Inflation Begins to Bite for Offshore Wind Developers

100-dollar bills

Published Nov 2, 2022 9:36 PM by The Maritime Executive

Soaring inflation is not just a problem for consumers. It appears to be taking some of the wind out of the sails of the budding U.S. offshore wind industry, despite a major package of financial incentives just passed by Congress.

Last week, Avangrid's Commonwealth Wind project - a 1,200 MW installation off the coast of Massachusetts - asked state regulators for a pause in its rate-approval proceedings because construction is "no longer viable" without revisions. Though Avangrid remains interested in the project, the financial structure will need to be updated to account for the new reality of inflation, the company said. 

"Global commodity price increases, in part due to ongoing war in Ukraine, sharp and sudden increases in interest rates, prolonged supply chain constraints, and persistent inflation have significantly increased the expected cost of constructing the project," warned the developer. "As a result, the project is no longer viable and would not be able to move forward absent amendments to the [power purchase agreements]," the contracts that guarantee long-term prices for the wind farm's electrical power output. 

In a supporting motion, the developers of a neighboring offshore wind project - the Shell/EDP/Engie-backed Mayflower Wind - said that they support Avangrid's request "for a one-month suspension to allow all PPA parties time to explore potential adjustments." These adjustments could include cost reductions, an increase in PPA pricing, and qualifying for the new tax incentives under the Inflation Reduction Act. Without PPA adjustments, the "resource may no longer be economic and financeable," Mayflower Wind cautioned.

The state of Massachusetts selected the Commonwealth and Mayflower Wind projects as suppliers last year in its third round of wind energy solicitations. At the time, the two projects contracted to sell power at $72 per MWh and $77 per MWh respectively; neither firm has mentioned how large any possible price increase might have to be in order to move forward, but Avangrid suggested that "modest" changes would be enough. 

This week, the New Jersey power utility Public Service Enterprise Group (PSEG) said that it might end its participation in Ocean Wind 1, an 1,100 MW project proposal off the state's southern coast. PSEG holds a 25 percent stake in the development, and  Danish offshore wind heavyweight Orsted owns the remaining 75 percent. 

Uncertainties about future cost of construction and power pricing are also dragging down turbine orders as developers push back their project timelines, according to turbine OEMs. Industry association WindEurope - which represents suppliers and project developers - says that new turbine orders fell by about 36 percent in the third quarter, reflecting the effects of high inflation. 

The pattern may be intensifying, but it is not strictly new. Inflation and supply issues were already an issue by the third quarter of 2021, at least for turbine maker Vestas, which reduced its best-case revenue guidance for the year by about $500 million on concerns over inflation-driven challenges.