What's going on with offshore wind?

In this episode, wind industry analyst Samantha Woodworth speaks to the growing pains of the offshore wind industry and what its future may hold.

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David Roberts

Last week, for the first time ever, a commercial offshore wind farm delivered power to the US grid. It was an important milestone — and also the rare bit of good news for an otherwise beleaguered industry. Everywhere else, costs are up, contracts are being renegotiated, and projects are getting canceled. It all sounds pretty bad, especially for a sector that barely even exists yet.

What’s going on? How much of this turmoil is temporary and how much reflects lasting structural changes? Is the US offshore wind industry going to die before it even leaves its crib?

To gain a little clarity on these questions, I contacted Samantha Woodworth, a senior wind industry analyst at Wood Mackenzie. We talked about the converging difficulties facing the industry right now, efforts to renegotiate contracts that were signed in the Before Times, the odd role that ships play in the whole mess, and the industry's prospects in coming years and decades.

Samantha Woodworth, welcome to Volts. Thank you so much for coming.

Samantha Woodworth

Well, thank you so much for having me. I'm happy to be here.

David Roberts

This is exciting. I have 411,000 questions. The more I dig, the more questions I have. So I'm excited to get into this. It seems like we're really at a hinge point here for offshore wind in the U.S., and there's lots of sort of contradictory signals happening. On the one hand, literally today, the day we're recording, we heard that the first power from an offshore wind turbine is being delivered in New York today. So I think, unless, correct me if I'm wrong, that marks the first actual power from offshore wind being used in the U.S.

Is that correct?

Samantha Woodworth

Essentially, yeah. I mean, it's the first commercial-scale offshore wind farm in the U.S. flowing power to the grid. It is a super-duper exciting day.

David Roberts

Yeah, that is exciting. And also, I think just a couple of days ago or maybe yesterday or very recently, there were some announcements of new offshore wind procurement. But then on the other hand, we have all these other stories coming. So let me just, in terms of the quote unquote crisis of U.S. offshore wind, let me summarize quickly what it seems like what I've gathered is going on, and you can fill in the details and tell me if I'm missing anything.

Samantha Woodworth

Absolutely.

David Roberts

Basically, a bunch of contracts were signed for offshore wind amidst a period of great enthusiasm in the Before Times, like pre-2019, back when things were normal, I don't know.

Samantha Woodworth

Yeah.

David Roberts

Were they normal?

Samantha Woodworth

More or less.

David Roberts

What's normal? But economic circumstances, let's say, were a lot better back then. So you sign these contracts, you sign up, and these projects take a long time to build. So in between the signing and today, we've had a pandemic. Inflation. Russia invaded Ukraine and screwed up the entire globe's supply chains. Now everything looks much, much, much more expensive than it did then. And so now these wind companies are stuck with these contracts premised on much lower prices, much lower inflation, much lower interest rates, et cetera, et cetera. And they're sort of scrambling.

Some of them are getting canceled, they're trying to renegotiate, et cetera, et cetera. Is that roughly accurate as a summary?

Samantha Woodworth

Yeah, yeah, definitely the shortlist of things that has kind of compounded to be a perfect storm of issues within the U.S. offshore space. And unfortunately, it's hitting hard everywhere. It's not just the U.S. offshore wind space that's getting absolutely derailed by these issues, but because the U.S. offshore wind space is so new and so young and doesn't have the robust foundation like even U.S. onshore wind does, they're definitely feeling the effects a lot harder with a higher magnitude.

David Roberts

Got it. So this is a global phenomenon, though. These are not U.S. specific trends here?

Samantha Woodworth

That's correct, yeah. Inflation, the pandemic recovery. There's a couple of U.S. specific things related to treasury guidance and that sort of thing. But for the most part, offshore wind is feeling these effects globally. Onshore wind is feeling these effects globally. It stinks — the timing for U.S. offshore, just because we were so close to getting all of these projects greenlit, and it just was the perfect storm of poor timing.

David Roberts

Really terrible. Really, really terrible timing for this industry in particular. They were just like a toddler, just sort of standing up and taking their first steps and like, now this.

Samantha Woodworth

Yeah.

David Roberts

We're talking about all these different things converging. If you had to rank them, what's the sort of biggest? Is it interest rates that are the main thing here, or could you rank them? Is it all just a mess?

Samantha Woodworth

Project costs and the effect of inflation are probably the biggest issue that we've been seeing with the offshore space. That's obviously what's causing the projects to come to the table and ask to renegotiate contracts or even just eating those massive termination penalties with a plan to rebid in subsequent tenders. Even local governments, the states that are soliciting offshore wind, are beginning to include clauses in these solicitations that allow for projects to index their bid price with inflation as a way —

David Roberts

Interesting.

Samantha Woodworth

Yeah, to help mitigate that potential for, God forbid, inflation keep going up.

David Roberts

Yeah, I want to get back to those tenders and the renegotiations and all that in a little bit. There's some interesting details here, but I guess one of my big questions is, if you listen to a skeptic, an offshore wind skeptic, what they will say is this shows basically that offshore wind was an artifact of weirdly low interest rates. The sort of weirdly low interest rates that held sway for the past decade. And basically, they can't compete in a world of normal interest rates. Does that seem true to you? And did no one see interest rates coming?

Was all this done on the assumption that interest rates were going to stay weirdly low, near zero, forever?

Samantha Woodworth

I would disagree with that. I mean, we've had the sort of foundational pieces in place to make offshore wind into a successful industry, including tax credits, financing regimes and that sort of thing. It is not unreasonable to think that interes