May 18, 2024: Offshore Wind
Good evening. First, several new people have subscribed in the last few weeks, so welcome, new readers. Each week, I write about a different topic, usually related to environmentalism or urbanism, but sometimes some very different topics. For the last several weeks, I have been been writing mostly about various energy production topics, and today I will continue with a look at offshore wind.
A year ago, I looked at environmental issues surrounding wind power in general. As of 2022, 93% of the world’s wind capacity was onshore, but many of the same issues apply to offshore wind as well. Today I want to focus more on economic issues. Compared to onshore wind, offshore wind is a less mature technology, but deployment has been growing rapidly, and the International Energy Agency estimates that offshore wind worldwide has the capacity to produce 420,000 terawatt-hours of electricity, which exceeds world electricity generation in 2022 by a factor of more than 14. And yet, much of the news coverage of offshore wind in the past year has been negative. For a couple of the better recent examples, I would suggest this article from Canary Media from Jeff St. John, and for a decided pro-offshore wind perspective, I would suggest this article from The Conversation by Christopher Niezrecki.
To outline the industry’s current troubles, recent high-profile cancellations of offshore wind projects include Ørsted’s Ocean Wind 1 and Ocean Wind 2 projects and a General Electric project off New York. In 2023, 12 gigawatts of projects have been cancelled or put up for renegotiation, and this doesn’t include the GE projects and others that have run into trouble this year. This compares to 64.3 GW of offshore wind at the end of 2022. A recent analysis from Wood Mackenzie foresees significant growth for the industry in coming years (30 GW per year by 2030 outside China, as the Chinese markets has its own very different dynamics), but also argues that recent projections and goals from governments (77 GW per year by 2030 outside China) are unrealistically ambitious.
Some projects are still coming online, such as France’s first offshore wind farm. Wikipedia lists 15 offshore wind projects worldwide that are under construction and will have a nameplate capacity of at least 400 MW; their collective capacity is 11.5 GW, and their expected completion dates range up to 2026 (some have a completion date of 2023, so the list is a bit outdated). Some media reports about the collapse of offshore wind have been exaggerated; it would be more accurate to characterize this as a rough patch and a recalibration of expectations from the unrealistic levels of a few years ago.
All right, so what have been the challenges to the industry. There are a few problems, some of which are external to the industry, and some with the industry itself.
Since the outbreak of COVID-19, many industries, with offshore wind not excepted, have been faced with high inflation, supply chain disruptions, and rising interest rates. High interest rates are especially harmful to capital-intensive projects. The Department of Energy recently published an analysis that found that typical offshore wind projects had a levelized cost of electricity of 8.5¢/kWh in 2021, and that had risen to 14¢/kWh in 2023. LCOE is the most common metric for evaluating electricity prices, and this metric is the price of electricity that an operator would need to receive, over the lifetime of the project, to break even financially. An LCOE of 14¢/kWh is too high to be economically competitive; even 8.5¢/kWh is not very good.
The study finds that about three quarters of the increase can be explained by the aforementioned macroeconomic factors, and the remaining quarter is due to additional cost overruns. They go on to estimate that prices will fall back back to 8.4¢/kWh—back where they were in 2021—by 2030, with the declines being driven in roughly equal parts by an easing of macroeconomic headwinds, policy support (e.g. tax credits), and learning-by-doing cost reductions as more offshore wind is built.
Several articles, such as the Niezrecki article, might talk about supply chain disruptions in the abstract, but highlight a specific own-goal for U.S. offshore wind policy: the Jones Act, a.k.a. Section 27 of the Merchant Marine Act of 1920. The act requires that goods transported by water between two ports in the United States are transported by ships that are constructed in the United States, fly the American flag, and are owned and operated by Americans. The Jones Act is, in my view, a bad policy that should be repealed, but that’s a subject for another time.
The Jones Act is particularly harmful for offshore wind in the United States because the U.S. lacks purpose-built wind turbine installation vessels—of which there are many elsewhere in the world—and so U.S. offshore wind is installed with barges instead. There is one Jones Act-compliant wind turbine installation vessel under construction now, the Charybdis, which has already been delayed.
The Wood Mackenzie report also singles out local content provisions, which are a prerequisite for tax credits for offshore wind and other energy sources under the Inflation Reduction Act, as raising costs as well.
Ambitious government targets themselves contribute to the supply chain problems. According to the Wood Mackenzie report, offshore wind had a banner year in 2015 that was not replicated the following year. This situation led to instability and financial problems for suppliers. The industry fears that overly ambitious targets for 2030 could lead to a similar problem, since if the 77 GW per year target is attained then, there will almost surely be a dropoff in immediately following years. Consequently, potential vendors are hesitant to fully ramp up production.
There are other bottlenecks too, as outlined in the Niezrecki article. They include congestion in transmission; getting more transmission capacity is a whole separate issue. Issues also include workforce constraints, which can be seen as part of the larger supply chain problems; NIMBYism; and public opposition, which I will touch on below.
The biggest recent U.S. offshore wind policy document came from the Department of Energy in 2023. It calls for 30 GW of offshore wind in the United States by 2030, 15 GW of floating offshore wind by 2035, and 110 GW of offshore wind by 2050. This comes as the industry in the United States is young and a bit late for the party; the first offshore wind in the U.S. came online in 2016, and there were 0.024 GW as of the end of 2022.
