US offshore wind highs and lows

Such global growth is predicted to continue over the next decade, with 380GW of offshore wind capacity to be added across 32 markets.¹ The US offshore wind market has been developing at a more measured pace and has experienced recent highs that have greatly incentivised/helped and lows that have negatively impacted the market. In this article, we explore these recent US offshore wind highs and lows, as well as outlooks, for leasing and permitting, interconnection, tax, offtake solicitations and actions, mergers and acquisitions (M&A) activity, and the supply chain.

Leasing and permitting

The Bureau of Ocean Energy Management (BOEM) has been aggressively pushing to meet the Biden administration’s commitment to deploy 30GW of offshore wind energy capacity by 2030 and 15GW of floating offshore wind energy capacity by 2035.

In 2023 and early 2024 alone, BOEM conducted the following offshore wind leasing and permitting activities:

* Gulf of Mexico – Identified a total of seven final wind energy areas (WEAs), finalised the environmental assessment for the entire 30-million acre potential leasing area for leasing and site assessment activities, conducted an auction for three lease areas in the Gulf of Mexico, and proposed a second auction for four lease areas in the Gulf of Mexico.

* Gulf of Maine – Issued a call for information and nominations, initiated an environmental assessment for leasing and site assessment activities, and identified a draft and a final WEA that has the potential for 10GW for Massachusetts and 3GW for Maine.

* Central Atlantic – Identified three final WEAs offshore Delaware, Maryland, and Virginia, initiated the environmental assessment for leasing and site assessment activities, and issued a proposed sale for one lease area offshore Delaware and Maryland and one lease area offshore Virginia.

* Oregon – Identified two draft and final WEAs off the coast of Oregon and initiated the environmental assessment for leasing and site assessment activities.

* Construction and operation plan (COP) approvals – Approved COPs for six offshore wind projects (Ocean Wind I, Revolution Wind, Coastal Virginia Offshore Wind, Empire Wind 1, Empire Wind 2, and Sunrise Wind)

In the coming year, BOEM is poised to continue to take significant actions to expand US offshore wind development. BOEM has announced that it will auction two lease areas off the Central Atlantic coast and four lease areas in the Gulf of Mexico. BOEM will finalise the environmental assessments for the WEAs off the Oregon coast and in the Gulf of Maine, and issue proposed sale notices and final sale notices, and conduct auctions for at least one lease area in the Gulf of Maine and at least one lease area off the Oregon coast, both of which require floating wind technology. In addition, BOEM will continue to review offshore wind project COPs and work towards its goal to review 16 COPs by 2025. Currently, BOEM has approved eight COPs for offshore wind projects.

Interconnection and transmission

As offshore wind lease auctions move forward in the US, it is becoming increasingly clear that bringing all of the desired capacity online and achieving various long-term renewable energy goals will significantly impact the transmission system and related infrastructure.

Accommodating large amounts of new offshore wind capacity interconnected to the onshore transmission system and ultimately delivering that output to end-users is likely to require considerable transmission planning efforts and system investments. The costs of needed transmission system upgrades may be substantial and have the potential, if assigned solely to an offshore wind generation developer, to impact the project economics and jeopardise further development. Recognising the importance of this issue and the need for a better approach, some states, regions and the federal government are taking proactive steps to plan for and facilitate offshore wind development.

For example, the state of New Jersey, which is targeting 11GW of offshore wind capacity by 2040, recently launched a so-called “state agreement approach” or SAA process under which, in coordination with the regional transmission operator, PJM Interconnection LLC, a solicitation process will be held for development of transmission improvements necessary to support 3.5GW of offshore wind output in support of the state’s new offshore wind goals. The associated costs of this would be allocated to system users more broadly, rather than to a single offshore wind developer. This marks the second time New Jersey has used this SAA process to solicit transmission investments in advancing its offshore wind goals, and a proposal window expected to open later this year.

Similarly, the state of New York is targeting 9GW of offshore wind capacity by 2035 and has recognised that this policy goal drives the need for additional transmission to deliver the offshore wind output. The New York Independent System Operator, in coordination with the state’s Public Service Commission, recently identified the Public Policy Transmission Need for transmission investments to interconnect at least 4.77GW of offshore wind output and the associated costs of which would be allocated to system users more broadly, rather than to a single offshore wind developer. A solicitation process to meet that need is expected to continue through 2024 and into 2025.

