The Orion is part of a fleet of vessels installing foundations for Vineyard Wind, the first commercial-scale wind farm in US waters.
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Even as US offshore wind projects are afforded tax credits so generous that the European Union has claimed they violate trade treaties, developers of the nascent industry are questioning whether they can turn a profit.
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Inflation has stung offshore wind projects across the world. But the pain is acute for the backers of US projects that are trying to navigate a supply chain that has yet to develop.
Capital is just beginning to be sunk into in factories, ports, vessels and workers to build the offshore wind supply chain. Meanwhile, with less than 50 MW operating to date, there is no model for a successful large-scale offshore wind farm in US waters.
The Inflation Reduction Act (IRA), signed into law Aug. 16, 2022, aims to address the issue with a 10% domestic content bonus tacked on to a 30% investment tax credit awarded to offshore wind projects that use 100% domestically made iron and steel in nonmanufactured components. Also, 20% of the total costs of manufactured components and subcomponents must be mined, produced or manufactured in the US, according to US Treasury Department guidance released in May.
But as the industry aims to meet President Joe Biden's target of 30 GW of offshore wind by 2030 and 110 GW by 2050, projects have shown signs of significant stress.
In Massachusetts, New York and Rhode Island, developers have renegotiated or terminated power purchase agreements with utilities, saying the tectonic shifts in the global economy since the contracts were drawn up have squeezed margins to well below the level required to justify the multibillion-dollar capital expenditures.
Only two projects are under construction. Building affordable offshore wind projects will require regional supply chains capable of installing and operating the massive generators.
"If you want to scale the industry, you're going to need domestic supply chains because these components are just too large to ship across the ocean," said Mike O'Boyle, senior director of the electricity program at Energy Innovation Policy & Technology LLC, a think tank that focuses on quantifying the impacts of decarbonization policies.
Surging global demand
By the end of 2022, 57.6 GW of cumulative offshore wind capacity was installed across the globe, according to a BloombergNEF offshore wind forecast published in February by the World Forum Offshore Wind. China accounted for 44% of that capacity with 25.6 GW. The UK came in second globally with 13.6 GW, and Germany was third with 8 GW. All three of those markets have well-developed regional supply chains.
"In the end, demand both in China and Southeast Asia, as well as Europe, is high enough that unless we want to pay a big premium over those domestic consumers, it's going to be really hard to get the components shipped in a timely fashion to the US," O'Boyle said.
The UK, which has one-tenth of the electricity demand of the US, aims to have 50 GW of offshore wind by 2030.
"We are playing catch-up," O'Boyle said.
As of the second quarter, US states have announced nearly 84 GW of offshore wind goals and targets, according to the Business Network for Offshore Wind. About 17.6 GW of capacity is under contract. During the quarter, construction began at Avangrid Inc.'s 800-MW Vineyard Offshore Wind Project offshore Massachusetts and Ørsted A/S' 132-MW South Fork Offshore Wind Project outside New York. The current US project pipeline has just enough capacity to meet Biden's goal of 30 GW by 2030.
Avangrid, a US affiliate of Spain-headquartered utility company Iberdrola SA, co-owns Vineyard Wind with investment firm Copenhagen Infrastructure Partners P/S. Ørsted co-owns South Fork and two other US developments with US utility Eversource Energy, though Eversource plans to sell its interest in the joint venture.
"The duality of the industry was on full display this quarter as Vineyard and South Fork marched forward, but most other projects under contract took a step back to reassess their finances in response to inflation and supply chain constraints," the trade group's report said. "US and international analysis suggest offshore wind prices soared at least 20% just in the last two years."
Matt Shields, senior offshore wind analyst for the US National Renewable Energy Laboratory's National Wind Technology Center, said the "European facilities are maxed out — Europe is increasing their own offshore targets."
"We're seeing other regions in the world — the Mediterranean, Southeast Asia, Australia, South America — these [regions] are all starting to look into offshore wind as well," Shields said. "There's a lot of demand. And so a way to get serious about meeting the targets we're setting for ourselves is manufacturing those components domestically."
Qualifying for credits
Despite the headwinds, the White House said in July that the IRA and its capacity targets are creating a new American industry in offshore wind, with 18 offshore wind shipbuilding projects and investments of nearly $3.5 billion in 12 manufacturing facilities and 13 ports. The boom is not contained to the coasts. In total, 4,100 companies in all 50 states are supporting offshore wind, according to the Business Network for Offshore Wind.
