This is Dana Perkins and you're listening to Switched on the BNEF podcast. Recently we talked about what's happening in the solar industry, So today we're going to pivot to another popular clean power solution, that's wind. We're going to have a specific focus today on what's happening in the United States, and that's because the Biden administration has set out an ambitious target of thirty gigawatts of installed offshore
wind capacity by twenty thirty. While onshore wind has historically done well in the US, embracing offshore is relatively new, but with a quarter of all US offshore wind deals canceled in twenty twenty three, this ambitious goal is looking increasingly out of reach. So what lies behind these cancelations and is this an issue only facing the offshore sector or is the US onshore wind sector in an equally
precarious position. To find out more, today I'm joined by two members of BNF's WIN Team, both based in New York, Chelsea, Jean Michel and Atten Jane, and they discuss some of their findings from bnfs recently published BNF Onshore and Offshore Wind outlooks for twenty twenty three. They share the impacts of the two eyes, interest rates and inflation on US offshore wind projects, and when a developer cancels one of
these offshore wind contracts, what actually happens. In many other parts of the world, you can't immediately rebid on the same project. But in the US, well, we're going to find this isn't necessarily the case, and they're going to give us a little more color under what circumstances. We also return once again to a pod favorite urcut the Texas grid, where onshore wind developments have been rolled out with far less friction and grid connection wait times are
significantly shorter than in other parts of the States. So what should other parts of the country be learning both good and bad from the lone Star state. We'll talk about that too. To access are onshore and offshore wind outlooks and other related insights and reports. B and EF subscribers will be able to find them on BNF dot com, on BNF Go on the Bloomberg terminal, or on BNF's
mobile app. If you like this podcast, make sure to subscribe, and if you'd like to share it with others, make sure to give us a review, But right now, let's jump straight into our conversation with Chelsea and Aton. Chelsea, thank you very much for joining the show today.
Hi Dana, thanks for having me.
And Aton nice to have you.
Here as well. Thank you, Dana.
So we're going to talk about onshore and offshore when today and I like to actually think of this particular industry as one of the darlings of renewable energy. There's been so much positive conversation historically around wind and its capacity factors. Why do you think wind has historically had such a strong reputation within renewables.
If you look at the story of the last two decades for renewables in the US, wind part actually has been the dominant force of clean energy transition in the country. And that's because wind has been able to enjoy a lot of subsidies in the US in the form of production tax credits. Those subsidies started way back in nineteen ninety two and continues till today and are going to continue at least for another ten years, and there are some estimates that maybe it can go all the way
up to twenty fifty these subsidies. So wind power delivers cheap form of eleccity in the country. Developers enjoy the subsidy benefits, which means they enjoy a handsome returns. There is some concern with the macroeconomic situation today, but overall wind has been a profitable business for the developers. We have enjoyed a local supply chain for onshore wind in the country. That means wind generates jobs. So everyone actually loves wind and.
That's onshore wind. But what is the history in US's relationship with offshore.
Wind bin Yeah, thanks Tina, and I guess if I could also add on a little bit more as well on the wind side of things. For being alling child, I think that if you compare the generation profile of a wind farm to a solar farm, right, wind's not
going to cut out at night. When you're looking at the capacity factor of a wind farm, So a capacity factor being essentially you know how efficiently that wind farm works over the course of a year, Basically how much does it generate versus how much is possible for it
to generate. Wind farm capacity factors tend to be closer to around thirty percent versus for solar when you're looking at closer to twenty percent, and so you're basically able to generate a lot more renewable electricity with the same installed capacity. Also, what wind has is it has scale, and so for onshure wind you might see projects in you know, the hundred megawat side of things, whereas for
solar they're usually a lot smaller. If you go offshore, then you start to look at gigawatt scale, And for context, in the US, one gigawat project offshore can power around three hundred and fifty thousand homes. So that's a lot of renewable electricity that you're generating at a large scale at higher efficiencies. Now, if we take a look at the history of offshore wind in the US, it has been a series of stop go stop, go, stop, go,
stop go, basically a lot of false starts. For context, today there are only seven turbines operating in the waters. So there's thirty megawats off the coast of Rhode Island
and there's twelve megawats off the coast of Virginia. That being said, there are also two projects currently under construction right now that's over nine hundred megawats, almost a gigawatt that's going to be commissioning all next year into twenty twenty four, and so we started to see kind of the first really good signs of the US offshore wind industry to start kicking off when the Biden administration began to take over. So we saw lots of federal approvals
come through. The first large scale offshore wind farm in the US was approved by the Biden administration. And we've also seen I mentioned that the first few projects start to get constructed. So that's kind of the overall history of the US about lots of false starts, but now we're starting to see some construction. And Atton hinted a little bit more about like the macroeconomic environment that we're in right now, which is meant that we've started to see a lot more struggles in the industry.
