The flood of financial headlines on the offshore wind industry have been quite bearish in recent months. The industry has been buffetted by strong post-COVID headwinds – dramatic inflationary pressures and supply chain problems – that have rendered several Atlantic coast projects uneconomic. After writing down its assets by $2.3 billion, Orsted's stock has been punished by the market as the company threatens to walk away from uneconomic projects unless their terms can be renegotiated to reflect changed economic circumstances. Offering another barometer of the deep bear market for offshore wind were recent lease auctions in the U.S. and UK, which received little to no interest.
Putting this all into perspective for us is Kris Ohleth, executive director at the Special Initiative for Offshore Wind. While acknowledging the near- and medium-term challenges churning the waters for the industry, Ohleth remains bullish on the long-term prospects for offshore wind in the United States:
"If you look at the decarbonization and clean-energy goals that we have for this nation, there is literally and absolutely no way to meet them without offshore wind. It is a technology of scale that is the only one, in fact, available for coastal states – for many coastal states in the United States – to meet their state and the overall national clean-energy targets that we need, especially as we continue to electrify our transportation systems and our building units. So there's a real demand for it. And I believe that the market will recorrect and we will make additional incremental progress towards commercialization in the United States in the next decade."
The flood of financial headlines on the offshore wind industry have been quite bearish in recent months. The industry has been buffetted by strong post-COVID headwinds – dramatic inflationary pressures and supply chain problems – that have rendered several Atlantic coast projects uneconomic. After writing down its assets by $2.3 billion, Orsted's stock has been punished by the market as the company threatens to walk away from uneconomic projects unless their terms can be renegotiated to reflect changed economic circumstances. Offering another barometer of the deep bear market for offshore wind were recent lease auctions in the U.S. and UK, which received little to no interest.
Putting this all into perspective for us is Kris Ohleth, executive director at the Special Initiative for Offshore Wind. While acknowledging the near- and medium-term challenges churning the waters for the industry, Ohleth remains bullish on the long-term prospects for offshore wind in the United States:
"If you look at the decarbonization and clean-energy goals that we have for this nation, there is literally and absolutely no way to meet them without offshore wind. It is a technology of scale that is the only one, in fact, available for coastal states – for many coastal states in the United States – to meet their state and the overall national clean-energy targets that we need, especially as we continue to electrify our transportation systems and our building units. So there's a real demand for it. And I believe that the market will recorrect and we will make additional incremental progress towards commercialization in the United States in the next decade."
EMP S3E18: Special Initiative on Offshore Wind’s Kris Ohleth, transcript
(edited for clarity)
EMP: Welcome to the Energy Markets Podcast. I'm Bryan Lee. With us today to talk about the strong headwinds for the future of offshore wind is Chris Ohleth, Executive Director at Special Initiative on Offshore Wind. Chris, you were formerly with Orsted, which has been pummeled by the market in recent days. And you were my former colleague at Atlantic Wind Connection. Thanks for coming on the podcast.
KO: Thanks for having me, Bryan.
EMP: So tell us about the Special Initiative on Offshore wind.
KO: We are a 10-year-now-long formed policy think tank formed in 2013 with a project that was really exciting at the time to figure out what the potential cost of offshore wind would be for the state of New York and their ratepayers. And I will tell you that that project 10 years later is probably more relevant than anything we do, considering all of the – certainly the applicability of cost and economics to the offshore wind sector right now. For the past 10 years, we have been developing studies such as that cost study for the state of New York, the state of Massachusetts, the state of Delaware – essentially, we work typically at the behest of federal and state policymakers to advance policies for the state or federal agencies that help promote the sustainable and responsible development of long-term offshore wind.
EMP: I was delighted to be reminded that Willett Kempton is part of your organization. We had him on an episode a few months back talking about vehicle-to-grid.
KO: Oh, yes, he's excellent. Our entity was actually founded at the University of Delaware 10 years ago, where Willett Kempton is a professor. We are now our own independent organization. As of about about two years ago, we split off from the university, and we're an independent entity, and working in the essentially NGO space now.
EMP: Hurricane Lee lurks off the coast, reminding us of just the plethora of violent weather we've been experiencing, in the last year or so, if not more. In the midst of this, you know, we need offshore wind to provide the kind of baseload resource that we're trying to phase out as part of the clean-energy transition. We talked a little bit before I hit the record button. You know, we were at Atlantic Wind Connection 10 years ago, and I didn't see much future for the technology then. So it was encouraging to see so much activity happening in recent years. But it seems like the COVID shutdown and the inflationary spirals from that, and the Ukraine war, and the supply chain problems have just really thrown a monkey wrench into the industry.
