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Show Notes
In this episode, wind industry analyst Samantha Woodworth speaks to the growing pains of the offshore wind industry and what its future may hold.
Text transcript:
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 interest rates would increase, but I don't think anyone could have predicted that they were going to just so rampantly go out of control post pandemic. The magnitude to which this issue happened is really what was causing the projects to no longer be viable. Interest rates fluctuate a lot anyway, but it's one of those things where I think this isn't something that anybody could have really predicted or should have been able to predict.
It's obviously going to cause a good amount of revisiting of how these contracts are scoped and how they're written, whether that is including index bids and whatnot. But it really is one of those things where I don't think anybody could have possibly predicted, you know. 7%, 8%, 9% —
David Roberts
Right. The severity of it.
Samantha Woodworth
Yeah. And if you look at Europe, too, you have commercially viable projects there that have similar remuneration mechanisms to what's being set up in the U.S., and they remained economically viable. So again, it just has to do with the nascence of the industry and not having as robust of a foundation or backbone or infrastructure as, say, in locations in Europe.
David Roberts
Right. Speaking of that infrastructure, let's talk a little bit about the supply chain. So there's sort of two supply chain stories, and I'm curious how they apply to offshore wind. One is just Russia invading Ukraine, you know, and then cut off the gas from Russia, and then everybody's scrambling for clean energy, and basically supply chains get jammed up in a way that is screwed up everybody for a while, screwed up all industries for a while, but particularly this industry. That's one story. And then the other story is just specific to offshore wind in the U.S., which is just, we don't have the supply chain in the U.S. yet, just because, as you say, the industry is nascent.
And now we have these laws sort of mandating that we have to use domestic content or use domestic manufacturing or use domestic ships, which we'll return to later. So now the industry is having to wait on a supply chain standing up. Which of those is responsible for the current woes?
Samantha Woodworth
I think it's a combination of both, really. I mean, like I had said, the whole renewables industry is feeling the effects of the supply chain disruptions caused by the pandemic, as well as caused by the conflict between Russia and Ukraine. As you mentioned, the local supply chain, especially for offshore wind in the U.S., is pretty non-existent. As it stands now, there are a number of idle facilities and newly proposed facilities that are being thought of to help address that. Unfortunately, even if all of those come online, we would need more to be able to meet demand.
But it's a very good start. That being said, I think it was Siemens Gamesa announced that they're no longer planning on building a blade manufacturing facility in the U.S. because of just how volatile the offshore wind market has become here and how —
David Roberts
Ugh.
Samantha Woodworth
Yeah, I know, it's a huge bummer — how projects are no longer guarantees at this point.
David Roberts
Well, this is a chicken and egg thing, right? I mean, the problem with the supply chain.
Samantha Woodworth
Yeah. And no one wants to spend millions of dollars to create a new manufacturing facility if the demand isn't going to be there for several years later if the project's delayed, God forbid, the project gets canceled. Right. So that's definitely one of the big issues that we're running into in the U.S. as far as just even establishing that local supply chain. We have a decently robust supply chain for onshore, but obviously we really don't have anything that can quite cater to offshore yet, just the scale and the scope. So we really need to make sure, especially this latest tranche of projects that are getting awarded, like New York's third auction, that the preliminary winners were announced a couple months ago, I think.
That as well as New Jersey, Massachusetts, Connecticut, Rhode Island, you know, the onus really is to get the pricing of those contracts right so that we can have that certainty in the project pipeline again, and therefore convey that certainty into establishing a robust supply chain of labor, of manufacturing, of port infrastructure, of ships, of everything we could possibly need to really foundationally have it.
David Roberts
At the same time, if you're proposing a project whether and how much that stuff will be available is very germane to the price you can ask. Right, this gets back to the chicken and egg thing. In a sense, you need that stuff around, or at least some idea that it's going to be around before you can properly assess your own project.
Samantha Woodworth
Yeah, but you know, we kind of knew going into creating this industry that we were going to be heavily reliant on Europe for not even just best practices, but being able to source these components because they have most of the offshore wind manufacturing in Europe and we were already going to be reliant on them for vessels, installation vessels anyway. So you can kind of get an idea of what these projects are going to cost. Just knowing where you would have to source supply chain at first, really the kind of question becomes, "all right, if we were to build these in the U.S., how would the costs be different? And what certain standards do these local supply chain and these local manufacturers have to adhere to?"