Well, let's go into that, go into the macroeconomic environment. I think everyone is very used to thinking about inflation and higher interest rates at the moment, but this is hitting the wind industry in particular in the US quite hard. What are some of the obstacles that currently granted winners of auctions are being faced with and really questioning whether or not to move forward with some of the projects. That they have been granted the rights to do and to build.
Yeah, I guess there are the two eyes which are the big problems right now for the project developers, the inflation and the interest rates. The inflation has come down from the peaks that we saw last year, but the interest rates are still very high. At the time of the recording of this podcast, I just had a quick check and the secured overnight financing rate the SOFA, which is like a benchmark to price loans in this country, that was at about five point three percent compared to
near zero levels we saw during the pandemic. So developers are really feeling the pinch of these interest rates and they all have their backs to the wall because there's very little they can really do around the inflation and
the interestate situation. And we actually did some analysis earlier this year around what has been the impact of inflation and interest rates on the US offshore wind project lcoees, and what we found was there's a near fifty percent increase in the costs of the US offshore wind Elecxcity just because of these challenges we have seen. If I have to run you through the math around it, I would go about by asking you to first remember there
are a lot of sevens involved here. Back in twenty twenty one, the levelized cost of flexity for a subsidized offshore wind farm basically a project that had access to the federal tax credits, that number was about seventy seven
dollars per megawata. Now, what has happened is inflation resulted in an increase in the KPX and OPIX for these projects, and the levelized cost of elixity went up by about seventeen dollars per megawata, and then the interest rates led to another hike of twenty seven dollars per mait what are to that number? But between the interest rate hikes and the inflation, we also saw the federal government pass the Inflation Reduction Act last year, and the IRA has
provisions for bonus tax credits. Now, if we have a conservative estimate on what bonuses these projects can qualify, we can actually see the impact. In a minor decline, the LCOE goes down by about seven dollars per megawatar, and so net and net, what you come to is one hundred and fourteen dollars per megawatar. Number in twenty twenty three,
compared to the seventy seven dollar you had. So seventy seven goes up by seventeen because of the inflation, goes up by another twenty seven because of the interest rates, goes down by seven because of the bonus tax credits, and net you reach at about one hundred and fourteen dollars per macota.
Now, to put this in context, and I want to keep this show about wind, I mean, that's that's what we're here to discuss. But if the LCOE for wind is worsening compare to other industries, does it remain competitive and does it remain lower? Is that one fourteen that you pointed out per megawat hour? Is that cost competitive with natural gas in the US or coal in the US?
Yeah, it still is quite competitive. You have to also think about it from this perspective that wind really has zero variable costs. Some of the variable costs associated with operating a gas turbine is quite high. Sometimes the fuel cost could be as igh as just the energy costs from an offshobin project. If your fuel costs are very high, and there is volatility associated with fuel prices as well, so it's not really a likeful like comparison. To make
with say a gas or a coal project. But I think that one hundred and fourteen dollars per megota number, put in the right context is still quite competitive.
And I guess if I could also just add something that one hundred and fourteen dollars per megawat hour that attens talking about, that's for offshore wind. So for onsure wind, this is lower. For solar this is lower. And so you know, I kind of want to make that distinction that offshore wind and onshore wind. They are still wind generation, but offshore is significantly more expensive and also just has a different generation profile. It has significantly higher capacity factors.
