Here's What's Going Wrong in the US Offshore Wind Industry

Joe Weisenthal (0:10)

Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, I have to say, there are a lot of exciting things happening in energy, decarbonization, electrification of the grid, things we've talked about recently with people like Jigar Shah and so forth. But I have to say, I keep seeing negative headlines about wind.

Tracy Alloway (0:33)

Oh my gosh, you know, just before we came in studio to record this, I was taking a look at the S&P Global Clean Energy Index. It's down 30% this year, more than 30% this year. And a lot of that is thanks to what's been going on in wind. And in fact, if you look at Orsted, which I think is the world's biggest provider of offshore wind farms, it's down 50% year to date.

Joe Weisenthal (0:57)

Yes, so we are recording this November 15th. I think just earlier in the week, two top Orsted executives departed the company. I think there was a project off the shore of, I think, New Jersey that recently the plug was pulled on.

And it just seems that every story, everywhere, around the world, with the exception maybe of China, it seems to be, something seems to be wrong, whether it's the math doesn't pencil out on the actual projects themselves. There are companies, I think Siemens Wind has had all kinds of manufacturing issues with respect to turbines, etc. And so, just trying to understand what is going on with this industry and how bad is it in terms of, if it's not going as planned, reaching our decarbonization goals as a country.

Tracy Alloway (1:45)

Yeah, so my understanding is there are two things kind of happening at once. You could say two headwinds for the wind power industry, creating a perfect storm, Joe.

Joe Weisenthal (1:55)

I thought a perfect storm would be good for wind.

Tracy Alloway (1:57)

I'm just going to get as many weather puns as I can into this conversation. But there's higher borrowing costs because of surging interest rates, and then there are also higher component costs.

And I guess my question is, how much of all of this is sort of growing pains for an industry that at least in the US is still relatively new, although it is true that it's also facing problems in places like the UK? Or is this a kind of permanent change in the industry's trajectory? Basically, is wind power a low interest rate phenomenon like, I don't know, WeWork or cheaper Ubers?

Joe Weisenthal (2:37)

Is wind power a lot of hot air?

You mentioned the renewable energy stocks, and that is sort of another, I don't know, funny is the right word, but we're having this great year in the stock market so far. And how many people would have bet, it's like, oh, the Inflation Reduction Act passed, all this money pouring into renewable energy, all these incentives can't lose betting on these companies. And wind and I think solar, I mean, it's been pretty dismal.

Tracy Alloway (3:03)

Yeah, absolutely. And wind especially was like a much hyped component of the Renewable Energy Revolution. And you're right, with the Inflation Reduction Act, there is this question about how much of this is a temporary holdup given permitting issues that we've discussed with people like Jigar versus how much of this is the math just doesn't pencil out. There is something fundamentally challenging in wind.

Joe Weisenthal (3:30)

Lots of questions, and we have the perfect guest to get the answers. We're going to be speaking with Chelsea Jean-Michel. She is an offshore wind analyst here at BloombergNEF, one of our colleagues on a different floor.

So excited to chat. Chelsea, thank you so much for coming on Odd Lots.

Chelsea Jean-Michel (3:46)

Thanks so much for having me, Joe and Tracy.

Joe Weisenthal (3:48)

Is our premise correct, more or less, that it's been a just dismal year for the industry?

Chelsea Jean-Michel (3:54)

I think dismal is a bit of a big word to use, but, you know, it hasn't it hasn't been great. And there have been a lot of negative headlines, and you guys highlighted a lot of the key issues already.

I think maybe to highlight at a grander scale, we have seen a lot of the impacts most saliently in the US.

And Tracy, you mentioned, you know, it's a very, like, new industry in the US. For context, there's only seven operational turbines, 42 megawatts installed. However, there are two offshore wind farms currently under construction right now, almost a gigawatt. So the industry is growing, but we've also seen over 12 gigawatts of offshore wind projects seek to cancel or renegotiate their off-take contracts in the US. Now, what I mean when I say an off-take contract is that's typically an agreement that these offshore wind developers, their projects will sign with states, state utilities, to essentially guarantee that they're going to buy their power for usually around 20 to 25 years. And that's really key for an offshore wind project because they need, you know, you have variable generation. So if you can't guarantee your generation, you can guarantee the price at which that generation is sold. And that makes it easier for these projects to, you know, reach financial close, make a business case for them.