Actually, with regard to that Siemens Gamesa cancellation of that facility, they're still planning on honoring all their contracts and their firm orders with U.S. projects. They're just saying that they're going to have to be imported from Europe.
David Roberts
Interesting. So on the one hand, you have this perfect storm, right? You have interest rates making everything more expensive, you have inflation making parts, et cetera, more expensive, all this stuff. But on the other hand, you also have, just a couple, a year ago, the passage of IRA, which contained — the Inflation Reduction Act — which contained kajillions of dollars for green projects, I assume has a lot of money available for offshore wind, a lot of money available for onshoring of manufacturing. Like all that stuff is getting showered with money right now. Is that money just not enough to — is the support in IRA just not enough to sort of offset the severity of all this stuff that's happening?
Samantha Woodworth
There's definitely a piece of that. I think, again, nobody wants to be the 100% footing the bill for all of this. Right? And I don't think that the way that the feds are looking at it is necessarily the same way that each state individually is looking at funding and getting all of these programs and infrastructure in place. And a lot of states are kind of acting in a vacuum too. Until very recently, with that three state, at least procurement, consortium that Rhode Island and Massachusetts and Connecticut are doing. That's the first regional agreement to actually do these projects together and will likely spur regional supply chain development, as opposed to just state by state supply chain development, which is going to be really good.
But it seems like in trying to get all of this stuff established again, nobody wants to be the only one footing the bill, but it seems like each entity that's trying to get it established is operating kind of within its own vacuum.
David Roberts
Yes. For a policy head like me, when I hear this, like, all these chicken and egg problems like, this can't happen until this happens. This can't happen until this happens. I think, hey, what about government?" What about some planning? What about some policy here? This seems like a great. But I thought IRA would have done some of that.
Samantha Woodworth
Yeah, and that's the thing. It obviously promised a whole bunch of money towards it, but ultimately, we haven't really seen anything like an offshore wind working group or like a supply chain working group, or there haven't been any sort of results like that that have stemmed from the Inflation Reduction Act. So I would agree and say there needs to be more actual action taken. I mean, yes, you can try and throw money at problems and hope they go away, but really, there needs to just be a whole bunch of stakeholders sat down at this table to figure out, okay, realistically, how is this going to work?
And realistically, where is the money going to come from?
David Roberts
It's like, the bill looks a lot bigger than it did, and now you got to get back together and figure out how to divvy it up. I want to return to policy in a little bit, but in the context of all this other stuff, how big a problem is NIMBYism for offshore wind specifically? I know sort of legendarily the first offshore wind project off of Cape Wind.
Samantha Woodworth
Oh, the Cape Wind project yeah.
David Roberts
Just got mired in NIMBY BS for years and eventually died.
Samantha Woodworth
Yep.
David Roberts
And I know there's been fights like that. Is that a big piece of the puzzle in the current woes?
Samantha Woodworth
So actually, it's kind of funny you bring Cape Wind up. I was an intern at the New Bedford Economic Development Council back when that project ultimately got mothballed. And I had asked the same questions, too, because it seemed like policy wise, everything was in place; they were ready to break ground. This was going to be such a boon for the New Bedford economy, and then, as you know, it just kind of fizzled out and died. And NIMBYism was a large piece of that. The reason that it is a bit less of a piece now when we're talking about U.S. offshore wind today is just purely based on the location of the projects.
Cape Wind was going to be in state waters within sight of Nantucket and Martha's Vineyard instead of out on the outer continental shelf where it'll be visible somewhat, but not as in your face as the location for Cape Wind would have been.
David Roberts
Yeah, these are like 40 miles out or something crazy like that, right?
Samantha Woodworth
Exactly.
David Roberts
Surely you can't see a turbine that's 40 miles away, can you? I don't know.
Samantha Woodworth
Yeah, I'm not sure.
David Roberts
It doesn't seem like it would be particularly oppressive in your visual field.
Samantha Woodworth
Yeah, I think you would need some binoculars or a telescope or something if you want to be that mad about it.
David Roberts
Are there problems where — because it does seem like the one place where NIMBYism could happen is all these farms need cables going to the shore at some point and that is some degree of disruption. And I remember reading — I don't remember the specific project, but I remember reading about a community that was rallying to fight having a cable from an offshore wind farm come under their town. Like at the end of the project, it literally wouldn't even have been visible. Just digging up and burying it. They fought and fought and blocked. Is that a pattern or is it?
