Perhaps no sector within the US energy industry has been affected more by the post-COVID-19 economic turmoil than offshore wind. With the sector already walking a fine line to remain competitive versus established onshore generation, the combination of inflation, rising interest rates and supply chain complications has forced several prospective offshore wind projects to cancel or indefinitely postpone development plans. Other projects, such as the Boardwalk Offshore Wind (Empire Wind) (Rockaway Peninsula) and Sunrise Wind I & II Offshore Farm (Holbrook) offshore projects, have remained on track but have required renegotiated contracts better adjusted to the current economic climate. With updated strike prices of over $146/MWh and $155/MWh, the bar has been raised for states still intent on reaching their aggressive offshore wind procurement targets.

The US offshore wind industry continues settling into the post-pandemic economic climate, with recent developments a steady mix of project advancements, delays and cancellations. Still heavily reliant on robust federal support, updated contract prices for offshore wind farms are expected to reflect higher capital costs as a result of financial pressures stemming from inflation, rising interest rates and supply chain headaches.

Most recently, renewed contracts for the Sunrise and Empire Wind offshore projects in New York underscore just how tumultuous the past four years have been, with rates increasing over 30% from prices negotiated prior to the COVID-19 pandemic. As a result, forecast financial returns for these two projects are expected to be sufficient to pay project debt while returns to equity holders steadily diminish over the forecast period due to rising forecast curtailment.

Two steps forward, one step back

One of the first goals of the Biden administration at the start of 2021 was to jump-start the sluggish offshore wind industry in the US by announcing an aggressive target of 30 GW of offshore wind by 2030. In efforts to achieve this target, it implemented various measures to expedite permitting stages and long-term federal tax credits as part of the Inflation Reduction Act of 2022. This jolt of federal support gave stability to projects in development along the East Coast, with sub-$100/MWh contracts already in place.

This stability proved to be short-lived, however, as economic hurdles in the wake of the COVID-19 pandemic quickly mounted and exposed the razor-thin margins many offshore wind projects were working with. While state and federal support remained, capital costs of early-stage offshore wind farms rapidly increased, and many contracts — negotiated pre-pandemic — were no longer economically viable. As the industry continues to adjust to this ongoing market volatility, it has been a series of two steps forward and one step back for offshore wind.

In October 2023, Ørsted A/S announced it was canceling development of the Ocean Wind 1 and Ocean Wind 2 projects off the coast of New Jersey. Ocean Wind 1 had received federal approval just four months prior. Among the reasons for Ørsted scrapping the projects altogether was the anticipation the projects would not be eligible for the 10% energy community tax credit boost. Ørsted agreed on a settlement to pay the state of New Jersey $125 million as a result of the cancellation.

In December 2023, the US offshore wind industry took a major step forward, however, as the first turbine in the 132-MW South Fork Offshore Wind Project began producing power. The project began commercial operations in March 2024, becoming the largest operating offshore wind farm in the country. But South Fork's operational capacity lead was short-lived, as 10 turbines were commissioned in June 2024 at the Vineyard Offshore Wind Project off the coast of Massachusetts, pushing its operating capacity to 136 MW. The project, owned by Avangrid Inc., will reach 806 MW once fully operational in 2025.

In January 2024, Ørsted suspended development of the Skipjack and Skipjack 2 projects, off the coast of Maryland, stating that the projects were no longer economically viable. In April, Maryland Gov. Wes Moore signed a bill to initiate future offshore wind solicitations. Ørsted aims to reposition the projects for future offtake opportunities.

Other developments in 2024 include the New York State Energy Research and Development Authority (NYSERDA) canceling the auction results of its third offshore wind solicitation, after GE Vernova Inc. halted production of the turbine that developers were planning to use for the projects. Construction and operation plans for Avangrid's New England Wind (Park City Wind Offshore) and New England Wind 2 Offshore Project (Commonwealth Wind) projects received authorization from the US Interior Department. Two projects developed by Invenergy LLC and Attentive Energy LLC totaling 3.7 GW were awarded in New Jersey's latest solicitation.

Rebid pricing — a new start for offshore wind?

Perhaps the most notable development came in June 2024 when New York state awarded updated contract prices to Empire Wind and Sunrise Wind (shown in the above map as numbers 10 and 5, respectively). The updated rates came after the projects were selected in the state's fourth offshore wind solicitation in February 2024. Both projects, along with Beacon Wind — a joint venture between BP PLC and Equinor ASA — appealed for renegotiated contracts in late 2023, which NYSERDA subsequently rejected.

The renegotiated contracts reported index offshore renewable energy certificate prices of $155/MWh and $146/MWh, both more than a 30% increase from prior contract prices of $118.38/MWh and $110.37/MWh for Empire Wind and Sunrise Wind, respectively. The renegotiated prices aim to keep New York on track for its clean energy goals while creating a more secure financial footing for these projects.

Based on the reported rebid prices, S&P Global Market Intelligence estimated the value of these contracts based on the forecast performance of Empire and Sunrise over the financing period. Estimations were performed using the Market Intelligence Power Evaluator analytical tool, with asset performance projections from the Market Intelligence Power Forecast as of March 31, 2024.

The capital-intensive nature of offshore wind projects, coupled with deployment still being in the early stages, generally drives a greater reliance on debt to optimize capital structure. The implied weighted average cost of capital is 8.3%. The analysis further assumes a step-up bonus of 10% in the investment tax credit for interconnection onshore in identified energy communities.

During the portfolio's first years of operation, it produces a forecast 6.8 TWh per year at an estimated contract rate of $148/MWh, which escalates through the contract period. The portfolio's generation is forecast to reduce materially after 2032, as the overall expansion of green energy in New York drives increasing solar penetration and curtailment potential. Post-2035 volumes stabilize at 5.1 TWh/year.

Equity cash flows average a forecast $271 million between 2027 and 2032, after which curtailed volumes impact distributions available to equity holders. Even with curtailment, energy revenues from the contracts are forecast to be sufficient to service portfolio debt and make reduced distributions to equity holders. While the new contracts are estimated to provide sufficient revenues for project financing, the forecast of curtailed generation keeps the portfolio from earning revenues sufficient to deliver a full return to equity holders over the contract term. As New York expands its fleet of renewable resources over the next 10 years, reducing curtailment risk may become increasingly important for offshore wind.

^{Data visualizations by Leigh Lunas and Shirley Gil.
For wholesale prices and supply and demand projections, see the S&P Global Market Intelligence Power Forecast. 
Regulatory Research Associates is a group within S&P Global Commodity Insights.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}