US offshore wind investments more than triple in 2022, IRA to boost alternative uses

New investments in the US offshore wind market more than tripled year on year to $9.8 billion in 2022 and going forward the Inflation Reduction Act will drive alternative uses of offshore wind power, according to the Business Network for Offshore Wind's annual US Offshore Wind Market Report released Feb. 21.

The federal government held three successful auctions in 2022 – the first in nearly four years – leasing 11.4 GW of new generation capacity and raising over $5.4 billion for the US Treasury, which showcased the strength and attractiveness of the US market, according to the report.

"From surging investments to cutting-edge floating turbine technology on the West Coast, passage of the landmark Inflation Reduction Act, and federal regulatory efforts that bring more certainty to permitting, 2022 kicked the American offshore wind industry into full throttle," Liz Burdock, president and CEO of Business Network for Offshore Wind, said in a Feb. 21 statement. "A visible pipeline of projects has emerged with half a dozen projects finalizing environmental review and another 11.4 GW of new areas leased for future development."

Industry challenges

Andrew Berg, S&P Global Commodity Insights offshore wind analyst, said permitting is the biggest challenge for the US offshore wind industry.

"It takes up to 10 years (and sometimes more) to develop a large-scale offshore wind project, to get the environmental licenses and all the necessary papers, and to start the construction. This is a global issue, which is equally applicable to the US as it is to Germany, Japan, etc.," Berg said. "If local authorities manage to cut permitting time by half, all the rest will adapt (supply chain, ports, vessels, etc.)."

Supply chain issues are going to continue to plague the US until it can develop US-flagged, Jones Act compliant wind turbine installation vessels and port infrastructure that can accommodate larger turbine vessels, Berg said, adding the challenge is that the design of the vessels, the design of the port and the design of the turbine need to be synchronized.

"As turbines get bigger, vessels need to follow suit, at which point ports need to accommodate those larger ships," Berg said. "The US offshore wind infrastructure is still immature and is stifling the domestic supply chain. "

In 2023, offshore wind capital costs are expected to increase due to increases in raw material prices, such as steel, aluminum and polyethylene, in 2020 and 2021, Berg said.

"These material prices have declined since their peak but will impact the levelized cost of energy in 2023 and 2024 due to offshore wind projects' long lead times," Berg said. "This cost increase could lend itself to additional project delays and contract negotiations – as the report mentions – or a slow-down in investment growth."

From 2023 to the end of the decade, Berg expects to see capacity additions, particularly in the deeper waters of the Pacific, such as California and Oregon, due to floating-specific technology innovations and interest from new markets where only deep-water sites are available.

2023 outlook

This year, the US market will transition from demonstration to commercialization as the first two commercial-scale projects, Vineyard Wind and South Fork Wind, began construction and will soon bring 932 MW of offshore wind generation to the grid.

"As the industry makes the transition from demonstration to commercialization amid global economic uncertainty, we must double down on a national industrial strategy, building up an offshore wind supply chain and manufacturing base in the United States," Burdock said.

While the US offshore wind market will continue to be dominated by state electricity demands, new market opportunities are emerging globally that harness offshore wind's power output for alternative uses, including green hydrogen production, green ammonia production and carbon sequestration activities, the report said about impacts of the IRA. The first major US announcement pairing green hydrogen and offshore wind occurred last year in Louisiana.

The IRA's 30% investment tax credit for offshore wind projects should accelerate industry progress and help developers mitigate the impacts of inflation and economic uncertainty, according to the report.

Massachusetts, New Jersey, New York and Rhode Island will all conduct or finalize new rounds of offshore wind procurement in 2023 and increase the amount of offshore wind with financial backing by at least 25%.

2022 highlights

While new offshore wind investments in 2022 were primarily driven by lease auction fees, more than $4.4 billion was directed to port infrastructure, supply chain development and transmission, according to the report.

Long-term state offshore wind targets increased 79% in 2022, according to the report. California set a goal of 25 GW of offshore wind generation by 2045, and Louisiana, New Jersey and Rhode Island announced new state goals.

However, the greatest achievement in 2022 was the passage of the IRA, which renewed the production tax credit for offshore wind projects and opened new areas for potential development, and the Bureau of Ocean Energy Management's first-ever Pacific auction of five lease areas covering nearly 400,000 acres off central and northern California with the potential to produce over 4.6 GW of offshore wind energy, Berg said.

While the Biden-Harris administration remains on track to hit self-defined targets to lease seven new areas and perform 16 project environmental reviews, the industry will fall short of installing 30 GW of offshore wind by 2030, but rapid development of lease areas in the New York Bight could close that gap, according to the report.

The IRA helps drive investment to port infrastructure, supply chain development and transmission, without legislation to help cut down on permitting times, but Berg said it's unlikely the US will make it to 30 GW of offshore wind in the next seven years. The US doesn't necessarily have the domestic supply chain to deliver 30 GW by 2030. The global supply chain will also likely be constrained towards the end of the decade, with reasons ranging from a lack of offshore wind components to competition for installation vessels.