Samantha Woodworth
Yeah, the NIMBYism has definitely evolved away from the "I don't want to see the turbines" piece — obviously that still exists. But a lot of the NIMBYism pieces that we're hearing about are exactly what you said: Local towns, municipalities not wanting gigantic cables put underneath their lands, having the disruption of that construction as well as there have been a whole bunch of unexplained whale deaths and people are trying to attribute those to the pre-development sonar activities and things that are done for site assessment.
David Roberts
I was going to ask later about the whales, but let's just talk about the whales. Is that BS? Is there anything to that?
Samantha Woodworth
So NOAA has been documenting an unexplained mortality event in humpback whale populations in the northeast for years and years and years now, well before even Block Island Wind Farm was developed. You know, I personally don't believe that offshore wind farms are killing whales, but you could make the argument that because a lot of these whale deaths are attributed to ship strikes, increased construction activities in offshore wind project areas could, in theory, cause more ship strikes, which then would cause more whale deaths. There has not been any sort of research or tracking that has said that that is the case. But it is also such a new thing that there's also not a ton of data monitoring ship strikes at offshore wind project sites.
And I mean, no one in the offshore wind industry wants to kill whales. Let's be real.
David Roberts
Are there ways to — I mean, I guess if we don't have a lot of data and a lot of science about this we probably don't also have a great idea how to avoid it. But are there better and worse ways to do this, ways that are more or less whale friendly?
Samantha Woodworth
All these projects have contracted with biologists and researchers and that sort of thing to analyze whale migratory patterns. What sort of marine life of all kinds is going to be impacted by these activities? It's kind of just more monitoring and making sure that if all of a sudden you're getting a ping that there's a whale in the vicinity, you make sure you give it a wide berth until it's gone on its way.
David Roberts
What about the disruption of fisheries? Because that's been a thing, too, isn't it?
Samantha Woodworth
Yeah, definitely. And I think, obviously, again, the offshore wind industry isn't in it to make it so fishermen can't make their livelihood scalloping — whatever they might be fishing. But at the same time, there's always going to be some sort of impact, right, to marine life, to fisheries, to anything in the ocean when you put up these massive projects. The onus is obviously on the developer to make sure that they're mitigating as much of the disruption as possible. And that's why they have — it's called the NEPA process — that's why all these projects go to open comments multiple times, they get redesigned multiple times to try and minimize that impact on user groups as well as actual, like, the environment.
So obviously, we have to have trust in the developers that they're doing everything they possibly can here to minimize that impact on user groups and the environment. But at the same time, they have a legal responsibility to do that.
David Roberts
And I've heard sort of, like, vaguely over the years also that sometimes offshore turbine platforms can sort of induce fish. I'm so out of my depth here. I have no idea what I'm talking about.
Samantha Woodworth
Like, create new marine ecosystems?
David Roberts
Create a habitat. Thank you. That's what I was looking for. Create a habitat for fish. Is that true?
Samantha Woodworth
It's not something I don't think really gets considered very often. But you figure in a lot of areas, they will strip down and sink aluminum car frames to create new reefs. If you're creating a new stable, kind of unmoving foundation down there, the ecosystem will adapt. And if it likes the components, I guess there's no reason to think that the ecosystem wouldn't grow around the foundation of an offshore wind turbine. It wouldn't create a new reef somewhere, or that sort of thing is definitely something that can happen. And I think it will. I think it's one of those things that it kind of gets overlooked that these will create additional habitats once they're put in.
It's not like we're going to be pulling them out every ten years for maintenance or anything.
David Roberts
One of the things I've been talking about a lot on the pod lately is this problem of NIMBYism and preparing developers better for it and how current practice is not great among developers. They're not particularly sensitive. They're not doing the early outreach that they need to be doing. They're not cognizant of the political climate into which they are wandering unprepared. So they're getting chewed up. What's the story there in the offshore wind industry? Does it seem like they are sensitive to the NIMBY issue and doing what they need to do to avoid it? Or are they kind of like stepping on rakes because they're not clued in about this?
Samantha Woodworth
It kind of depends, developer to developer. We have definitely seen some developers that do a better job of it than others. I think it was really hard for the industry to conceptualize NIMBYism as it's evolved away from the "I just don't want to see the turbines." And once that became no longer the issue, I think there was a little bit of a pause. Kind of a "oh, there are other issues that people have with this?"