The US federal government is also taking some proactive steps. In 2023, the US Department of Energy (DOE) commenced the West Coast Offshore Wind Transmission Study assessing offshore wind energy transmission through potential points of interconnection located along the US west coast, which will continue into 2024. The US Federal Energy Regulatory Commission is also expected to issue a final rule in its pending transmission planning rulemaking proceeding. This may require significant reforms to the planning process, which could also support transmission planning processes to facilitate offshore wind development.

While these efforts may take time to fully implement, they are important steps and proactive transmission planning efforts are expected to be crucial to facilitating offshore wind development and meeting various renewable energy policy goals.

Tax

The Inflation Reduction Act (IRA), passed in August 2022, has emerged as the landmark climate change law in the US, injecting more than US$500bn into federal incentives targeted at various green energy initiatives and including tax incentives for wind, solar, carbon capture, electric vehicles, clean hydrogen, and standalone battery storage. Over the course of the latter half of 2023 and into the first quarter of 2024, there has been increasingly pressing demand for regulatory clarification of this massive piece of legislation, resulting in issuance some key guidance relevant, and largely favourable to, the offshore wind space.

Specifically, in November, the Internal Revenue Service (IRS) issued proposed regulations updating treasury regulations under Section 48 of the Internal Revenue Code of 1986, (Code), regarding investment tax credits (ITCs) for renewable energy projects. While these proposed regulations were intended primarily to serve as an update to existing (now outdated) treasury regulations in order to account for changes made by the IRA to Section 48 of the Code, many of the changes effected therein were decidedly favourable to offshore wind.

Specifically, in the context of an offshore wind project, these proposed regulations made clear that the costs associated with all offshore and onshore power conditioning and transfer equipment up to and including those incurred at an onshore substation where the project’s electricity is converted to electrical grid voltage are ITC-eligible and therefore effectively increase the amount of the ITC. Because the manufacturing, construction and installation of these particular components are particularly labour-intensive and costly in the context of an offshore wind project, and because these proposed regulations removed what had been significant doubt as to the ITC-eligibility of these costs, the impact of this unexpected and favourable guidance is proving to be meaningful.

Separately, through a series of notices issued in July 2023 and in March 2024, respectively, the Department of the Treasury and IRS announced their intent to promulgate treasury regulations which, if finalised, would significantly expand the availability of the energy communities bonus adder (EC Bonus) to offshore wind projects. Typically, in order to qualify for the EC Bonus, a project would need to source either 50% of its nameplate capacity or 50% of its square footage to a geographic area that is generally either: 1) a brownfield site for purposes of CERCLA; 2) a site possessing both (i) a certain threshold percentage of traditional fossil fuel employment or tax revenue and (ii) an unemployment rate in excess of the national average, or; 3) the situs of a closed coal mine or coal-fired electric generating unit.

Under the aforementioned series of notices, offshore wind projects with nameplate capacity would be deemed located on land based upon either the location of; 1) land-based power conditioning equipment, eg an onshore substation, or alternatively; 2) certain supervisory, control and data acquisition (SCADA) equipment for purposes of determining whether such projects are located in an energy community and therefore eligible for the EC Bonus. These developments add considerable flexibility to offshore wind projects that would otherwise be precluded from availing themselves of the EC Bonus, which, where applicable, could add as much as 33% in additional credits to an offshore wind project otherwise qualifying for the ITC.

Offtake solicitations and actions

The US offshore wind energy market continues to be driven by state-level offshore wind policies and procurement activities. At least 12 US states have set offshore-wind-specific goals, and six of the 12 have contracted or announced awards for offshore wind procurement to work towards fulfilling their goals. According to a National Renewable Energy Laboratory (NREL) study in 2023, as of May 31 2023, 27 offtake agreements had been signed, associated with 17,567MW of contracted capacity. However, the second half of 2023 and start of 2024 proved to be a turbulent period for offshore wind offtake agreements, with several developers terminating existing offtake agreements and states launching new solicitation processes to recoup lost generation capacity and expand additional capacity.

