Offshore

The biggest challenges impeding U.S. offshore wind goals and how to overcome them

The biggest challenges impeding U.S. offshore wind goals and how to overcome them
Dominion Energy, Ørsted and Eversource Reach Deal on Contract to Charter Offshore Wind Turbine Installation Vessel (Courtesy: Dominion Energy)

Contributed by Tom Harper, Baringa

Offshore wind, bolstered by state procurement and the federal Investment Tax Credit (ITC), is a pivotal part of decarbonization efforts in the U.S. The offshore wind industry as a whole is backed by significant targets, including the Biden-Harris administration’s goal of deploying 30 GW of offshore wind energy capacity by 2030 with capital expenditures of nearly $100 billion. Baringa is forecasting that nearly 45 GW will be installed by 2035. In order to meet ambitious goals for U.S. offshore wind, significant progress must be made for projects to reduce costs in an environment with stricter local content requirements, supply chain constraints, and global competition. Widespread support on a state and federal level for offshore wind projects will become increasingly important to overcome these challenges.

The Inflation Reduction Act signaled a positive change in the industry

The passing of the Inflation Reduction Act (IRA) in August 2022 changed the overall landscape and outlook for the offshore wind industry as a whole. Without the IRA, projects beginning construction in 2026 and onwards would have been ineligible for tax credits. The IRA extends the ITC at its full value of 30% (subject to workforce requirements) through at least 2033 and allows for a 10% bonus if projects meet domestic content requirements. While macroeconomic conditions remain a challenge for developers, 10 years of firm policy support with the ITC gives an unprecedented level of policy certainty in the medium-term. In addition to the extended ITC, the clear runway of lease areas provided by the Bureau of Ocean Energy Management (BOEM) will help to increase certainty and investor confidence in building out the necessary support infrastructure for offshore wind development. BOEM has lease auctions in the works for the Gulf of Mexico, Central Atlantic, Oregon, and the Gulf of Maine.

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Support is equally important on the state level

States can provide support for offshore wind developments through power purchase agreements (PPAs) and offshore wind renewable energy credit (OREC) contracts. There are slight differences between how states approach OREC or PPA structure and mechanics. Most commercial structures provide a fixed payment for each megawatt hour generated. In New York, on the other hand, OREC value is indexed to the zonal energy price, leaving the project with basis risk where project node and zonal price can change over time, which exposes developers to increased market risks relative to other states. New Jersey and Maryland ORECs are governed by regulatory orders rather than contracts, which could lead to potential exposure to regulatory risk, particularly if there are future regulatory changes to OREC structure and price.

Some states are beginning to put more thought behind how they can best get out in front of issues around transmission and tying different offshore wind projects to the land. New Jersey worked with regional transmission operator PJM to facilitate a coordinated approach, ultimately accommodating additional build by amplifying the network on the grid prior to the start of construction. Similar initiatives are being considered off the coasts of California and New England.

Given the capital intensity of projects, joint ventures, which make up the majority of offshore wind projects, are becoming increasingly common because of their ability to diversify risk and bring different strengths together across offshore wind development, grid, and supply chain. In the Northeast, for example, utilities have partnered with household name offshore wind companies from Europe like Ørsted and Avangrid. The Northeast is also seeing the most activity in offshore wind, particularly in New York and Massachusetts, which are the only two states with projects currently under construction.  These projects have the potential for up to 16 GW of future capacity, more than half of the administration’s target of 30 GW by 2030. Further south in the Carolinas and to the west in states like California and Oregon, companies are taking a closer look at what they can accomplish with offshore wind and what the potential benefits are to state economies.

Supply chain issues persist

While the U.S. is making great strides in developing a project pipeline to meet that 30 GW goal by 2030, supply chain issues are an impediment to reaching that goal. Wind turbine manufacturers have experienced significant setbacks over the last few years, including General Electric which laid off 20% of U.S.-based employees from its onshore wind unit last year. Siemens Energy recently announced major quality issues at its wind turbine manufacturing subsidiary, Siemens Gamesa, which could potentially affect up to 30% of installed turbines worldwide and further impact the offshore business. The U.S. also lacks existing infrastructure and the manufacturing capability to efficiently handle turning pipeline projects into actual wind farms operating off the coast. Wind turbine installation vessels (WTIVs) require 3-4 years for construction. There’s currently only one WTIV under construction in the U.S. Europe has five suitable WTIVs that could be used in the U.S. but will likely go to competing European projects. Capital intensive manufacturing investments that take over three years to reach operation, like WTIVs, need long-term, post-IRA policy support which is not guaranteed given the political volatility within the U.S. Additionally, the shortage of Marine-grade welding capability further exacerbates supply chain issues, making it critical for the U.S. to mobilize a specialized workforce with the necessary skillset to execute on these projects.

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While constraints within the supply chain are a persistent problem, there have been efforts to address the challenges. By providing tax credits for domestic manufacturing, the IRA incentivizes developers to use domestic content and manufacturers are incentivized to set up those capabilities. To be eligible for the domestic manufacturing credits, all iron and steel must be manufactured domestically, and the total cost of manufactured products is required to be 40% domestic before 2026 and 55% for projects beginning in 2026 and after.  Additionally, the BOEM multi-factor auction formats provide additional credit to lease auction bidders who support development of offshore wind supply chain. In the Carolinas and California seabed leasing auctions, bidders are utilizing the multi-factor credit, an adder to bidders’ cash bids, and opting to inject large sums into supply chain and workforce training efforts. In the California auction, credits could be achieved up to 20% of the cash bid through contributing to workforce training or supply chain investments, of which building manufacturing facilities, wind turbine installation vessels, or any contributions to the national offshore wind supply chain, would qualify.

As U.S. decarbonization efforts move forward, support from all entities, from the federal and local government to developers and stakeholders, will continue to be a critical part of advancing offshore wind projects. While there is still much work to be done and significant challenges to overcome, efforts show that progress is being made and momentum is going in the right direction.

About the author

Tom Harper is an Expert in Energy Market Advisory at the global management consulting firm Baringa.