David Roberts
I mean, I can't believe people have an issue with a cable going under their town, even though I know it. So I can imagine trying to anticipate that could be difficult.
Samantha Woodworth
Yeah. And I think that's really what it was, is once we all thought that the turbines were so far offshore you can't see them, so it shouldn't be an issue anymore. I don't think anyone was really able to anticipate what other sort of local opposition stances there would be. Naturally, the grassroots environmental concerns exist across the board, but that's something that all renewable energy developers have a decent amount of expertise with at this point.
David Roberts
Well, also, as I keep pounding the table, this is not spontaneous resistance that is happening in these places.
Samantha Woodworth
Exactly.
David Roberts
It's very well funded. You just have to assume it's going to be there because there's a giant well-funded movement making sure it is there.
Samantha Woodworth
Yeah, and I think there probably was a little bit of the industry being taken aback by all the new local opposition stances that came up. But again, the onus is on the developers to make sure that they are doing an adequate job of mitigating disruptions to stakeholders due to these projects, as well as making sure that they are designing their project in a way that tries to make everyone happy. Obviously, it's not really entirely feasible to make everyone happy, but you want to get darn close.
David Roberts
Yeah. What would make a wealthy community happy about something underneath their town? If you can't even imagine why they're mad, it's hard to imagine what would make them happy.
Samantha Woodworth
That's definitely a piece of it, too. Those sorts of —
David Roberts
Just money? Like, they already have money. Right? They're rich.
Samantha Woodworth
Well, and you figure that's, I think, when you start to see the developers coming out with pledges as far as, like, economic development and we'll build a school.
David Roberts
Benefit sharing. I have a whole pod coming out on that. Yeah. I was just wondering if that, how sort of evolved that thinking is in this particular industry.
Samantha Woodworth
Yeah, that's, I think, the next step at that point when you're like, I can't not put the cable underneath your town, but here I will do something good to bolster the town's economy and the town's resources and whatever. That's when you start getting into that benefit sharing piece and honestly negotiating permit approvals, especially at the local and municipal level, based on that sort of benefit sharing.
David Roberts
Just for listeners' benefit: So some of these wind farms, the proposals in various stages, some are in areas with wholesale energy markets, restructured utilities, as they say, where there's competition among utilities, and some of them are taking place in old school, vertically integrated monopoly utilities. And I think this is an interesting difference. So right now, the ones that are in the restructured areas, listeners will know if you're in a competitive wholesale market, you're just bidding your power, you're offering your power, and the state is choosing the lowest bid. It's a competitive process. So in those areas —
So what's happened, as we said, is these big farms came in, they entered these auctions, won these auctions by saying, "we will offer our power to you, New York, at x per kilowatt hour." And now everything's gone wrong, and they cannot possibly sell power at those prices anymore. And they've been trying to renegotiate those PPAs, those off take contracts that they settled, but, like, New York, for instance, just said "no," refused to renegotiate, and now these two projects in New York have gotten canceled. So I guess one of the things I'm wondering is, what are the dynamics there?
Why wouldn't New York renegotiate? What is the source of the resistance? I guess if you have an auction, and someone wins with a deceptively low price and then comes back to you afterwards, it's like, "actually, I want more money." It kind of screws the other participants in the auction. But what are the dynamics there? Why don't states want to renegotiate?
Samantha Woodworth
To your point: That's a good piece of it is — you don't want to discourage the competition by allowing somebody who bids, let's say, an unrealistically low price, which I don't necessarily believe any of the winners of the previous New York auctions did. I think they bid prices that worked at the time. But part of that is maintaining that competitive process. I know that NYSERDA has been batting around the idea of doing a very quick fourth solicitation; they're calling it like a "fire" solicitation, that would allow those projects to essentially rebid as soon as that solicitation is opened.
David Roberts
Let's just review the facts real quick. If people have not been keeping up, there's two big projects, both by Ørsted that just got canceled.
Samantha Woodworth
Right. Are you talking about the ones that the PUC denied their renegotiation, or are you talking about the ocean wind projects that Ørsted just came out a couple weeks ago and said, "we're not doing these anymore."
David Roberts
Oh, are those different?
Samantha Woodworth
Yes. Yeah. So the two projects, the Ocean Wind projects that Ørsted just recently canceled, are located in New Jersey.