So I mentioned thirty percent earlier on in the podcast. Offshore in the US can reach as high as forty five percent forty eight percent in some cases, And so with that in mind, there is a distinction between the two. Also, I think it's important to clarify that what Atten has been saying about interest rates and inflation, this isn't just
impacting wind. This has impacted renewables and other technologies, other industries across the board, and so yes, while the price of wind is going up, we've also seen the price of solar go up. We've seen the price of so many different technologies go up and the last few months or the last year or so, and so yes, it might not necessarily be as competitive now as it was in the past. But I guess the opposite of the idiom rising tide lifts ale boats, but rising interest rates
raise the cost of capital for everyone. And then the last piece on offshore wind that I think is important to mention is that it has the highest levelized cost of electricity across renewable technologies. So if you compare it to on sure wind, and you compare it to on
your solar, offshore wind's a lot higher. And if you take a look at why it is that states are building offshore wind, it's not because it's the cheapest source of power, right, It's because you see sometimes really high price spikes in the winter due to high gas prices or gas shortages in the Northeast. And so offshore wind as a technology, because it generates a lot during the winter, it can kind of offset that price spike, so that
provides additional benefits. These are also massive billion dollar infrastructure projects, so there's a lot of economic development opportunities associated with it. Also, environmental benefits as well. I mentioned the scale that offshore wind has gigawatt scale that you can build, and so there's all of these other pieces that aren't necessarily contextualized within an LCOE that adds the benefits to offshore wind and can make it more competitive in certain respects.
Now, these increased costs have led some developers to think about whether or not to proceed with certain projects, and my question really comes down to what happens then, What is the process of pulling out of a project, How prevalent is this across the different developers who have won auctions, and are they likely to then stay in the game for the future.
Well, at the time of the recording of this podcast, we've just heard that the total projects that have been canceled so far this year is at about five point five gig awart, including the two point three gigawaut of
projects that osted recently canceled. The other developers that have canceled some capacity include a Van Grade that have canceled I mean they have canceled around two gigaout of projects, and shall Ocean Winds they have canceled at another one point two gig awut so I think what essentially all these developers are now trying to look at is can they rebid in future auctions? And most states allow this levey for their developers essentially.
So to contextualize, we've seen over twelve gigawatts of US offshore wind projects seek to either cancel or renegotiate their off take contracts. To put that into context, twelve gigawatts of offshore wind can power around four point two million homes, and that represents over half of all contracted US offshore wind capacity. Now what I mean when I say contracted capacity, So these are projects that have won contracts via a
competitive solicitation in state auctions. So a state like New York, which has a target of nine gigawatts by twenty thirty five, will have these solicitations or these auctions to procure power, and developers will bid in and say, oh, I can provide it at this price, I can provide it at this lower price, and then usually some other elements like economic development, environmental benefits, et cetera, and then these contracts
will be awarded. Now what's been happening is a lot of these contracts have been awarded in twenty nineteen and twenty twenty, where developers were making assumptions on what interest rates would be like, what inflation would be like, and we've seen over the last year or so how this reality has shifted, and so when they bid at their contract prices. In the US, this is union because these contracts aren't indexed to inflation. So in the UK you might have a fifteen year off take contract and then
it'll go up by inflation each year. This is also the case for Poland partially for Ireland. In the US this is not the case, so you'll receive a flat price over the entire contract term, be that twenty twenty five years, or you'll receive a flat escalator, so it might go up by like one percent, two percent, three percent, et cetera. And so what has happened is that developers baked in certain assumptions on what the macroeconomic environment would
be like when they needed to reach financial close. So this is around now for a lot of these projects that bid in twenty nineteen and twenty twenty. But the reality has shifted so much that it's put the economic viability of their.
Projects at risk.
