The U.S. offshore wind industry is facing a host of challenges, with rising costs, permitting delays, and grid connection hurdles, all contributing to low returns for developers, according to a recent report by BloombergNEF (BNEF).

Inflation and supply chain disruptions have driven up capital expenditure. The spike in financing costs due to rising interest rates has further compounded the situation.

As a result, developers are seeking to renegotiate or cancel their agreed offtake deals, putting ambitious state and federal offshore wind capacity goals at risk.

The U.S. offshore wind industry has witnessed a significant increase in costs. According to BNEF, the levelized cost of electricity for subsidized offshore wind projects has risen to $114.20/MWh in 2023, up almost 50% from 2021 levels.

This surge can be attributed to increased capital expenditure and operational expenses, adding $16.90/MWh to the LCOE.

Additionally, higher capital costs due to interest rate hikes have raised the levelized costs by another $27.20/MWh. This challenging financial environment has forced some developers to consider accepting lower overall returns, adding to their challenges.

Agreement Revisions

The escalating costs and financing challenges have prompted developers to seek revisions to their existing power offtake agreements. Avangrid, the U.S. subsidiary of Iberdrola, recently agreed to pay $48.9 million in fines to Massachusetts to terminate its commitment to the under-development “Commonwealth Wind” offshore farm.

The low penalties, in this case, could encourage other firms to follow suit and cancel their power purchase contracts.

The report found that about 9.7 GW of U.S. offshore wind projects are now queued for renegotiation or potential cancellation of offtake agreements. This represents over half of the contracted pipeline across New York, Massachusetts, New Jersey, and Connecticut.

The offshore wind industry has been hit by a surge in materials, labor, and logistics costs, leading to increased total project costs for most developers.

Inflation rates, which were at 1.8% before the COVID-19 pandemic in 2019, soared to 3% at the end of June 2023, significantly higher than when most of the projects were awarded. Inflation can erode the value of developers’ revenue over time, making it more challenging to finance and build projects.

As a result, developers are calling for inflation adjustment mechanisms in offtake contracts to mitigate risks and improve project economics.

The renegotiation and cancellation efforts put state governments’ ambitious offshore wind capacity goals at risk. For instance, New York state, which aims to add 9 GW of cumulative offshore wind capacity by 2035, has contracted 4.3 GW of projects in two solicitations.

However, developers of 95% of the contracted capacity are now seeking renegotiation, potentially leading to delays in project implementation. Similar situations are unfolding in Massachusetts, Connecticut, and New Jersey, jeopardizing their respective offshore wind targets.

The U.S. offshore wind industry’s cost-related headwinds are not unique to the country. Swedish utility Vattenfall suspended development in the UK on its 1.4 GW Norfolk Boreas offshore wind project due to high interest rates and cost inflation.

These challenges are echoing across the global offshore wind sector, affecting the growth and expansion of renewable energy sources.

According to another BNEF report, over the past six months, new-build offshore wind and storage project costs have experienced 2% and 12% reductions, respectively. The global benchmark costs for onshore wind have decreased by 6% over the past year, remaining stable since the second half of 2022.

An earlier study by BNEF found that wind and solar projects collectively supplied over 10% of the world’s electricity demand for the first time in 2021.