Wind Project Approvals, Tax Credits Look to Outpace Macroeconomic and Supply Chain Headwinds in 2024
Recent events in the wind power industry, all occurring on a single day, provide a snapshot of the sector’s challenges and opportunities heading into 2024.
Ørsted, the world’s largest developer of offshore wind, on Oct. 31 announced the cancellation of Ocean Wind 1 and 2, two 1,000-MW-plus projects off the coast of New Jersey. In the same announcement, Ørsted touted its decision to move forward with Revolution Wind, a 704-MW wind project and joint venture with Eversource Energy off the coast of Connecticut and Rhode Island.
COMMENTARY
The Biden administration made its own major announcement that day. It approved the nation’s largest offshore wind project yet, Coastal Virginia Offshore Wind, which plans to provide 2,600 MW of wind energy.
The details behind these projects highlight the macroeconomic and logistical challenges that have driven the cancellation of several major wind projects in 2023. There remain plenty of opportunities to deploy wind power projects, and there still are many challenges that the industry and regulatory agencies must address.
A Tale of Two Projects
When canceling Ocean Wind 1 and 2, Ørsted cited “[m]acroeconomic factors” that “have changed dramatically over a short period of time, with high inflation, rising interest rates, and supply chain bottlenecks impacting our long-term capital investments.”
Inflationary pressures and high interest rates that have impacted renewable energy projects across the county have had a particularly harsh impact on offshore wind projects, which require multibillion-dollar investments for a decades-later payoff. These trends have bucked assumptions on which developers, utilities, and commercial off-takers negotiated power purchase agreements, signaling to the developers that projects may never reach profitability.
Further, in states like New York, utility regulators have rejected requests to amend these agreements based on these changing dynamics.
These macroeconomic forces only increase the importance of a project’s ability to utilize the energy tax credits in the Inflation Reduction Act (IRA). Ørsted’s commitment decision in Revolution Wind provides a prime example. Ørsted expects that Revolution Wind will qualify for the IRA’s “energy community” credit, which allows developers to deduct an extra 10% of its total investment (40% vs. 30%). The IRA’s energy community credit is available for projects that redevelop brownfields, including sites previously used for coal-fired power plants and extraction (coal mines). The credit also supports programs to help fossil-fuel-reliant communities experiencing above-average unemployment.
The Ocean 1 and 2 cancellations highlight the supply chain and logistical issues facing the wind industry. For those projects, Ørsted expressed concerns that it could not obtain access to the giant vessels necessary for construction. Revolution Wind, in contrast, expects to have access to those vessels. And alleviating the Jones Act’s restrictions on the use of foreign vessels could further help address these issues.
Broader supply chain costs and delays are also impacting the wind industry. In an April 2023 report, Energy Monitor estimated that wind turbine costs have risen 38% in two years due to rising commodity costs. Further, the average price of the wind industry’s seven most critical minerals has increased by 93% since January 2020.
Ocean Wind 1 also faced legal challenges. In July, the group Protect Our Coast NJ, along with individual property owners, filed suit against the project in New Jersey state court. And just weeks before the cancellation, Cape May County, N.J., and a coalition of tourism and fishing groups filed a lawsuit in federal court challenging the federal Bureau of Ocean Energy Management’s (BOEM) approval and environmental analysis of the project.
Biden Administration Remains All-In
While litigation, or the threat of it, may slow impacted projects, the Biden administration has demonstrated its commitment to moving projects forward through the environmental review and permitting process. As noted earlier, the administration on Oct. 31 authorized the construction of the Coastal Virginia Offshore Wind project, BOEM’s fifth and largest offshore wind project approval.
BOEM expects to complete the environmental review of 16 offshore wind projects by 2025. These efforts reaffirm the administration’s commitment to the president’s goal of deploying 30 GW of offshore wind energy by 2030.
However, offshore wind developments on the West Coast have also begun to face challenges. In December 2022, the administration conducted a wind energy auction for five leases off the California coast. Winning bids for the five leases totaled more than $750 million, aligning with projects that could produce more than 4.6 GW of energy.
But the proposed projects off California’s Central Coast are facing pushback from indigenous tribal leaders who oppose plans to lay cables across the Chumash Heritage National Marine Sanctuary to reach transmission lines at the Diablo Canyon nuclear power plant. The use of existing transmission lines plays a major role in the projects’ viability, given that transmission capacity and availability have long plagued wind energy developers. Funding and siting issues continue to delay the construction of new transmission lines across the country.
While Oct. 31 demonstrated the impact of macroeconomic factors on previously negotiated projects, it also demonstrates the powerful role that the IRA’s tax credits and the federal government can play in nurturing the wind industry. Finding ways to overcome the macroeconomic and supply chain challenges facing the wind industry remains vital to states meeting their climate goals and supporting other new technologies like green hydrogen that need access to reliable renewable energy.
—John M. Ugai is an environmental law attorney at Farella Braun + Martel LLP in San Francisco, where he is a member of the firm’s Energy + Infrastructure Industry Group. He can be reached at [email protected] or via the firm’s website at https://www.fbm.com.