And so that's what Atten was talking about a little bit earlier in terms of the rise in LCOE. Now developers are you know, kind of doing the maths and saying, wait, this isn't checking out in this way. And so in terms of the penalties data that you asked about, like what exactly happens when you want to cancel, there might be requests to renegotiate. So this happened in the case of Orsted and VP Equinora in New York, where they ask for off take price increases of around twenty seven
to sixty six percent. The New York Public Service Commission said, no, we will not increase your prices. And so now the developers are at a place where they need to decide if they're going to cancel their contracts or if they're going to try and figure out other pieces to make
the projects work. New York has also come out and said that they are willing to put forward a backfill auction, So in the case that these contracts are canceled, they'll put forward another solicitation, say sooner than usual, in order to try and backfill those projects and make up for
some of that lost capacity. That's around four point three kigwats in New York in the case of Massachusetts Avon Grid and Shell Ocean Winds, the developers that Atton had mentioned, they have canceled their off take contracts entirely, and so they are paying forty nine million dollars and sixty million
dollars in fees for canceling those off take contracts. And in the case of Oristed's Ocean Wind one in two projects in New Jersey, this is recent news, so we still have yet to see what's going on in there. But these projects have actually halted development altogether. So in the case of Massachusetts, these projects have said that they want to rebid at higher prices, but in the case of New Jersey, there's no indication of what the future
of these projects hold. So there are some penalties, there's some renegotiation, there's a couple of different things that developers can take, but we've seen a couple of different approaches at this point.
Now, wind farm development can take some time to get off the ground, and presumably if that moved a little bit faster, there would be less time for economic conditions to change so much in the amount of time it takes to get these things online. So let's talk a little bit about time. How long it takes to bring things online. There are a number of factors that weigh into this, including grid constraints, which we've actually talked about
on this show in the past, and permitting delays. What is the state of play right now in the majority of the US, And let's leave Urkot to the side, because I actually want to come back to that and talk about how this is an outlier both in terms of how that electricity system is structured and what they have done to be come the leading state in the United States when it comes to wind.
Dana, you highlighted like a really really key issue. So for offshore wind, these timelines can take eight to ten years in the US, can take as long as fourteen years, sometimes even longer as we're waiting to hear about the fate of some of these projects. And so with that in mind, New York recently awarded four gigawatts of offshore wind capacity to very early stage projects. And so these were projects that won seabed lease in a federal auction
just last year and they're hoping to commission by twenty thirty. Now, I mentioned eight to ten years and sometimes as long as fourteen years, and so for US, we think they're going to commission into the twenty thirties, so later on than they're hoping for. And this is because of things like long permitting timelines, needing to figure out your transmission offshore wind again like huge infrastructure projects, and the US supply chain is extremely nascent on the offshore side of things.
And because these projects just secured seabed leases last year and they won their off take contracts this year, this means that they are locked into pricing for when they commit in the twenty thirties, which is like a high level of risk that we usually don't see in other markets. So, for example, in the UK, you're required to have your permits as well as access to a grid connection before you bid for off take, and that's usually closer to when you'll reach financial close and have a better idea
of how much your project's actually going to cost. I'll pivot to add and to talk a little bit more about the onshore side.
Yeah, the onshore projects come up relatively quicker than offshore, but still take a lot of time. In the US, I think the average time varies at around four to five years, but in some cases can go even high as up to a decade or even more. And the major challenge that most of the project developers in the
US phase for onshore is permitting. Researchers at the Columbia Law School identified about two hundred and twenty eight local and about nine state level restrictions that have impacted projects in about forty five states of the country, so we
almost every state has the same kind of problems. And if you have to kind of like break down what kind of challenges these projects face, they're essentially like seven may types, and then if you have to bucket all the other challenges into other category, there's probably an eighth one as well. The most common form of wind farm limitation that we see in the US is about a required distance limit or sometimes called as a set pack limit between the turbines and public or private property lines
imposed by the local councils. And we have seen this kind of a challenge really emerge in the Midwest States, which is really has become some sort of a hotbed for opposition for both onshore wind farms as well as solar projects in the country. And if I have to talk about some of the states that are really increasing the pressure on the developers or like really pushing back on wind par One state that comes to my mind is Indiana. Indiana has about twenty local counties where there
is some sort of restriction that wind projects face. There are other important states with good wind resource like Nebraska, Ohio, Texas as well to an extent where the developers are really facing these permitting challenges.
Pivot to Texas, the island grid for the lone Star state urcut. They have been able to get some of the projects down to as little as two years. How and why have they been able to pull that off?