David Roberts
Oh, New Jersey. That's what I meant. Right, right. Those are the two big canceled projects that everybody's very angsty about. And they got canceled because New Jersey wouldn't renegotiate the PPA, right? So is the idea to have another auction, is the idea that these same canceled projects might bid into this new auction and win it and then be able to go forward after all?
Samantha Woodworth
So I don't believe that the Ocean Wind projects got canceled because of the PUC. So the ones that got canceled because the New York PUC denied renegotiation, that was Empire Wind, Sunrise Wind, and Beacon Wind 1 were the projects that had petitioned the Public Service Commission in New York to renegotiate the contracts. The Public Service Commission said, "nope, we're not letting you do that." Then they announced the winners of the third solicitation, and there had been some mention of a very quick follow up solicitation to, in theory, let those projects that wanted to renegotiate, cancel, eat the contract termination fees and rebid in such a quick succession that it, in theory, wouldn't affect their project timelines.
David Roberts
Right, assuming they win.
Samantha Woodworth
Yes, exactly. Assuming they win.
David Roberts
So those projects are not 100% for sure canceled.
Samantha Woodworth
Correct.
David Roberts
They're just in limbo-ish?
Samantha Woodworth
Essentially, yes. Developers haven't come out and said we're canceling. They haven't come out and said we're breaking our contracts and hoping to rebid. There's just been kind of radio silence from those projects.
David Roberts
I'm sure there's a lot of angsty meetings happening in a —
Samantha Woodworth
I'm certain, I'm certain.
David Roberts
When we talk about these contract cancellation fees, is that a substantial hit to them? Like, is that something they would really rather avoid?
Samantha Woodworth
Oh, definitely. I believe Commonwealth Wind is likely to pay something along the lines of $50 million, close to it, for terminating those contracts. South Coast, I believe, is paying a little bit more than that. So, yeah, it really highlights just how much project costs have become an issue with a lot of these projects and how bad the inflation problem has affected these projects, because if you're willing to eat $50 million —
David Roberts
I was going to say you have to be pretty desperate. So those three New York projects are right now trying to figure out, "do we just cancel and eat everything, or do we just eat the contract cancellation cost and rebid and try to keep moving forward?"
Samantha Woodworth
Exactly. Yeah. And I think that all hinges upon, obviously, whether or not NYSERDA does this flash solicitation that they'd been hinting at.
David Roberts
I have no idea how long that process takes. Could they do it quickly?
Samantha Woodworth
They're going to have to get their ducks in a row really fast if they want to do it in the kind of near future. Generally, the RFP process can take anywhere from, I don't know, like eight-ish months to over a year just because you're in theory, supposed to release a draft and then allow for public comments. So it is a long process by design. So it'll be interesting to see, you know, kind of what they can do in a very quick timeframe or what they're expecting to be a quick timeframe.
David Roberts
So those three New York projects are in limbo. The two New Jersey Ørsted projects are just flat canceled?
Samantha Woodworth
Yes, those are flat out canceled. Ørsted cited project delays, permitting timelines, and inflation as the primary reasons.
David Roberts
Permitting timelines. I thought that had, like, I thought by the time they were at this stage, they would have had the land, or I guess it's not land, ocean land. What do they call it out there? They would have had what they need in terms of permitting, like they're still waiting for?
Samantha Woodworth
I think generally when they say permitting in that regard, they're looking for those state municipal, local level permits for that interconnection infrastructure where it makes landfall, especially if it has to go through any sort of sensitive habitats like marshlands and that sort of thing. Ocean Winds, neither of those projects had gotten altogether that far in the BOEM permitting process. They were still doing environmental reviews. Their construction operations plan hadn't been approved yet, so they were still kind of in the middle of that whole permitting process.
David Roberts
Just for listeners. BOEM is the Bureau of Ocean Energy Management. That's in charge of federal waters. And all of these post Cape Wind, all these projects are far enough out that they're in federal waters, right?
Samantha Woodworth
Correct.
David Roberts
So here's a thought I had, or a question I had. If you're in a wholesale energy market and you're in a competitive market and all your costs go up and you have to renegotiate your contracts, you're just like, it's a mess for you. But if you're in a vertically integrated regulated monopoly utility area, isn't this a little easier for you because you can just offload the increased costs onto your captive ratepayers? Is that — are they having an easier time?
