Ørsted, the world’s largest offshore-wind developer, announced on Tuesday that it will be ceasing work on two major projects in New Jersey. These projects were initially expected to generate enough power to supply approximately one million homes.
According to the Danish company, it had “no choice” but to halt the projects due to a combination of high interest rates, supply-chain issues, and significant delays. Additionally, Ørsted faced setbacks when a wind project in New York suffered financial ramifications after the state refused to increase the value of an already-signed contract. As a result, Ørsted (ticker: DNNGY) is set to record impairments of at least $4 billion related to its wind projects. Unsurprisingly, the company’s American depositary receipts experienced a 20% decline in early trading on Wednesday.
The development of offshore wind plays a crucial role in America’s plan for decarbonization. In 2021, President Biden unveiled an ambitious target of installing 30 gigawatts of offshore-wind power by 2030. This amount of capacity could effectively power 10 million homes and prevent the emission of 78 million metric tons of carbon dioxide. Looking even further into the future, the President projected that the U.S. will have the capacity to generate 110 gigawatts of offshore-wind power by 2050, a substantial increase from the current installed capacity of less than 1 gigawatt. However, the inflationary impact on material costs for turbine construction, with raw materials such as steel experiencing surges, has posed significant challenges to the economic viability of offshore-wind projects.
Challenges Facing the U.S. Offshore Wind Industry
The U.S. offshore wind industry is facing various challenges that are hindering its growth. One major obstacle is the lack of an established supply chain to construct wind farms, resulting in developers competing for limited vessels and equipment. As a result, the development process becomes more challenging and time-consuming.
Another issue contributing to the difficulties faced by wind developers is the discrepancy in contract adjustments among different states. While some states have agreed to modify contracts, leading to higher electricity prices for consumers, others have rejected such requests. This inconsistency further complicates the financial viability of offshore wind projects.
David Hardy, CEO Americas at Ørsted, highlighted the significant macroeconomic changes affecting long-term capital investments in the sector. Factors such as high inflation, rising interest rates, and supply chain bottlenecks have impacted the financial landscape for wind developers. Ørsted even warned investors earlier in July about potential impairments in the months ahead, implying that President Biden’s 30-gigawatt goal for offshore wind might be unattainable.
Ørsted is not alone in facing these challenges. BP and Equinor recently announced substantial write-downs in the value of their offshore wind developments in New York, totaling $840 million. However, it is yet to be decided whether these companies will abandon their projects due to the state’s rejection of their requests for improved rates.
Despite these setbacks, Ørsted has made a positive announcement regarding its U.S. wind portfolio. The company intends to pursue the Revolution Wind project in Rhode Island. However, it is important to note that this project is expected to produce significantly less power compared to the offshore wind farms Ørsted is relinquishing.
Overall, the U.S. offshore wind industry continues to confront various obstacles that pose significant challenges to its growth and development.