A quick digression, because for the 2035, I said floating offshore wind. The best wind resources are found far from the coastline, typically at depths that are too great for a traditional fixed bottom turbine. Instead, a floating platform, tethered to the ocean floor, is used. There were several pilot projects in earlier years, and the first commercial floating offshore wind farm was the 30 MW Hywind Scotland, commissioned in 2017. There are no such farms in the United States yet.
The DoE report envisions an LCOE of 5.1¢/kWh for fixed-bottom turbines in 2030 and 4.5¢/kWh for floating turbines in 2035. These numbers strike me unrealistic, and one notes that the fixed-bottom cost is significantly less than that estimated in another DoE report I mentioned above. The amounts projected are probably not realistic either, as mentioned in the Niezrecki article and others.
What is the way forward for the industry? I would offer the following suggestions.
First, protectionist measures such as the Jones Act and local content mandates should be done away with. I understand why these measures persist. Labor is an important element of President Biden’s political coalition, and protectionism is more popular among the general public than it is among economists, and so these measures are likely to persist, even though they work at cross purposes to the goal of deploying clean energy.
Second, government targets should come at a more measured pace, if at all. Building a new industry is a marathon, not a sprint, and the targets will ultimately do damage to the industry if they set us up for another oversupply scenario. I don’t like the idea of government-set targets and timetables in general, as planners at the Department of Energy lack both the knowledge and dispassion to say what the right amount of offshore wind “should” be at a given time.
For a measure that I would not advocate, many offshore wind supporters, such as described in the Niezrecki article, call for a rebidding process. This means that vendors would put forth an initial bid, and years later, when the environmental permitting is finally done and water use rights secured, they would rebid to reflect changed market conditions. This is especially relevant for the cost rises that would have been (mostly) unforeseeable in 2019. I disagree with this idea for two reasons. First, as described in the St. John article, rebidding is a bait and switch for utilities, whose finances ultimately go back to ratepayers, and it leaves the public at risk for cost overruns such as happened this decade. Second, there is a need for broader permitting reform. Rebidding would undermine the case for broader reform by shielding a politically charismatic industry from the harms caused by permitting-induced delays.
I’ve written about public opposition to wind power in general in the context of environmental issues, and most of the negative sentiment about offshore wind is similar to that against wind power in general, and so I won’t rehash this subject in detail.
By now, it does appear that, for a variety of reasons, opposition to wind power in some political quarters is entrenched. The anti-wind movement looks very much like the anti-nuclear movement, and given that the anti-nuclear movement has persisted for decades despite not having any basis for their objections, a similar thing should be expected for the anti-wind movement. It is not clear to me how much of a problem for the wind industry this will be. I would note that hydraulic fracturing has also been subject to intense political opposition, yet it has thrived in the United States. As Jack Devanney argues, of the reasons that nuclear power struggles, activist opposition is the least of the industry’s problems.
Despite some exaggerated headlines, my assessment is that offshore wind is doing fine, and what we are seeing now is not a failure of the industry, but rather a recalibration of unrealistic expectations. Despite its apparent favor, offshore wind has not been treated well by the U.S. government, with unrealistic projections and goals from the Department of Energy and protectionist measures that hurt the industry’s development. If offshore wind is to best thrive, it will thrive with non-prescriptive goals, such as a price on carbon; a free market that lets the best technologies rise to the top; and a rejection of populist scaremongering.
It is not clear that, in a competitive market, offshore wind will actually thrive. There are many promising energy technologies on the horizon and on the market today, such as various forms of solar power, enhanced geothermal, and maybe methane hydrates, which is a topic that I would like to explore later on. Compared to these, offshore wind also has the advantage of a very high resource base, but for all the public support, it is not clear that the cost will fall to a level needed to make offshore wind competitive.
Quick Hits
After signing the Civil Rights Act of 1964, Lyndon Johnson proverbially said, “We’ve lost the south for a generation”. Whether Johnson actually said this is one thing, but as Zaid Jalani documents on Twitter, this assessment simply isn’t true. Democrats continued to thrive in the South electorally well into the 1980s and 1990s. The anecdote is supposed to convey the “truth” that white Southerners are racist and would not countenance a political party that would support civil rights.
On Cipher, a clean energy publication, there is an article entitled, “How we can fix the electrician shortage”. I’m sorry to pick on this article, but I am triggered, having written a piece challenging the idea that there exists any such shortage. The Cipher piece does not bring any compelling evidence to the table; it seems to assume that “everyone knows” there is a labor shortage in the trades, and so there is no need to argue this. The idea of a labor shortage in the trades is one of these ideas that has gotten calcified as common wisdom despite the evidence being flimsy at best, a bit like that a housing bubble occurred prior to the 2008 financial panic, or Iraqi weapons of mass destruction.
The YouTuber NeverKnowsBest made a fun video about bad video games and our perception of them, if you have an hour and a half to burn.
The fundamental problem for offshore wind is costs equivalent to what we should be able to build nuclear for, without actually being firm.
Current US costs seem to be at bad FOAK nuclear costs even!