Energy Musings - November 11, 2024

Happy Veterans Day! Trump's election marks both the end and beginning of dark periods for offshore wind in this country. The earnings results of wind companies showed problems continue.

Wednesday Morning and Offshore Wind’s Dark Period

At 4:30 am Wednesday local time, an exclamation point was added to offshore wind’s most recent dark period. That was when the Associated Press called President Donald J. Trump the winner in the Wisconsin presidential balloting, securing the state’s 10 electoral votes. That decision pushed Trump’s projected Electoral College vote total above the 270 (277) votes needed to be declared the 47th President of the United States.

The AP declared Wisconsin for Trump after 99% of the vote was counted. He led Vice President Kamala Harris by almost 30,000 votes, 50% more than when he won the state by against Hillary Clinton in 2016 and the margin he lost to Joe Biden in 2020.

The Wisconsin vote was a shocker for Democrats after six polls released within a week of the November 5 election showed Harris leading Trump in all of them, although by slim margins and with Trump closing the gap. Harris led by one point in the FiveThirtyEight weighted average of polls, was tied with Trump in the Emerson College/The Hill poll, was up by two points among likely voters in the New York Times/Siena swing state poll, led by two points in the Marist poll, was up by one point in the Marquette Law School poll, and had a six-point advantage in the CNN/SSRS poll.

While Democrats seek answers to their shellacking in the Electoral College and losing the popular vote by almost four million votes (74.2 vs. 70.3 million), Republicans are working on assembling their government – cabinet secretaries and key bureaucratic appointees – and their 100-day governing plan and Day One Executive Orders. Get ready for an avalanche of EOs, as Biden issued 94 on his first day in office to overturn previous Trump policies. Those will all be reversed along with many new ones. Energy policy will be prominent in the 100-day plans and the EOs.

Offshore Wind’s Latest Dark Period

Offshore wind’s recent dark period opened with GE Vernova’s earnings report on October 23. We wrote about its earnings problems related to the Vineyard Wind Blade accident on the night of July 13. That episode and the accident’s root cause analysis led the company to take a $700 million charge for costs associated with the construction delays, inspections of all its offshore wind blades, the repair of defective blades, and downsizing its offshore wind business.

Part of GE Vernova’s problems is that it still has a $3 billion backlog of offshore projects with questionable financials. Management is considering employing additional construction vessels to speed up its projects, but it expects completing the backlog to extend beyond the end of 2025. Competing projects faster may reduce the financial cost of projects. The financial community must wait until December 10 for management to outline its plans and their cost.

The next dark period event was the offshore wind sale in the Gulf of Maine. Only four of the eight leases offered for sale were purchased by developers offering minimum bids acceptable to the Bureau of Ocean Energy Management (BOEM). Additionally, only two of the 14 approved lease sale bidders submitted bids, ending the sale in hours rather than the two days BOEM said it might require.

Because of the lease area’s water depth, wind farms will require floating wind turbines, even more expensive than bottom-supported turbines. The leases extend into a whale protection area and at least a portion of the seafloor has coral and other marine organisms that will require protection during the installation process. The restrictions for avoiding these issues will further inflate project costs. There are also wind turbine restrictions to remediate potential radar interference with the NORAD continental defense system.

On election day, we learned details about the earnings of wind farm developer Ørsted and wind turbine manufacturer Vestas Wind Systems. Both results included revelations about problems with the offshore wind industry.

Ørsted disclosed it was having problems installing its substation platform in the Revolution Wind farm off the coasts of Massachusetts and Rhode Island. It also announced it reversed a previous charge for terminating its Ocean Wind 1 and 2 wind projects off the New Jersey coast because the settlement talks produced a more beneficial outcome. The company reversed DKK 5.1 billion ($744.68 million) of previously booked provisions for the project cancellations. They said they also found further equipment that can be used in other projects in the company’s portfolio, which had a minor positive impact on the reversal of the provision. However, the Revolution Wind issue resulted in an additional charge.

Ørsted CEO Mads Nipper disclosed the problem with the Revolution Wind construction project that may impact its cost.

“We are managing a challenge with the installation of one of our offshore substation monopiles. It is a complication related to the piling of the monopile into the seabed, leaving the monopile in a position where although it has been safely driven to the target depth, it may not be suitable for use as currently installed. The course is likely to be related to the resistance within the seabed soil, which is an extremely rare occurrence that we have only seen very few times in our experience of installing more than 2000 monopiles. The offshore substation monopile is in a safe and stable position, and using our extensive experience, our team are assessing the root cause and establishing the best path forward for the project. The offshore construction activities, including foundation, turbine, and array cable installations, are continuing as planned, and we do not expect to change the commissioning date of the project. As a result of this complication, we are expecting additional costs to complete the project, which, despite these developments, still holds a positive value from an absolute lifecycle IRI level, as well as an attractive forward-looking return. This is an evolving situation, and we are still evaluating all options, but have incorporated a prudent cost estimate into the impairment calculation, and we have increased our contingencies accordingly.”

The Revolution Wind problem Nipper cited is the glauconite deposits underlying several of the offshore wind leases on the East Coast. This clay mineral is also known as greensand for its green to sometimes black color. At one time, it was mined for agricultural purposes due to its high potassium content.

Given changes over time to the glauconite soil, it can become a problem for driving monopile foundations to depth. As explained by the University of Massachusetts Amherst, a participant in a 2020 research study of glauconite soil and its response to foundation installations, “This fundamentally alters the engineering response of the soil, affecting foundation design. For large offshore monopile foundations, the main design aspects comprise installations, long-term axial capacity, and lateral pile-soil stiffness.”