Yeah, so Texas is just Texas. As they say, in the last five year, wind projects have come faster in Texas than many other US par regions. And there's like a multitude of reasons for that. First thing. First, much of the land in Texas is actually privately owned, which means that it simplifies the negotiations that a developer goes through for land leases and right of the way compared to other regions where land ownership is a little bit
more complex. ERCOTT also operates as an independent grid, which can allow for a faster integration of new renewable energy resources. Just because they can control all these permitting studies, technical assessments around par injection into the grid, and so on, and permitting can also be quick in the state because
there are relatively simpler regulations. Texas also gets an advantage for easy access to equipment for the developers because it has a lot of existing wind factories inside the state, and also some of the neighbors, like Oklahoma, have a robust wind supply chain and a logistics network, so essentially getting equipment and getting services that are needed to build
a wind farm is just easily available there. So while we have seen Texas really grow very sharply in terms of adding new wind capacity, that could actually change because there are risks building in the system. So earlier this year, Texas lawmakers tried to pass a bill that, if approved, would have allowed large scale wind and solar projects to first seek an approval from the state's Public Utility Commission
before even beginning construction. That bill would have also required wind turbines to be at least about three thousand feet away from any property line. This could make it extremely challenging for the developers to find suitable project sites. There were other bill provisions which would have meant that the environmental impact of view process also becomes a little bit
more complicated for the developers. Now, this bill did not pass, so right now the developers can have a sigh of a relief, but it can't be ruled out that similar provisions or similar bills could not be introduced in the state's legislature in future.
So what I want to know is how well received or poorly received wind, a new build of wind is perceived in the United States. And I'm thinking immediately of this term nimbiism, which I'm sure many people are familiar with, the not in my backyard, folks, and the fact that there were projects in the state of Massachusetts which were often opposed by the Kennedys and off the coast of Cape cod that really weren't going to get the backing that they needed in order to get set up there.
Are we finding that, as you pointed out, provisions being added regarding how close they can be to someone's property line. Are we finding that there is a a reticence to see wind farms set up in sight of everyday citizens and importantly headed into an election your voters, or is this something that the country's embracing as a domestic source of energy, and frankly, I think wind turbines are a bit beautiful.
Well, I think it's a mixed bag of a situation right now because there are so many people people like me who really love wind farms. I may be a little bit biased, but there are many people like me who really see the economic advantage that a wind project brings to the community in terms of additional payments to the landowners, local jobs, and just like a creation of a new supply chain which wasn't really there earlier. So there are clear economic advantages that wind farm bring.
Are they leading to a surgeon jobs in the US and does it have that as something that is making it popular.
Yes, I guess one of the fastest growing jobs in the US actually is that of a wind turbine technician. So it is really adding to in some of the local communities, particularly in the rural parts of the countries in Midwest, which is a good thing for economy. So just because of all these job growths all the other benefits of the wind farm to a community, wind farms are actually become a topic which is bringing a lot of bipartisan support.
Really, that's cool.
I think, just like one thing to know is Dana. You mentioned the Cape Cod example. We saw Cape wind fall through as a project earlier on in the US offshrew win story. I think one key thing to know is that the offshore wind farms now are cited further offshore, and so people can get a little bit more behind an offshore wind farm when it's more of a speck in the distance rather than being right up front, close and personal.
So let's talk a little bit about our market outlooks for both of these industries. Now, the Biden administration has a target of adding thirty gigawatts of offshore wind capacity by twenty thirty. Do we see that happening? And more simply put, what do our market outlooks tell us regarding what we think will be built in the near term in the medium term.