Samantha Woodworth
So in theory you can. It's the Public Utility Commission's job to make sure that you're not unduly burdening ratepayers with your cost recovery. But as we kind of saw with the Coastal Virginia project, there are a number of cost overruns, and unfortunately, they are going to end up ultimately passed to the customer. And that is kind of the big difference there, is that the utility still has to go through the process of proving need and necessity and public good of the project and getting the cost recovery approved by the Public Service Commission. So the burden of proof is on the developer, on the utility at that point.
But ultimately, if that gets approved, the effect is going to be felt by ratepayers, whether, you know, up or down.
David Roberts
Yeah, it's like the Vogtle nuclear plant in Georgia. Right?
Samantha Woodworth
Exactly.
David Roberts
They weren't competing with anyone. There was no auction. It was just them and the regulators. And they're, "ah, costs are going up again." And the regulators are very chummy with them. They're like, "yeah, take it out of the ratepayers," but at least then the projects go forward, right? At least those projects would go and get built.
Samantha Woodworth
Yeah. So that at least at the very end there, you have a pretty much guarantee that the project is going to get built in some form or fashion because generally the utilities, too, will also tie in other, a bit more contingency planning into it in that regard. They're going to kind of tend to — I would say err on the high side of costs — when they present their numbers, as opposed to when you're in a competitive bidding scenario. You want to bid low cost.
David Roberts
Right, right, right. You say now that they're talking about doing a process where bids are tied in some way to inflation rates. You say that's standard in Europe?
Samantha Woodworth
Well, there isn't much, actually that's standard in Europe as far as remuneration mechanisms go. It really varies market to market and country to country. But at least in the Massachusetts, the most recent tender that they released, as well as the draft materials for the upcoming Rhode Island and Connecticut tenders that are being put out as part of that tri-state consortium or tri-state regional procurement, those all allow for developers to submit — you can either submit a fixed bid like you normally would, or you can submit an indexed bid. There's different stipulations around each that are very, very in the weeds, so I won't bother going into them.
There are certain criteria you have to meet and to do if you want to do an indexed bid versus a fixed bid. But allowing for that indexation to inflation is obviously a good option, especially considering no one wants to think about it. But God forbid, like I said, inflation keeps going up.
David Roberts
Yeah. If we've demonstrated anything in the past few years is that no one, including the alleged experts, has any friggin idea what's going to happen to it. So it does seem like indexing is good, although I have to say from a state's perspective, you want to be careful saying "we'll pay no matter what happens with inflation."
Samantha Woodworth
Well, that's why I'm saying there's other stipulations around it that, like I said, it goes really into the weeds. But that's just one way that some states are trying to address the issue of "if inflation skyrockets again, none of these projects are getting built." They want to obviously avoid that. The states have already said — they have targets, they want offshore wind energy. They've put a lot of money and investments into the industry already. So having projects get scrapped is really not good on them or for them either.
David Roberts
Yeah, I mean, the backdrop to all this, I mean, maybe you and I probably know this, but it's just worth saying. It's just like the northeast in particular really needs some new power. It's very congested and very — this is not some luxury for them. They badly need these things. Tell us, what is the deal with ships and the Jones Act? What's going on there?
Samantha Woodworth
Sure. Yeah. So, the reason the Jones Act was such a big talking point for the offshore industry is that it essentially precludes foreign vessels from being able to go into U.S. waters, U.S. ports, pick up components, and bring them to the project site for the offshore wind projects.
David Roberts
What exactly does it say? It's illegal for a foreign ship to carry from a U.S. manufacturer to a U.S. consumer, like a U.S. to U.S. trip. Is that specifically?
Samantha Woodworth
Essentially, yes. So, the whole point of it was to kind of prop up the U.S. shipping and shipbuilding industry years and years ago by making it so that any shipping activity that happens within U.S. waters between U.S. ports has to be done by U.S.-built and U.S.-flagged vessels.
David Roberts
Yes. And so now what's happening is you need special ships for these things, yes?
Samantha Woodworth
Correct.
David Roberts
And we don't have them?
Samantha Woodworth
Correct.
David Roberts
Which is like a real problem.
Samantha Woodworth
So, you know, we have the one vessel that Dominion's building, Charybdis, that was supposed to be done this year; unfortunately, due to supply chain troubles —
David Roberts
Doh!
Samantha Woodworth
Yep. I don't know, did you see that one coming? You know, the timeline for that has been delayed somewhat, I think, to next year, maybe even 2025. I'm not entirely sure on that one.
David Roberts
One ship is not going to do the job, presumably.