KO: You're absolutely right, Bryan, you hit the nail on the head. There are certainly these kinds of macroeconomic and global challenges that, frankly, are facing offshore wind, but also really any projects that have upfront large capital requirements and in these big infrastructure projects, we're seeing that across the board. So it's not really exclusive or unique to offshore wind. And offshore wind is kind of part-and-parcel experiencing some of those challenges, for sure.
EMP: But I guess it's more than that, though. The regulatory environment just isn't right. I mean, the costs are there. It's an out-of-market technology. And so states have tried to make it work. And I guess the latest round of projects are getting delayed or rebid because of the changing economics. It's more than the permitting and regulatory challenges. I think it's the domestic content under the Inflation Reduction Act. There's the Jones Act. There's just a whole range of things. It just seems like there's just a whole – if you're going to design a the system to keep it from happening, that what we have is what you would do.
KO: Yes, it is certainly an uphill battle. That's something that we've seen, you know, over, frankly, the past over 20 years now of trying to bring offshore wind to the United States. If your listeners aren't familiar, I'd like to remind them that it was back in 1991 – so well over 30 years ago, now – that the first offshore wind farm was built in Europe, off the coast of Denmark. So while this may seem like a bit of science fiction here in the U.S., there is really a strong precedent set globally with over 10,000 turbines spinning in the water, 5,000 off the coast of Europe or so and more than 5000 off the coast of Asia. And the U.S. is really lagging behind those markets. When you mentioned the war in Ukraine, there really is this special impact where now all of Europe's offshore wind is being seen with a new sense of urgency to try to remove the pressure of, you know, being stuck on Russian oil, and to clean and decarbonize the European grid. And so many of the supply chain resources are being directed in Europe, which is essentially further strengthening a really great system that they had already developed. So it becomes another challenge in the U.S. market. I will say though, if you look at the decarbonization and clean-energy goals that we have for this nation, there is literally and absolutely no way to meet them without offshore wind. It is a technology of scale that is the only one, in fact, available for coastal states – for many coastal states in the United States – to meet their state and the overall national clean-energy targets that we need, especially as we continue to electrify our transportation systems and our building units. So there's a real demand for it. And I believe that the market will recorrect and we will make additional incremental progress towards commercialization in the United States in the next decade.
EMP: Let's talk about some of the negative headlines that have been happening. Rather than go on a monologue here listing them all, let's tick them off one at a time here. So you've got Siemens grappling with the aftermath of failures of its wind turbine components. Now I understand that's mostly the onshore technology. Fast behind Siemens is Orsted, your former employer, they're now threatening to walk away from U.S. projects because the economics post-COVID have so drastically changed, as you mentioned, amid inflationary pressures and supply chain problems. It wrote down its assets by $2.3 billion – more than half – and the company's stock value tanked. But I found it interesting, the company still sees the projects as being in their shareholders’ interests long term. It seems maybe just threatening to walk is a tactic so they can more readily renegotiate the terms to reflect changed circumstances?
KO: I mean, I don't really see that as necessarily true. I see it as, you know, in their typical Danish perspective, as I learned from working there, is they’re just really frank about, you know, that kind of Scandinavian frankness about where they are financially. They're not going to lose money building these projects. And if they need to shift the risk and focus of their project development to other continents for the time being, I don't think that Orsted has a fear of doing that. They're going to work first for their bottom line. And that's what makes them, frankly, a responsible company and one that's lasted in the marketplace so long. They make good decisions. I know this from kind of working on the inside there, they make great decisions and they're not going to lose money on a project. So, you know, the states can choose, I think, to renegotiate and reengage as they need to, or Orsted can focus their project development activities in other markets until this market kind of turns around itself a little more organically.
EMP: Well, and then we've got Avangrid and South Coast Wind in Massachusetts, each of them saying they have projects that are no longer economic. Why don't we dig down into the domestic content issue under the Inflation Reduction Act? I guess that changed the economics of the renewable energy credits they expected to get from their projects? Explain that for us.
