problems cited, the Empire Wind 2 OREC price left the project “unfinanceable,” (our word of the year for 2023) according to the developers. The “out” afforded the developers was New York State allowing the project to rebid in this year’s offshore wind power solicitation. That explains why Empire Wind 2 was not canceled, but it may still face challenges.
BP/Equinor has an adjacent project, Empire Wind 1, with an OREC of $118.38/MWh. The developers had asked for that rate to be hiked to $159.64/MWh, which was rejected by the regulators like the Empire Wind 2 request. As EW 2 is about 50% larger than EW 1 (1,260 MW vs. 816 MW), we wonder whether BP/Equinor will try to secure a high-priced contract for EW 2 in the upcoming solicitation, which, when averaged with EW 1, gives them a blended price that generates a respectable average return for the two projects.
Such a strategy may work, but the price may still prove too high. Since BP/Equinor won their lease and moved forward with EW 2 they learned that there is glauconite in the seabed which may limit the number of turbines that can be installed while also potentially boosting the project’s construction cost.
On the same date, BP/Equinor announced the EW 2 OREC cancellation, and another announcement came from Seatrium, a subsidiary of Sembcorp Marine Offshore Platforms. It announced that BP/Equinor had canceled the contract for a $250 million substation platform for use in EW 2. The contract with Seatrium had called for a substation platform for each wind project, but now the EW 2 platform is not needed.
This is an election year, and the Biden administration will be working to burnish its green energy credentials. Expect to see all the stops pulled out to accelerate offshore wind development among other steps. This will be supported by an avalanche of press releases claiming offshore wind industry firsts and trumpeting the huge economic benefits being derived by the host states. Most are temporary, however.
Reaching the Biden administration’s 2030 target was dead by mid-year 2023 given the financial troubles of the offshore wind industry that emerged in the fall of 2022. "Thirty gigawatts is now unfortunately not something that the developers are really aspiring to," said Michael Brown, the U.S. country manager for Ocean Winds, an offshore wind joint venture between France's ENGIE and Portugal's EDP Renovaveis told a Reuters Events conference in July. "We want to meet as high a gigawatt target as possible, but it's not going to be possible to meet those 30 GW."
Brown’s statement reflected reality, but his assessment clashed with the political narrative. The Reuters article quoting Brown also quoted White House spokesperson Michael Kikukawa who stated that the administration "is using every legally available tool to advance American offshore wind opportunities and achieve the goal of 30 GW by 2030."
Kikukawa’s view was supported by Department of Energy spokesperson Samah Shaiq who said the 2030 goal "is still within striking distance." She went on to innumerate the conditions determining
if the goal would be reached. These included regulatory efficiency, the availability of vessels and port infrastructure, grid planning, and new turbine technology. So far, only regulatory efficiency seems to be working – because it is part of the Biden administration’s agenda. The Bureau of Ocean Energy Management (BOEM) has been rushing to approve offshore wind projects even over the objections of its co-agency with evaluation responsibility, the National Oceanic and Atmospheric Administration (NOAA). Approvals are being granted in the name of clean energy mandates, regardless of the potential environmental and economic harm from some of the developments.
Astoundingly, the BP/Equinor press release quoted Molly Morris, president of Equinor Renewables Americas stating: “Commercial viability is fundamental for ambitious projects of this size and scale. The Empire Wind 2 decision provides the opportunity to reset and develop a stronger and more robust project going forward.” If you think about that statement, it is an indictment of management’s handling of the initial project.
When offshore wind developers, seeking higher rates from New York State, claimed they were blindsided by inflation, supply chain issues, and higher interest rates, the state’s economic consultant lambasted them for failing to foresee higher interest rates, the most impactful ingredient in project cost equations. These projects are highly capital intensive and frontloaded, meaning that the economics over their 20-year life is determined by the cost of capital. When interest rates went from 3% to 7%, project economics were destroyed. But expecting a continuation of zero interest rates was foolhardy. It led to substantially underpricing their projects, not that utility companies would have been receptive to much higher cost power, even though they are forced to buy it to continue to operate in the state.
The impact of these industry developments is that ratepayers had better hold onto their wallets. Higher electric bills are coming, but only after they vote. As offshore wind developers use their monopoly pricing power to foster $150-$200/MWh rates for their power onto utility companies, families are about to see their budgets blown sky-high. That is the story for our next article.