Woes from 2023 Spill Over into 2024

Unfavorable macroeconomic factors blew fierce winds against the offshore wind farm development industry in the second half of 2023. A combination of higher interest rates, cost inflation, and supply chain issues resulted in development costs exceeding contracted power prices for several projects.

This in turn led to some noteworthy contract cancelations and write-downs at offshore wind farm developers. These industry challenges have now spilled over into 2024, with additional cancelations and related headwinds.

The challenges affecting the developers of offshore wind projects are comparable with those facing a number of companies planning and developing renewable energy projects globally. Companies and governments are now rethinking energy transition plans to reach their clean energy goals. In addition to rising development and interest costs, the level of government support is also coming into question: is it sufficient to enable the scale necessary to meet net-zero targets?

Furthermore, the war in Ukraine has reasserted the importance of energy security. For example, Germany is building new natural gas-fired power plants and, in October 2023, approved bringing back coal-fired power plants on a temporary basis through March 2024. The upshot is that successfully transitioning to a net-zero world will not be without challenges and costly setbacks.

Morningstar DBRS continue to view these problems as near-term credit concerns for offshore wind farm developers and intermediate term challenges for governments with clean energy and offshore wind power targets. Significant increases in interest rates and other development costs, such as those experienced last year, are particularly harmful for multiyear development projects like offshore wind farms. Over the long term, Morningstar DBRS anticipate continued offshore wind development to be successful, supported by expectations for lower macroeconomic inflation and a return to more stable prices, cost reductions from supply chain build-out in the U.S. and technological improvements, as well as a fresh view from all stakeholders that incorporates the current economic environment.

Orsted's Challenges

Most notable so far has been the challenges faced by Danish company Orsted A/S (Orsted1), the world's largest offshore wind farm developer. In the second half of 2023, Orsted wrote down three of its largest U.S. projects: first the 924-megawatt (MW) Sunrise Wind project located east of Long Island, New York, and then the 1,100-MW Ocean Wind 1 and 1,148-MW Ocean Wind 2 projects, both located off the coast of New Jersey. Orsted's stock price cratered from August through October, related impairments from the project cancelations eventually exceeded $5 billion, and the company announced the departure of its chief financial officer and chief operations officer.

Orsted's troubles continued in 2024, with the company's February 7 announcement of major reductions to its future investment and capacity targets and a pause in dividend payouts. Orsted's new business plan lowers the company's targeted installed renewable capacity by 2030 to 35-38 gigawatts (GW) from 50 GW under the previous plan; current installed capacity is 15.7 GW. Orsted will exit several offshore markets, including Norway, Spain, and Portugal, and will decrease development in Japan; the company's primary focus going forward will be its offshore wind portfolio in the Northeast U.S.

Cost cutting under the new plan is expected to reduce capital expenditures by about $5 billion over the next three years, and the company plans to reduce its fixed costs by eliminating 600-800 employee positions globally, including approximately 250 people over the coming months. As part of Orsted's new financing plan, the company expects to divest more than $16 billion of assets through 2030, primarily through farm-downs and other sales, which should help finance Orsted's growth while easing shareholder concerns about dilution. These cost cutting measures and non-core asset sales may also limit the negative impact on Orsted's credit quality.

Omo Syd Gets Left to the Birds

On January 29, 2024, the Danish company European Energy announced it was ceasing the development of the Omo Syd (Omo South) offshore wind project in Denmark. The company had been developing the project for more than ten years and had its environmental impact assessment approved in 2020. However, the Danish government plans to designate the same area as a Natura 2000 bird sanctuary, and the feasibility study permit has a height limit of 200 meters; today's offshore wind turbines reach a height of 256 meters, thus making the Omo Syd project an impossibility.

Working Together for the Greater Good

We opined last year on the likelihood the offshore wind farm development industry will receive some form of government support because of the importance of offshore wind power in realizing various clean energy targets; we believe this is starting to occur. In certain jurisdictions, including the UK and New York, developers, governments, and other stakeholders are working together for the greater good.

UK

In November 2023 the UK announced it would raise the maximum price offshore wind farm developers can secure in a contract auction by 66% to GBP 73/MWh (in 2012 prices), from GBP 44/MWh previously. This action is in response to the government's failed auction in September 2023, which saw no bids from offshore wind developers; development costs had increased significantly, yet contracted power prices remained stagnant. The new terms are expected to result in more successful auctions going forward, with likely 10 GW of projects to be awarded at the UK's next auction in March 2024.

New York

New York State Energy Research and Development Authority (NYSERDA), the public benefit corporation leading the coordination of offshore wind opportunities in New York State, announced a new, streamlined process for developers to try to negotiate higher prices as part of NYSERDA's fourth competitive offshore wind solicitation. Sunrise Wind, a 924-MW project jointly owned by Orsted and Eversource Energy (Eversource), and Empire Wind 1, an 816-MW project jointly owned by Equinor and BP p.l.c. (BP; rated "A" with a Stable trend by Morningstar DBRS), petitioned for higher prices in this solicitation. Bids were due January 25, 2024, with winners expected to be announced before the end of February.