To be blunt, no, we don't think that the target is going to be met. In fact, since we've been forecasting the US market, we've never once said that thirty gigawatts is going to be reached. So this wasn't one of those situations where the target came out and we said, oh my goodness, like they're going to meet it. There's a lot of bottlenecks in the US that stifle this build. So we've talked a lot about permitting, mostly from the onshore side of things, but for offshore this is also
very rigorous. So it's not only the federal permitting process that you have to go through, but also you're dealing with local permits. You know where exactly that cable is going to be when it falls onshore. You're dealing with state permits. You're also dealing with your transmission service operators on a regional basis, and so there's all these different entities between the states and the local government and the federal government, and you have to get all your ducks
in a row. That usually working in all of these different pieces is not what a lot of more mature European markets have been doing as they build offshore wind. So this stifles a lot of US offshore wind build I also mentioned it's a nascent industry, and so you
really do have to build up that supply chain. If you take a look at the projects that are currently under construction right now, Vineyard Wind and South Fork Wind, they're receiving a lot of their components from Europe, and so you have these foundations, these turbines, making days long strips over the Atlantic and that introduces a level of risk for delays, and you know it can create a
domino effect. So this is something that or Steit highlighted in a key reason for the cancelation of their Ocean Wind one and two projects is that supplier delays caused a knock on effect and when you're dealing with components being shipped from so far away, this means that you're taking on a higher level of risk in this newer market rather than compared to a newer market in Europe.
And so with all of that in mind, we recently updated our US forecast and it looks like by twenty thirty, we think the US is more likely to install roughly half of that thirty gig go out target.
Yeah, on onshore picture is a little bit more rosier than offshore in terms of we're going to see an increase in the installers going from next year onwards. So we think between now in twenty thirty, you has got to add about one hundred and twelve gig of new on shore wind projects, which is if you actually add both on shore and offshore projects combined, would be nearly enough to really double or nearly double the total installed
wind capacity in the country. So yeah, onshore wind is actually going to be a major driver of growth of the total wind power sector in the country between now and twenty thirty.
Zooming out to the global picture. As we prepare for COP twenty eight, the first week of December, we'll be releasing a white paper which focuses on the tripling renewables ambition, which is part of the COP twenty eight, part of the targets that they're setting forward. Can we talk about what percentage of global power generation currently comes from wind and well where it was in the not too distant past, and where we think it might go.
Yeah. So, essentially, in twenty twenty two, global wind power generation accounted for about eight percent of global generation, but that is up from four percent six years prior, so I think that's a pretty interesting statistic.
So, following on to that discussion about tripling renewables, if not wind with it, faced with all of these obstacles that have cropped up recently and our need to decarbonize quickly in order to meet net zero targets which enable us to limit planetary warming, what else is there and is there anything that you believe can fill that void from a capacity standpoint that wind does.
Yeah, there are very few technologies which are carbon free and can deliver electricity at scale and at a relatively competitive price, and wind is one of them. Now, solar is also another technology if it is discod but like, you don't really get solar energy during the nighttime. So essentially that if you have to really meet round the clock electricity supply, you need a reliable electricity source which can provide electricity not just during the daytime but also
nightas and wind that source. So I guess policymakers do really need to understand if they do not really support wind power, if they do not make building new wind farms easy, if they do not fasten up the permitting process, the transmission hurdles, how are you going to meet your zero carbon elexicity demands in the future. So if I don't really see a lot of options beyond wind at this point in.
Time, and if I could just add one last piece there, I mean, I think it's important to remember that wind, like, even though you have higher capacity factors and thus you're able to generate more renewable electrons with the same capacity compared to other renewables. That being said, it's still variable, and so when we're talking about the energy transition, battery
storage is going to become a lot more important. We've been seeing a lot more announcements around pairing offshore wind with electrolyizers and using that add some flexibility to the grid and add some flexibility for developers as well, and so thinking about all of the different ways in which you can store that power, dispatch it in ways where it can be used a little bit more flexibly and where the demand is, and you know, upgrading the grid and all of that great fun stuff I think is
going to be key because wind, I think is a really important technology in the transition, but it can't do it alone.
Aton Chelsea, thank you very much for joining today. Thank you, Dana. Bloomberg n EF is a service provided by Bloomberg Finance LP in its affiliates. This recording does not constitute, nor should it be construed as investment advice, investment recommendations, or a recommendation as to an investment or other strategy. Bloomberg n EF should not be considered as information sufficient upon
which to base an investment decision. Neither Bloomberg Finance LP, nor any of its affiliates, makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability as a result of this recording is expressly disclaimed.
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