Insights 2024

A Perfect Storm Battered the Offshore Wind Industry in 2023: Is Fairer Weather Ahead?

Following a turbulent 2023, the new year brings renewed promise in US offshore wind power development as industry participants adapt to challenges—rising costs, permitting bottlenecks, and global supply chain issues—that have caused difficult headwinds of late.

There is broad acknowledgement of the critical piece offshore wind power plays in solving the great energy transition puzzle. The Biden administration has set an aggressive goal to install 30 gigawatts of offshore wind power capacity by 2030—enough to power about 10 million homes—while state governments along the coasts have set similarly ambitious production targets. Private industry has responded with project developers and other market participants pouring billions into projects along the coasts, with the eastern seaboard leading the charge.

At the heart of the industry’s challenges is the length of time these projects take to complete. Even under the best of circumstances, each phase of an offshore wind project runs significantly longer than its onshore counterpart. Development periods are so long, in fact, that traditional US onshore wind project financing structures—including having committed tax equity financing at financial close—are difficult to utilize. Industry participants are employing structures that allow for the projects to move forward, but the financing costs are understandably higher. Federal and state permitting bottlenecks and global supply chain issues lengthened development timeframes further. The situation grew more precarious for some projects over the past year as inflation and interest rates remained stubbornly high, resulting in a perfect storm of increased costs for offshore wind power developers, which threatened the viability of projects lacking sufficient flexibility to adjust to changing economic conditions. So much so that, over the summer, a group of project developers with existing contracts with New York State Energy Research and Development Authority (NYSERDA) petitioned the New York Public Service Commission (NYPSC), the state’s utility regulator, to adjust their existing contracts to help ease the impact of these costs. NYPSC refused the request and, in response, developers warned they might be forced to cancel the contracts. The developers of Empire Wind 2 ultimately did terminate that project’s contract with NYSERDA. Another major developer cancelled its offshore wind project off the New Jersey coast entirely, citing high costs, while various developers have announced write-offs in the billions.

At the heart of the industry’s challenges is the length of time these projects take to complete.

But, there has been good news as well. In October, NYSERDA awarded new offshore wind contracts to three new projects at higher prices than the earlier awarded projects. And, since then, New York issued a new offshore wind solicitation open to all bidders, including those with existing contracts, allowing companies to re-offer their planned projects at higher prices and exit their old contracts. New Jersey recently awarded two new contracts for offshore wind projects, which—together—would be capable of producing approximately 3,750 megawatts of power—enough to power about 1.8 million homes. In December, New York’s South Fork Wind, generated and delivered power to Long Island from its first operational wind turbine, with all 12 turbines expected to be installed by early 2024. And, in early January of 2024, Vineyard Wind 1 successfully generated and delivered power to Massachusetts. That project will ultimately consist of 62 wind turbines generating 806 megawatts—enough to power about 400,000 homes. In the meantime, the federal government has continued its efforts to support the industry. The Bureau of Ocean Energy Management (BOEM) approved four offshore wind projects in 2023 alone. In total, since the start of the Biden administration, the BOEM has greenlit the nation’s first six commercial-scale, offshore wind energy projects: Vineyard Wind 1, South Fork Wind, Ocean Wind 1, Revolution Wind, Coastal Virginia Offshore Wind and Empire Wind.

Of course, offshore wind project developers and their governmental offtake counterparties are not the only industry participants. These mega projects also require the development of port and transmission infrastructure, investment in specialized vessels to facilitate the construction and ongoing operation and maintenance of the projects, specialized expertise to design, construct, and operate the facilities, and reliable equipment supply, among others. The viability of offshore wind projects depends on participants at each level maintaining flexibility and creativity to facilitate further development.

This year will be pivotal for the US offshore wind industry. Notwithstanding the tremendous challenges of 2023, project developers, federal and state governments, and other project participants remain committed to offshore wind in the US and are seeking to learn from the setbacks, rather than retreat entirely. Among the lessons that developers, offtakers, and other players are learning is that the projects with the best chance for success appear to be ones that allow for flexibility in the face of macroeconomic changes. There will undoubtedly be further ups and downs, but the opportunity to take advantage of the enormous potential remains powerful enough to weather the storm.