Offshore wind industry hammered by inflation, interest rates

Economics has frustrated efforts to expand the turbine fleet and meet clean energy goals. But the industry is adjusting.

The Joe Biden administration has pinned a big chunk of its renewable energy ambitions on offshore wind. Back in 2021, the president set the goal of growing U.S. offshore wind capacity 700-fold by the end of the decade. Companies around the world have invested billions in building up an offshore wind industry here, pretty much from scratch. 

But the one-two punch of inflation and high interest rates has hit the sector hard — and offshore wind developers are racing to adjust.

Walking around the port of New Bedford, Massachusetts, Klaus Moeller is like a kid in a toy store. In this case, the toys are bigger than a football field. 

“You’re seeing the blades, which is my favorite part of a turbine,” said Moeller, CEO of Vineyard Wind, pointing to a giant metal rack holding three blades, each 117 yards long. They’ll soon be ferried out to sea and bolted onto wind turbines twice the height of the Statue of Liberty. 

“Each turn of the blades gives power for a house for one day,” he said. “It’s an amazing technology.” 

Construction of Vineyard Wind I, an array of 62 turbines about 15 miles south of Martha’s Vineyard, began construction in late 2021. Once completed, it will be the nation’s first utility-scale offshore wind farm in operation and will power more than 400,000 homes, according to the company. 

But building offshore wind projects has been a struggle for other developers in the past two years. Companies are facing steeper borrowing costs for the billions of dollars needed for these projects. And inflation has hit the price of the materials, including the hundreds of tons of steel in each turbine.

Moeller admitted that part of the reason Vineyard Wind I is being built actually comes down to luck. “When you look at the macro and what has happened, to some degree we were a little bit ahead of the wave,” he said. 

Vineyard Wind had its funding lined up before interest rates jumped. The timing of other projects hasn’t been so fortunate.

“Certainly 2022, 2023 have been challenging years,” said Michael Brown, CEO of Ocean Winds North America. In 2021, Brown’s company struck a deal to sell power into the Massachusetts grid at $75 per megawatt-hour for the next 20 years. 

But before the project was scheduled to get underway, the Federal Reserve began raising interest rates in its effort to curb inflation. 

“The underlying financing cost doubled,” Brown said. With potential revenue locked in for two decades and construction costs skyrocketing, the project became unviable — “not just loss-making, but significantly loss-making. Hundreds of millions of dollars in losses.”

The company scrapped its agreement with the state. And it wasn’t alone. In the past two years, more proposed offshore wind farms have been tabled than have started construction. 

“It’s an extremely tough environment for these projects,” Brown said. “They’re incredibly expensive.”

But Brown says things are turning around, as the industry changes course to cover those expenses and revive its prospects. For instance, states and power utilities have stopped setting electricity prices in stone for 20 years; new offshore wind solicitations allow for some inflation adjustment if costs change. 

That flexibility is “huge,” said Brown, “because it allows us to take the uncertainty factor out of our bid.”

Ocean Winds has submitted a new bid to build an offshore wind farm serving the New England power grid.

The federal government is also streamlining the permitting process for offshore wind and offering tax credits through the Inflation Reduction Act. Together, the changes will help more projects be built and make them cost-competitive with other power sources by the end of the decade, per Kris Ohleth, executive director of the think tank Special Initiative on Offshore Wind.

“Overall, we’ll be on track,” Ohleth said. “We have a path.”

While Ohleth is confident the industry is on the upswing right now, she cautions that could change come November. “The [Donald] Trump administration, if they get a second term, will come in swinging on renewable energy, and particularly offshore wind.”

Trump has said he’d put a halt to offshore wind via executive order on Day 1. “So companies are watching very closely and will make investment decisions related to the outcome of this election,” said Ohleth. 

Back at the Port of New Bedford, Klaus Moeller, a native of Denmark, said something is often missed in the economic and political debate over offshore wind in the U.S.: It’s a mature technology.

“When I looked at the ocean as a kid, I saw wind farms,” he said. “We’ve seen it operating for decades … without big problems.”

About 12,000 turbines are spinning in the waters off Europe and Asia. In the U.S., it’s only a couple of dozen — for now.