US offshore wind push runs into bureaucracy, investment headwinds

California has completed its first steps toward joining the global offshore wind (OSW) energy buildout with a first auction of leases that will eventually support floating turbines generating as much as 4.6 gigawatts (GW) of energy, the Bureau of Ocean Energy Management (BOEM) announced last week.

Offshore and onshore wind turbines are a core cargo for the multipurpose and heavy-lift fleet, expected to fuel demand for ocean and inland transport and logistics services for years. However, project owners, manufacturers, and service providers are facing lengthy permitting processes, supply chain bottlenecks, and a monumental lack of needed infrastructure and equipment, including offshore wind (OSW) construction and service vessels.

The California auction brought in $757 million from the five companies that won the leases: RWE Renewables, California North South Floating LLC, Equinor Wind, Central California Offshore Wind, and Invenergy California Offshore, according to Utility Dive. The state's larger goal is 25 GW of floating offshore wind by 2035, according to Cal Matters.

US East Coast auctions for offshore wind leases have netted much larger amounts for BOEM, primarily because these projects will be built using fixed-bottom turbines, a mature technology, and because they have offtake agreements — or buyers for the energy they will generate — already in place. Floating offshore wind is an immature technology with little to no global or regional supply chain or supporting infrastructure in place, according to Marine Link.

The permitting bottleneck

Offshore wind developers who are not self-financing their projects must have buyers for the power they will generate before they can secure financial backing from banks or equity providers, John Begala, vice president for federal and state policy with the Business Network for Offshore Wind (BNOW), said during a Marine Money finance forum in New Orleans on Nov. 30. BNOW is a Baltimore-based nonprofit organization that provides resources for would-be participants in the nascent US offshore wind energy industry.

However, no actual construction takes place until federal permitting is complete, and permitting, at least currently, takes years, Begala told the Journal of Commerce. After BOEM auctions award leases to developers, each project still must go through a full National Environmental Policy Act (NEPA) review before permitting is complete, he said.

US states on the East, West, and Gulf coasts have said they plan to build 77 GW of offshore wind energy by 2045. But developers accounting for only 17.6 GW of these planned wind farms have signed offtake agreements with energy customers thus far, and only two wind farms, South Fork and Vineyard Wind — which total .93 GW — have completed the permitting process and are under construction.

The BOEM auction for the lease that became the Vineyard project was held in January of 2015. The final permit for the 85-turbine, 800 MW project was received in May of 2021 — almost six and a half years later — and the project is now under construction, Begala said.

"17.6 GW under contract is a large pipeline of work," he said. "That'll be well over 1,000 turbines and more than 3,000 miles of cable. The hang-up remains on the permitting front."

The process should become easier as BOEM and the other agencies involved become more experienced. "Vineyard is the floor," said Begala. "It has taken longest because it's the first."

Chicken or egg?

A key source of funding for offshore wind will be the Biden administration's Inflation Reduction Act (IRA), which creates a "major boost" for OSW with production and investment tax credits, according to a statement from government policy consultancy Atlantic Council.

But while the IRA has the potential to provide huge tax credits, "before anything else we have to get these permits through," Begala said during the Marine Money forum. Industry members, particularly vessel operators and owners, are wary about shouldering the risk of building expensive construction vessels when they see that only two projects have been permitted, he said.

Thus, the US market is facing a severe shortage of the vessels needed for offshore wind, Robert Day, head of offshore with London-based transport analyst VesselsValue, said during the forum. Financing is expensive and charter rates do not reflect the rates needed to cover capital costs, he said.

The renewables market is also competing for assets with a thriving oil and gas market. Rigs in cold storage are being reactivated, an expensive undertaking that only happens when owners have positive commitments, Day said. "Two years ago, rigs were selling for scrap. Now they are at second-hand levels of pricing," and there are few newbuildings coming on the market, he said.

OSW developers have been looking at offshore oil and gas tonnage for conversion, but as the oil and gas market improves, owners become reluctant to sell suitable tonnage, Day said.

Building a service operation vessel (SOV) for offshore wind construction costs from $160 million to $180 million and "charter rates aren't creating necessary returns," Otto Candies, chairman and CEO of eponymous Louisiana-based offshore vessel owner and operator Otto Candies, said during the forum.

Owners have to amortize costs over the entire life of a vessel, Candies said, noting "you can't amortize over five years."

If the plan is to modify existing vessels, they must have the right hull and shape to handle the conditions. If there are not enough available in the second-hand market, new ships will have to be built. "The key will be matching the lifetime of the contract with the lifespan of the asset," he said.

"It's not just vessels that need financing. We also need capital for terminals," Jeff Andreini, vice president of Crowley Wind Services, said during the forum. "Don't lose sight of the amount of money it's going to take to build out the terminals for marshaling" as well as for fabrication, operations, and maintenance.

"Private equity won't invest in a terminal without an anchor tenant...[there is] difficulty in getting a developer or OEM to come in and be here for five years," he added. "They won't do it if they don't have a project secured already. It's a chicken and the egg situation."

If BOEM cooperated on approving several regional projects at a time, "then we might be able to get developers on board at one time," Gavin Robb, head of generation with Spanish OSW developer Ocean Winds, said during the forum. "[They could] cooperate and work together and share assets," as the pipeline of projects is building.

"We are going through probably the most tenuous moment in the industry right now," Begala said. "So many projects are on the verge of moving forward, but haven't received [permitting] on [their] construction and operations plans."

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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.