KO: Sure thing, the Inflation Reduction Act extended and expanded what's known as the investment tax credit, or the ITC, which is a really valuable vehicle for creating a market for offshore wind in a new technology as it's expanding in the U.S. And there have been some challenges in terms of getting proper guidance from the federal government on exactly who would apply, how they would apply, in different aspects of their offshore wind projects. And the current guidance is offering this up to 30% investment tax credit opportunity, provided companies are meeting certain domestic supply-chain opportunities. This is not unlike what we've seen in states like Maryland, where to build an offshore wind project, you needed to have a certain amount of local labor and domestic content. In this case, that would be a national requirement. So this would incentivize companies to build their turbines, for example, from steel that was rolled here in the United States and developed here in the United States. Part of the challenge around that is that because the supply chain is relatively nascent here, there are substantive and actual challenges of being able to obtain up to 30% of your domestic content, for example, from local sources. And so companies like Orsted are running up against those challenges and saying, well, we had presumed we will be able to enjoy this investment tax credit. But perhaps we can't, as we learn what those rules are, as they're coming out from the Treasury, because technically and actually, they're not able to be met because of the lack of local supply chain at this point.
EMP: Let's delve into the Jones Act a little bit, shall we? These projects require specialized ships to carry these wind turbine blades that are what how many football pitches long and those aren't made in this country. And the Jones Act requires the ship to be made here. Remind me because I'm a little hazy on the Jones Act.
KO: The Jones Act is something – it's a over 150-year-old act that was formed in the United States to encourage local labor. And again, this concept that we've been talking about local workforce and local production of heavy industry. And this applies to offshore wind in that anything that is being delivered from port-to-port, quote, unquote, as defined in the Jones Act needs to be done on what's called a U.S.-flagged vessel. So a vessel that was built and operated under U.S. requirements. When you build a foundation for an offshore wind farm out at sea, that is now considered a quote “port,” because it is connected to the Outer Continental Shelf seabed. And now this is an offshore port. And so when you take a vessel from, for example, like the port of Norfolk, Virginia, and you take it out to an offshore wind foundation, you are making a port-to-port transfer. And under those Jones Act regulations that were written a very long time ago, for a, you know, kind of a different world, frankly, a U.S.-flagged vessel must be used to make that transfer. And so that is causing a real crimp in the offshore wind sector’s ability to install at scale, because there are no current Jones Act-compliant vessels that can make that kind of move and can install wind turbines at that scale. So it's required that other ships be used from other countries. And this is creating companies that are building offshore wind farms now – and as a reminder to your listeners, there are two offshore wind farms being built off the coast of Massachusetts literally as we're speaking here in September of 2023 – and they are needing to use very creative solutions with feeder barges and, you know, kind of complicated logistics systems that’s driving up cost and risk offshore, increasing dangers and challenges. So be it's a real patchwork system right now. And the first Jones Act-compliant vessel is being built in the Gulf of Mexico. We did learn and you probably have this in your list of challenging headlines, that Dominion Energy who is building that vessel has experienced cost and time overruns. And so that vessel has been delayed. It's not ready for deployment. And it is costing more than they had originally figured. So the Jones Act challenge is one that we've known about in the industry for 20 years. And it's kind of coming to a head as the industry is seeking to pivot from development to deployment. I would recommend to your listeners, if they did have a few extra $100 million dollars that they should get into the business of boat building for offshore wind, because there is quite a bit of demand for it. And you would be fully subscribed for decades immediately.
EMP: Well, there's quite a few congressmen with shipbuilding interests still in their districts that that be with you on that one. So going down the bad headlines, you mentioned Dominion, they have the benefits of monopoly protection in building their facility, but they're still, they're now looking for a partner to come in and “de-risk” the project for them somewhat. It’s just astonishing. And then we have the most recent lease sales. Gulf of Mexico in recent days, only one expression of interest and two receiving no interest whatsoever. And I guess tomorrow they're going to announce the UK lease auction. And that's expected to be a similar flop. And Vattenfall has put the brakes on a big project in UK waters. So, it comes down to economics, right? So what is the answer? Should we be subsidizing it? Can a carbon tax help us get there? How do we levelize the investment so that it's competitive?
KO: Yeah, I think there's certainly been a longstanding debate about the way to properly account for the externalities that are the reality of energy sources that are being, you know, using fossil fuels for generation up to and including natural gas. And how we're looking at not only the environmental impacts, but the health impacts of those type of generation sources. This is, you know, a concept that has been at debate for decades. It is something I think that it would be incredibly politically challenging to do, as we've seen in the past, and certainly in these increasingly partisan times. So I would have skepticism about counting on that approach to make a source financeable, frankly, I mean, I don't know if you have thoughts on this, you've been in the energy space for a long time, too. But the idea of being able to properly account for externalities is something that, unfortunately, I wouldn't see as something politically palatable.