Samantha Woodworth
That's the thing. And so there was a proposition at one point that was going to say all the foreign installation vessels that we bring over have to have either a full U.S. crew or a crew flagged from the vessel's hailing port. Obviously, that's like another bunch of hurdles to jump through when we're trying to attract European vessels to come across the pond and do these projects for us. That provision never passed, thank goodness, because honestly, it probably would have choked the offshore industry a lot.
David Roberts
Well, how is this not just going to bring everything to a halt? Is there any way around this? You can't build one without a ship? We don't have the ships. It's illegal to bring a ship over from where they're building ships. What's the solution to this puzzle?
Samantha Woodworth
So there's two hypothetical workarounds. The first is what was used to do Block Island Wind Farm, the Coastal Virginia Demonstration Project, which was to basically ferry things back and forth from a foreign port. So they set up in Halifax. And —
David Roberts
Ah!
Samantha Woodworth
Yeah, obviously not really a very good solution.
David Roberts
Not economically ideal, let's say.
Samantha Woodworth
Especially if you're trying to build an 800-megawatt wind farm, as opposed to a 20-megawatt wind farm.
David Roberts
Right.
Samantha Woodworth
So that was the first of the suggested workarounds. Scalability, obviously, huge concern with that one. The current workaround that's being used for the Vineyard Wind Project is to have U.S.-flagged feeder barges and a foreign installation vessel. So instead of having the installation vessel come to port and pick up components, the installation vessel just stays stationed at that project site, while the U.S.-flagged feeder barges are the ones going from project site to port to pick up these components. Then you transfer them to the installation vessel and then it gets installed that way. Obviously not ideal either, but —
David Roberts
Every economist in the audience right now is getting hives.
Samantha Woodworth
I know, I know, I'm sure. Obviously not ideal, but when we look at Vineyard Wind specifically, actually, another piece of good news for today is that the first five turbines of that project already installed, and they're planning to flow power very soon. That project wasn't really adversely affected, timeline-wise, by using this feeder barge workaround.
David Roberts
They did the barge thing and it worked.
Samantha Woodworth
Yes. It didn't seem to really impact the actual construction timeline at all. Obviously, it's going to be a bit more expensive because not only are we paying a premium on getting the foreign installation vessels.
David Roberts
Yeah, you have to get the vessels anyway. Like, you still have to get them.
Samantha Woodworth
Yeah. And so obviously we have to pay a premium to incentivize European vessels coming over here because they have a ton of demand in Europe anyway. So it's going to be a bit more expensive using that workaround because you're paying a higher day rate for the installation vessel as well as the day rates for the barges. But at least it's not impacting timelines detrimentally. Or at least it hasn't in the one example we have. So it is a viable workaround is what we've learned.
David Roberts
Seems so crazy, though. Is there no prospect or chance of Congress just like for once doing a think, you know, they could just sit down and in five minutes pass an amendment to the Jones Act. You know, saying, "except for offshore wind." Is that not even on the table?
Samantha Woodworth
Yeah, it's not really on the table. It is funny, and a little sad, because obviously the whole point of it was to prop up the shipping and shipbuilding industries in the U.S. The U.S. shipbuilding industry has just continued to decline. But that was always the question when this issue first got brought up was whether or not they would ever pass an amendment. And it was a pretty emphatic no, because it is a policy that is rooted in nationalism and a lot of people in government still believe that it is a good policy.
David Roberts
So then are we going to get a shipbuilding industry? Like, is there anything on the horizon other than the one, the one ship?
Samantha Woodworth
That's the interesting piece. Right. So we have the one ship that is going to be done within the next year or so. There haven't been any contracts signed about or like to build additional Jones Act installation vessels. There have been a lot of proposals and potential contracts, expected contracts around other hybrid vessels related to maintenance and that sort of thing, which, you know, obviously equally as important, once the industry gets off the ground, you don't need the installation vessel really anymore. You need those Jones Act compliant operations and maintenance vessels. So having those is going to be really important because we know that feeder barge workaround works.
We can get these projects built even if we don't have more Jones Act installation vessels. A lot of the problem, though, has to do with just shipyards being able to build these. So there is a continuous kind of arms race going on in the offshore industry right now about bigger and better turbines.
David Roberts
Yeah, I was going to ask this. What are you even building the ships for? Right. It seems like a moving target.
Samantha Woodworth
Yeah. So most of the fleets that would be available to the U.S. right now can install turbin