Is it possible the substation’s location must be moved to solve the problem? We can only wonder. If it must be moved, what impact might it have on the time for BOEM’s approval of a modification of Revolution Wind’s COP (Construction and Operation Plan) and its cost? We have no idea what contingencies may have been included in the DKK 1.7 billion ($248 million) provision booked for Revolution Wind. The company said this impairment charge included the installation issues, lower assumptions for market prices at the project, and increased contingency planning, offset by a decline in U.S. interest rates. Guess who will pay for these problems – Massachusetts and Rhode Island utility customers.

Vestas faces problems related to the ongoing challenges of slow wind farm permitting, cost inflation, supply-chain disruptions, and increased competition, especially from Chinese wind turbine manufacturers. The company operates two divisions – a main power solutions business that manufactures wind turbines, accounting for most of the company’s revenues, and a services business that maintains customer’s turbines. The services business is typically much more profitable than the main turbine manufacturing business. However, in this quarter Vestas said its warranty costs increased to €313 ($336) million. The increase was related to a component installed at two offshore sites.

When the company announced its third-quarter earnings, it said its full-year profit margin before special items would be at the lower end of its guidance range of 4% to 5%. Its third-quarter margin was 4.5%. An analyst commenting on the earnings report suggested the fourth-quarter profit margin would need a sharp rebound. She said the service business needs a profit margin of around 20%, up from 16% in the recent quarter. The power solutions business would need a fourth-quarter margin of more than 12%, a level not seen since 2017, compared to the third-quarter margin of 4.2%.

Trump Election Fears

The major fear for the offshore wind industry, however, was the election outcome. President Trump is not a fan of offshore wind, while Vice President Harris was a proponent of expanding her administration’s green energy plans.

At an offshore wind conference days before the election, the pall of a possible Trump victory overhung the discussions. “A Harris-Walz win next Tuesday is good news for the offshore wind industry. A Trump-Vance win next Tuesday is terrible,” Sean McGarvey, president of the North America’s Building Trades Unions, which works on offshore wind projects, told conference attendees. He predicted Harris would win the election; a prediction met with unanimous applause from the audience. We are sure Wednesday morning industry participants were hanging black mourning crepes.

A problem the industry faces is most U.S. offshore wind projects are awaiting permits. How quickly can BOEM push those awards out the door? While the Trump administration does not assume office until January 20, 2025, he has vowed to stop offshore wind on Day One.

Could needed permits be derailed under Trump?

Following the move by President Biden to rescind Alaskan oil and gas leases, Trump might direct BOEM to terminate the 12 scheduled leases along with the 10 auctioned leases. What would happen to existing projects if BOEM was instructed to rescind its waivers that developers post bonds for wind farm removal costs at the end of their operational life? Those waivers were granted because fulfilling them jeopardized the project financings as well as negatively impacting profit returns for the developer and investors.

Although offshore wind developers are preparing a case for how important their projects are for state economies, job creation, and environmental goals, this case may not be as strong as they would suggest. The Vineyard Wind blade accident and the environmental harm it unleashed caused the non-profit group The Maria Mitchell Association to pull out of the “Good Neighbor Agreement” with Vineyard Wind, which had been agreed to in the summer of 2020.

In a letter to supporters, the head of the non-profit wrote, “This decision was not made lightly. For the past several years, as more information became available regarding additional wind turbine projects, the aggregate impact of the lighting on each turbine, the recent blade failure, it became increasingly clear to us that the impact on our night skies and our island community was not something we could support.”

Joanna Roche, the executive director of the non-profit, wrote to Lars Thaaning Pedersen, CEO of Copenhagen Infrastructure Partners, the parent company for Vineyard Wind, claiming it had breached the Good Neighbor Agreement in its conduct following the July 13 blade failure.

“Not only did your company fail to cooperate with us regarding the development, permitting, construction, operations, and maintenance of the Projects, but when this marine cataclysm occurred, Vineyard Wind failed to notify Nantucket officials and residents – to enable us to respond to this environmental disaster.” Roche wrote, “To date, remarkably, there has been no outreach from Vineyard Wind to the Association regarding the turbine failure or any other of your company’s other obligations under the Agreement.”

A key issue the non-profit identified with the Vineyard Wind project was “…this blade failure exposed a risk not previously disclosed to us when we signed the Good Neighbor Agreement – that these blades fail regularly and that it is likely that more blades at the Project will fail during its lifetime.” That is an environmental risk the non-profit’s supporters and Nantucket residents do not wish to accept.

While 155 local businesses, including one business owner on the Nantucket Select Board, have urged it to withdraw from the Good Neighbor Agreement, there is a strong argument not to. The Board has retained lawyers to examine its options. An argument can be made that by walking away from the Agreement, Nantucket would lose its ability to sue under Vineyard Wind. We do not know all the legal ins and outs, but it sounds logical. It certainly would seem on the surface to enable a stronger public article when suing a partner in an agreement.

We can safely state that offshore wind will be a high-profile story in January when President Trump assumes office. His Day One EOs will kick off the battles. New officials overseeing BOEM and other energy and environmental agencies within the government will be forced to tilt the playing field away from the Green New Deal policies of the Biden administration.

Wednesday’s exclamation point marked the end of the most recent offshore wind dark period. However, it also marks the starting point for the next dark period, which may be volatile. We will be watching and commenting on the developments.