As part of this solicitation process, the developers of Sunrise Wind and Empire Wind 1 both announced plans to restructure the ownership of these projects if they are awarded new contracts. Orsted would acquire Eversource's 50% share of the Sunrise Wind project; Equinor and BP would finalize a swap transaction under which Equinor would take full ownership of the Empire Wind 1 and 2 lease and projects, and BP would take full ownership of the Beacon Wind 1 and 2 lease and projects.

Other Notable Updates

Empire Wind 2

The year 2024 started by following the contract cancelation theme common in the second half of 2023. Equinor and BP announced in the first week of January that they were canceling the contract for their 1.26-GW Empire Wind 2 project. Equinor and BP entered into this contract in 2022 to sell renewable energy credits from Empire Wind 2 at $107.50 per megawatt-hour (MWh) as part of New York's second offshore wind solicitation; the developers requested to raise this in October 2023 to $177.84/MWh, but the New York State Public Service Commission rejected it.

The Empire Wind complex is to consist of two projects totaling 147 turbines and expected to deliver 2.1 GW of energy. Empire Wind 1 and 2 both received the federal Record of Decision from the Bureau of Ocean Energy Management (BOEM); in December 2023 Empire Wind 1 also received its Article VII Certificate of Environmental Compatibility and Public Need in New York. Empire Wind 1 is currently going through another solicitation process to try to procure higher prices.

New Jersey

In January 2024, New Jersey awarded conditional offers to two offshore wind projects in its latest solicitation. The 2.4-GW Leading Light Wind project is being developed by Invenergy and energyRe and received an award with a price of $112.50/MWh. The 1,342-MW Attentive Energy Two is jointly owned by TotalEnergies and Corio Generation and received a price of $131/MWh. Both projects are expected to enter operation in 2031, with Leading Light coming online in two 1.2-GW phases, with the second coming online in 2032.

South Fork Wind

Orsted and Eversource are nearing completion of their jointly owned 132-MW South Fork Wind project. It started generating power from its first turbine in December 2023, and seven of the project's 12 13-MW turbines had already been installed as of January 18, 2024; the remaining turbines are expected to be installed later this month. The South Fork Wind project is located 35 miles east of Montauk Point (Long Island), New York.

Vineyard Wind 1

The 806-MW Vineyard Wind 1 project will be the first large-scale offshore wind power project once completed. It started generating power from its first turbine in January 2024, and six of its turbines had been installed as of January 22, 2024. Construction is expected to be completed in May 2024. Vineyard Wind 1 is ultimately jointly owned by Avangrid Renewables, LLC (a subsidiary of U.S. utility holding company AVANGRID, Inc.) and Copenhagen Infrastructure Partners K/S. It will consist of 62 13-MW turbines located 35 miles south of mainland Massachusetts and 15 miles south of Martha's Vineyard.

Revolution Wind

Orsted is continuing its development of the Revolution Wind project, which is a 700-MW wind farm located 15 miles south of Rhode Island jointly owned by Orsted and Eversource. Revolution Wind would provide Connecticut and Rhode Island with enough power for about 350,000 homes. The project was approved by BOEM in August 2023 and is expected to be completed in 2025.

New England

In January 2024, Massachusetts, Connecticut, and Rhode Island extended the date bids are due in these states' next offshore wind solicitations from January 31 to March 27, 2024. The extension allows additional time for developers to react to the possibility of further guidance from the U.S. Internal Revenue Service regarding key tax credits available to offshore wind projects. Potential bidders include Equinor, BP, Orsted, AVANGRID, Shell plc (rated AA (low) with a Stable trend by Morningstar DBRS), EDP Energias de Portugal, and ENGIE SA.

Coastal Virginia Offshore Wind (CVOW)

Dominion Energy's CVOW project is the largest offshore wind project under development in the U.S. and is located off the coast of Virginia Beach. Construction is expected to start this year; once completed in 2026, it will consist of 176 turbines and generate up to 2.6 GW of power.

Dogger Bank

The Dogger Bank Offshore Wind Farm is a joint venture between Equinor (40%), SSE Renewables (40%), and Vargronn AS (20%). The 3.6-GW wind project is being constructed in three 1.2-GW phases 70 miles off the coast of Yorkshire, UK. Phase A started generating electricity in October 2023 from its first turbine; recent delays related to a shortage of vessels are expected to push back the completion of Phase A to 2025. However, the project's three phases consisting of 277 turbines in aggregate are expected to fully achieve commercial operation in 2026. When complete, Dogger Bank will be the world's largest offshore wind farm.

East Anglia THREE

The East Anglia THREE project is the second of four East Anglia offshore wind projects to be developed and is wholly owned by ScottishPower Renewables, a subsidiary of Iberdrola S.A. The 1.4-GW project is located 43 miles off the coast of Norfolk, UK. Onshore construction began in 2022, and the project is scheduled to fully achieve commercial operation in 2026.