Why the Rise in Offshore Wind Costs is Temporary

U.S. Coastal Cities Show Strong Support for Offshore Wind

The offshore wind sector has gained focus in recent months following the efforts of a number of U.S. offshore wind projects to renegotiate plans in light of ongoing inflation and supply chain pressures. Though the entire energy industry is grappling with macroeconomic headwinds, analysts and experts say that the rough patch should be temporary for offshore wind and point to the industry’s long-term benefits around climate, health, economic investment, and energy price stability. The first major U.S. offshore wind projects are still expected to start delivering power this year.

As inflation subsides, supply chains scale up, and the industry matures, offshore wind is well positioned to deliver major cost reductions, climate benefits, and economic growth.

  • Analysts say most offshore wind projects will be built just a year or two later than originally planned, and advocates say investment in domestic supply chains can help mitigate inflationary risks over the long-term.
  • The current challenges are likely to be short-term crunches, as inflation has already begun to moderate and U.S. buildout of domestic offshore wind supply chains is well underway.
    • Research shows that the continued ramp-up of domestic component and ship manufacturing capacity will help avoid price increases over the long-term.
    • Offshore wind is a mature technology but it is not a mature industry in the United States — yet. The early projects in development now will lay the groundwork for the industry to scale up, and international examples show that costs will come down as the industry matures. Even with recent domestic challenges, offshore wind still remains cheaper than fossil gas energy in the U.K.
  • As it scales up, the offshore wind industry is poised to create a homegrown manufacturing and labor force, creating hundreds of thousands of jobs
  • Offshore wind companies are already showing how smart supply chain investments can drive down costs. Dominion Energy recently announced it expects to produce electricity from its Coastal Virginia Offshore Wind farm at lower prices than it initially forecast.
    • The cost reductions come from a variety of factors, including Dominion’s investment in its own wind turbine installation vessel and the large 2.6 gigawatt size of the wind farm benefiting from economies of scale.
  • The cost savings of offshore wind, even amid these inflationary pressures, are especially strong in the Northeastern U.S. — a region that relies heavily on fossil gas, which is known to be strongly affected by volatile global markets and has seen prices skyrocket in recent months. The Northeast is also where the first major offshore wind projects are closest to coming online and delivering these benefits.
    • Offshore wind produces the most clean energy during winter months, helping address supply issues during that critical period when energy prices in the Northeast typically rise.
    • Compared to oil and gas, offshore wind offers a long-term, fixed-price contract, so utilities and ratepayers have transparency on their costs and can rely on price stability rather than volatile fossil fuel markets.
  • The long-term benefits and cost savings–in terms of energy rates as well as carbon pollution reduction and all its associated climate, environmental, and health costs—far outweigh the status quo or building more fossil fuel infrastructure.
  • Recent analysis shows that offshore wind could meet up to a quarter of U.S. energy demand while injecting up to $1.8 trillion in investment into the economy and creating up to 390,000 jobs by 2050.
  • A 2022 report out of Maryland projects $5 billion in savings for the state’s ratepayers over the next decade as offshore wind gets added to the energy mix.

Inflation is impacting the energy sector across the board, and building more clean energy is a solution to bringing down energy costs. Some of the recent challenges for U.S. offshore wind will be addressed as the industry adapts to market changes.

  • Energy costs are expensive across the board right now due to inflation, supply chain constraints, and global market forces. 
    • Fossil fuels are not free from these pressures, either. Financing challenges are slowing momentum to build new LNG export terminals, while drilling completion costs for oil & gas producers have risen sharply and pressured companies to limit their drilling expansion plans. Oil & gas industry costs rose 7-15 percent in 2022 with a further 6-10 percent expected in 2023. 
    • Fossil fuels themselves are also driving many of the inflationary pressures hitting the energy sector: this August, gas prices were the key contributor to overall inflation.  
  • Clean energy like offshore wind power also provides deflationary effects across the economy, because once installed, it generates clean energy at minimal cost for years, unlike fossil fuels which require continual mining or drilling.
  • While these types of pressures can be typical for all new industries, much of the challenge for offshore wind prices comes down to the shift in macroeconomic conditions during the gap between when projects set their prices and when they started to build. 
    • The impacts of inflation, COVID-19, rising interest rates, and the war in Ukraine all hit after most U.S. offshore wind contracts were signed. The resulting price spikes were not accounted for in these initial bids, leading to the current corrective period and rebidding processes.
  • Industry representatives, federal officials, suppliers, and analysts say the long-term outlook for offshore wind remains strong as states and developers are working together to adapt to the changing market (e.g. building inflation adjusters into contracts). 
    • Researchers say electricity costs from offshore wind are likely to approach the prices of onshore wind and solar-powered electricity, which have seen a dramatic decline in prices as the industry scales up, and affirm that offshore wind remains essential to achieving U.S. climate goals and improving grid reliability.

Renewable energy technologies are expected to weather macroeconomic headwinds, but fossil fuels may never recover.

  • Renewable energy prices are already beginning to resume their declining trajectory as supply chain pressures relax and production capacity increases, though interest rates continue to pose some financial challenges. 
  • Analysts have also maintained their forecasts for offshore wind development, writing that the industry “remains on track to meet its long-term targets despite recent negative trends.”
  • Analysis shows that investing in domestic renewable energy like offshore wind is an important strategy for lowering electricity prices and combating inflation in the long run. 
  • Despite the temporary cost increases, renewable energies remain the cheapest sources of power, and the gap between renewables and fossil fuels is widening
  • Last year was the most volatile on record for gas prices, and even though wholesale prices have declined in recent months, consumers are still feeling the effects through elevated utility bills.
  • The cost of iron, steel, aluminum and other metals used in construction of wind turbines have seen prices dropping over recent months.