Many US offshore wind projects continue to face challenges maintaining economic viability due to rising inflation and associated capital and financing costs. Developers continue to grapple with a critical cost-revenue imbalance – offtake revenues that were locked in several years ago not meeting the high construction and operational costs, exacerbated by the pandemic and geopolitical tensions. In response, some developers have exercised costly cancellation and termination rights under offtake agreements, including four East Coast offshore wind projects, and three more projects have shelved development indefinitely.

Despite these challenges, states are forging ahead with ambitious plans for offshore wind energy expansion in the coming year. States such as New York, New Jersey, Massachusetts, Connecticut, and Rhode Island are preparing to award new contracts with revised price mechanisms to prevent repeat cancellations and several developers that terminated offtake agreements have rebid at higher prices in recent solicitations or aim to do so in forthcoming solicitations.

In 2024, the New York State Energy Research & Development Authority (NYSERDA) plans to finalise purchase and sale agreements with winners of its third and fourth offshore wind solicitations and may launch a fifth solicitation towards the end of 2024. New Jersey recently announced the winners of its third offshore wind solicitation and plans to launch its fourth solicitation in 2024, with awards expected in early 2025. Massachusetts, Rhode Island and Connecticut have entered a multi-state coordination agreement for the procurement of offshore wind generation capacity, inviting offshore wind developers to submit multi-state project proposals, signalling a strategic shift toward regional planning to foster more cost-effective development.

Based on the planned state procurements, up to 15.5GW of new power offtake could be awarded by the end of 2024. If there are no further offtake agreement terminations, this could mean that the US could have 25GW under contract by the end of 2024.

M&A activity

M&A activity in the offshore wind space remains dynamic, driven by incumbent developers seeking to recover capital on high lease prices and reduce their exposure on single projects, major offshore wind developers and infrastructure funds looking to enter the US offshore wind market, and strategic divestments following the division of lease areas into multiple projects.

For example, BP and Equinor have restructured their joint venture, with BP taking full ownership of the Beacon Wind projects, and Equinor assuming complete control of the Empire Wind projects; Ocean Wind has acquired the remaining 50% interest in SouthCoast Wind from its joint venture partner, Shell New Energies; and Eversource has divested its 50% interest in the Sunrise Wind project to its joint venture partner, Orsted, and its 50% interest in the South Fork and Revolution Wind projects to Global Infrastructure Partners.

In addition, Corio and Rise have acquired respective stakes of 27.7% and 16.3% in the Attentive Energy project from TotalEnergies and Stonepeak has acquired a 50% interest in Dominion Energy’s Coastal Virginia Offshore Wind project. These moves reflect the industry’s growing consolidation and the strategic realignment of assets among leading players.

Supply chain

The US offshore wind industry continues to confront considerable supply chain challenges. An NREL study in 2023 indicated a need for US$22bn in supply chain investment to meet the target of 30GW by 2030. However, the US is currently behind in both public and private investment levels required for this growth, including investment in vessel construction, blade and foundation manufacturing, cable facilities, ports and labour, which may delay projects beyond 2030.

Currently, there are two US facilities producing primary offshore wind components – Nexan’s export cable manufacturing facility in South Carolina and EEW’s foundation facility in New Jersey. The first Jones Act-compliant Wind Turbine Installation Vessel (WTIV) is expected to be completed in 2025; however NREL estimates that four to six such vessels are required to achieve the 30GW target.

With manufacturing investments largely tied to singular projects, issues faced in the power offtake market over the past year have also stalled development of the supply chain. Many of the announced manufacturing projects remain in the planning stage and the termination of offtake agreements and cancellation of projects have led to the cancellation of several supply contracts and manufacturing facilities.

Suppliers also face the same issues with high inflation and material costs, and many are waiting for multiple orders and a clearer growth outlook before committing to building local factories. Without a significant increase in both public and private sector investment, and a strategic approach to the development of manufacturing facilities and infrastructure, the goal of achieving 30GW of offshore wind capacity by 2030 may remain an elusive milestone.

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