SouthCoast Wind report suggests pricey future for offshore wind
Costs up more than 20% since 2019 – a seller’s market
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A REPORT COMMISSIONED by SouthCoast Wind indicates the cost of building and operating US offshore wind farms has risen by more than 20 percent since 2019, suggesting the Massachusetts procurement scheduled for next year could be pricey.
SouthCoast Wind on Monday said it was seeking to terminate the power purchase agreements it previously signed with Massachusetts because of changing economic circumstances but looking to rebid the projects under new terms next year.
To demonstrate for regulators how the economics of offshore wind has shifted, SouthCoast commissioned a report on the changing state of the US offshore wind industry.
“The overall conclusion of the report is that the costs of building and operating offshore wind farms have likely increased above 20 percent since 2019, in addition to the significant increase in financing costs. The economics and ability to fund offshore wind in the US has been adversely impacted,” the report said. “It will take several years and significant investment to overcome some of these challenges. Recent quarterly losses announced by the two leading original equipment manufacturers, Siemens and Vestas, also supports the view that this is not an industry that is in a healthy and mature state.”
The Wood report illustrates how global forces, including inflation, supply chain difficulties, and the war in Ukraine, are upending the cost structure of offshore wind. For example, the price of natural gas in Europe has soared since the war in Ukraine began, as Russia reduced natural gas exports to Europe and European countries scrambled to reduce their reliance on natural gas. That dramatic shift has accelerated the pace of inflation and driven up the costs of manufacturing firms, particularly wind turbine makers.
“As a result, the prices once agreed on for turbines have caused massive losses to manufacturers,” the report said. “In November 2022, Siemens Gamesa reported an annual loss of $965 million; the company announced cost-cutting programs that may lead to reducing nearly 11 percent of its workforce. Vestas Wind has also reported a loss of nearly $151 million for the third quarter of 2022.”
All this turmoil in the industry is coming as demand for turbines is on the upswing, both in Europe as countries try to reduce their reliance on natural gas and in the US as states and the federal government race to achieve climate change goals that are heavily reliant on offshore wind.
Massachusetts is at the forefront of that effort. Vineyard Wind, the nation’s first industrial-scale wind farm, is beginning construction now and expected to begin generating some electricity later this year. But the state’s second and third procurements – worth a total of 2,400 megawatts in all — are in danger of being wiped out as the two wind farm operators who secured power supply contracts for their projects now say those contracts are not sufficient to attract financing.
The Wood report suggests the international economy is starting to stabilize, but it will be some time before that actually happens. “Given the current market conditions, our view is that the global and domestic markets have shifted to a seller’s market for the foreseeable future,” the report said.