EMP: Yeah, it's unfortunate and, and you still have congressmen and their constituents who call climate change a hoax. So I'm not sure how you get any traction in that kind of an environment. You know, the world is literally burning around our ears, when it's not flooding. And if you can't get traction around the issue with what's happening now, I don't know how many years down the road, it's going to be finally not be able to stand up against that.
KO: I agree that if not now, then when would it be alarming enough for folks to take notice?
EMP: Exactly. Has anyone done an analysis to see how much the Jones Act is adding to cost of offshore wind development?
KO: That's a really great question. I haven't seen that. I would guess it's out there. But I haven't seen it. And I'm going to look after our conversation to see if I can find something on that because it would be a great data point. I think you're seeing this, you know, maybe what you're alluding to is this kind of push-pull where we are inherently and by the nature of the policies in our country, creating increased cost for this type of development that we supposedly support as an administration, but then are critical when the costs are high. So how are we really doing the moonshot? How are we going to the 30-gigawatt-by-2030 target as a whole-of-government approach, if it's fractured by all of these policies that in fact make it more challenging, more time consuming, more risky and more expensive?
EMP: Yeah, and we never did get into the permitting challenges.
KO: Exactly. And, you know, so that's another reason that the inflationary pressures really are multiplied in the offshore wind space, because the permitting and siting and regulations by design take about seven to nine years for an offshore wind farm to be sited, built and enter operations. And if that is like the baseline for normal – seven to nine years – then you know that for me, that screams a problem. And that is something that the federal regulators essentially say this is how long the process takes. In fact, it ends up taking longer than that, even though federal agencies have tried to implement things like Fast 41, which is a transparent dashboard, where any stakeholder can log on and see the status of their permits or streamlining the National Environmental Policy Act regulations so that there's page limits or time-limit requirements. It's still taking federal agencies very many years to review, and then issue the permits for these projects. And so during that big time gap and time lag, the inflationary pressures only vacillate that much more and change over time. So there isn't a lot of assurance for developers when they bid on these projects, what their final costs will be as the cost of all their materials and supply chain opportunities change over that period of time. So there's a real challenge between the agencies, among the agencies, between the agencies and the developers, and it's a longstanding issue.
EMP: You've got the timeline for onshore transmission lines, on comparable timescales – over a decade, many of them. And with every wind farm you construct offshore, you have to construct a transmission line as well. Unless you got something like an Atlantic Wind Connection. We could really use some overarching guidance, I think and something better than scattershot state-by-state subsidies in order to promote a robust development and help us get to scale.
KO: Agreed, and that's something, as a sector, you know, when the Biden administration came into office, I think, you know, we had recommended an Offshore Wind Czar that was at the Cabinet level that could coordinate across not only, you know, the agencies, but across Cabinet levels, because we have some in the Department of Interior, Department of Commerce, Department of Transportation, all having a role in seeing offshore wind succeed. And having something at, you know, that just reports directly to the White House, and, frankly, can cut through some of these challenges and the squabbles that end up, on an operational perspective, causing some serious delays and challenges on the ground.
EMP: Well, Kris, I've gone through my notes here. As I do every guest, I’ll offer it back to you if there's anything else to bring up we haven't for the good of the discussion.
KO: I still remain so optimistic about offshore wind, it's the only thing I've done professionally since grad school. And so this makes it entering my 23rd year and I really still just have so much faith in the long game here. And as we've talked about with your listeners, and I think the theme here is there are a lot of short- and medium-term challenges for offshore wind. But the stakes have never been higher for us, from not only a climate perspective, but from an economic development and markets perspective and an environmental perspective. Because I would like to offer that even if you didn't agree that climate change was an existential threat to humanity, you'd still like to have an environment that was cleaner than one that is given to us by fossil-fuel production. You'd want to breathe clean air and have a human health indices that's really positive and, you know, our nation deserves better. It deserves more deserves something that a technology like offshore wind can bring. So I think that over time, like many technologies – you know, utility poles were objected to 100 years ago. You know, over time, offshore wind will become part of the landscape in the United States, and we're sticking with it for the long game.
EMP: Kris Ohleth executive director with the Initiative on Offshore Wind, thank you so much for your time.
KO: Thanks, Bryan, for your great work on this. We really appreciate it
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