EEW Holding GmbH & Co. KG subsidiary EEW American Offshore Structures Inc. in December 2022 announced an agreement to manufacture monopiles for the 1.5-GW Atlantic Shores South Offshore Wind Project owned by Electricité de France SA subsidiary EDF Renewables Inc. and Shell PLC subsidiary Shell New Energies US LLC out of a manufacturing plant at the Port of Paulsboro, NJ. The German manufacturer and New Jersey-headquartered utility Public Service Enterprise Group Inc. are investing $250 million in the facility, which said it can produce more than 100 monopiles a year.
EEW American Offshore Structures CEO Lee Laurendeau said in an email that the tax credits for US monopiles "are extremely important to us as we need to compete with monopiles delivered from Europe."
"And because of our significant investment, our prices tend to be higher," Laurendeau said. "The IRA will level the playing field and help us be competitive."
Under Treasury Department guidelines on how developers can capture new credits, the monopiles would qualify as a manufactured product.
Jackets, the latticed foundations that support the turbines in a more complex design than monopiles, would not qualify as a manufactured product under the IRS guidance even though a jacket is a "highly manufactured item," according to Seth Kaplan, director of government and regulatory affairs for Ocean Winds SL, the joint offshore wind venture between EDP Renováveis SA and Engie SA. Ocean Winds has nearly 6 GW of US offshore wind capacity proposed off the shores of California, Massachusetts and New York.
Jackets would need to use 100% domestically made iron and steel to qualify for the domestic content bonus.
"To to be honest, we're a little baffled by guidance that says a monopile is a manufactured product and a jacket is not," Kaplan said. "A jacket is structural iron and steel. A monopile does require significant amount of manufacturing activity, but a jacket requires more."
Ocean Winds officials are trying to figure out "if the effort and additional cost needed to qualify is worth the bonus that you will receive," Kaplan said.
"And the lack of clarity from the interim guidance makes that really difficult," Kaplan said. "All of the issues of cost versus value — all of the uncertainty that we hear around it — makes that calculation of what you have to do in order to get the bonus all the more harder, which, to be very blunt, undermines the bonus."
Construction begins on an offshore wind tower manufacturing facility at the Port of Albany, NY, one of dozens of new manufacturing and port projects taking advantage of state and federal incentives aimed at boosting the offshore wind economy. |
'Bolder vision' for offshore wind growth
In the Gulf of Mexico, where the Biden administration plans to hold lease sales Aug. 29 for three areas in the Outer Continental Shelf, the oil and gas industry is gearing up to manufacture ships and components for the industry.
"We have the welders and pipefitters, and I think it will just be a matter of time for the same supply chain that fueled the nation for the last 60 years in offshore energy just gets re-spun up for this new industry in the Gulf," Louisiana state Rep. Joseph Orgeron, who operated vessels for offshore oil and gas projects, told an audience at the American Clean Power Association's annual conference in New Orleans in May.
"The oil and gas industry was built pretty much as a Gulf-wide, regional buildout, and I think we need to keep that for offshore wind," added Orgeron, who helped with the installation of the first offshore wind project in the US, Ørsted's 29-MW Block Island Offshore Wind farm off of Rhode Island.
The chicken-and-egg problem will persist with the US supply chain until federal and state policymakers commit to even larger offshore wind targets on the scale of China and Europe, O'Boyle said.
"Attributing domestic investment in supply chains of offshore wind to the IRA in part misses the big picture," O'Boyle said. "If the industry is going to scale, we need to have a bolder vision for offshore wind growth, which will lead to more domestic supply chain investments just because that's the most cost-effective thing to do."
Speaking about its completion in 2021 of a factory in Charleston, SC, to manufacture high-voltage subsea cable, Christopher Guerin, CEO of French cable manufacturer Nexans SA, said in a July 26 earnings call, "It's very complex to ramp up new factories in a country that has no legacy in offshore wind farm subsea cables."
Money supply
The financial supply chain also needs to develop.
Ryan Ferguson, head of corporate communications for the Americas for Ørsted, said the tax credits are critical for the Danish developer's US projects. But the pool of buyers that have enough capital to finance the construction of complex, multibillion-dollar offshore wind farms needs to expand.
"If we get all these tax credits but we have no one else to sell them to or to invest in them, they're useless to us," Ferguson said. "And right now, the market for those is so small that it's pretty much a handful of big banks that have an interest in buying."
The IRS in June released guidance on the provisions allowing tax credits to be transferred. Comments on proposed regulations were due Aug. 14. (Docket No. REG -101610-23).
"And given the pipeline, not just our projects but of clean energy projects across the country, there's going to be a much larger market of people interested in buying" the tax credits, Ferguson said.
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