The price of offshore wind is about to go up, and electricity users across the Empire State will be on the hook for it. Two firms developing offshore wind projects — Sunrise Wind and Equinor-bp — have gone to the state Public Service Commission asking for an increase in the price they’ll receive per megawatt-hour of electricity produced.
Given the fiscal realities of the situation, PSC’s only two options are to grant the request or delay the development of wind energy while the state seeks new offshore wind construction bids. Either way, costs will rise.
Policies promoting renewable energy have driven a flurry of offshore wind projects. Globally, 2021 saw a record number of installations, and in the U.S., there was double-digit growth in planned projects from the previous year. And because of a combination of subsidies and technology gains, the levelized cost of offshore wind projects in the U.S. fell to an estimated cost of $84 per megawatt-hour (although that must be compared to around $37 for natural gas and onshore wind).
But this recent growth in the offshore wind industry does not necessarily reflect its long-term health. Two substantial headwinds threaten to make projects uneconomical. One is the recent high inflation, which raised the costs of materials and labor across all industries, and the other is bottlenecked supply chains that are causing a bidding-up of the prices of materials and components needed for building wind turbines.
The problems aren’t confined to New York. Last December, Avangrid, the developers of the massive Commonwealth Wind project in Massachusetts, asked that state’s Department of Public Utilities to cancel its contracts because the agreed-upon price could no longer finance the project. And in Great Britain, wind power projects are also threatened by rising costs.
Unlike most businesses, these companies can’t unilaterally decide to raise their prices to restore profitability. The way windpower projects work is that the relevant government agency seeks bids from potential developers, chooses a winner and agrees to a “strike price” (the price the firm is guaranteed to receive per megawatt hour). McDonalds can raise the price of a hamburger at will if the cost of beef goes up, the windpower developers are legally committed to the agreed-upon strike price regardless of any cost increases they experience.
And while McDonalds can base its prices on what’s happening in the economy right now, offshore wind developers must base their prices on their expectations of how the economy will develop over the multiple years it takes to get permits, design the project, and finally get it built. It’s a guessing game, and they have no control over what happens in the years between making their bid and completing construction. Imagine McDonalds having to commit to a certain hamburger price for 2035 in all new restaurants before beginning construction on them.
Sunrise Wind, for example, in bidding for a windfarm off of Long Island, structured its bid on an assumption that inflation would remain the same as it had in recent years, at about 2 percent per year. But in 2021, inflation hit more than double that, and in 2022 the U.S. inflation rate topped 8 percent, quadruple the assumption on which the bid was based.
Between that and unexpected supply chain pressures, their costs have increased well beyond what they anticipated, while their expected revenues are fixed. Sometimes businesses, because of competitive pressures, have to bite the bullet and accept lower profits or take a loss until they can figure out how to be profitable again. But if they look ahead and see no prospect for ever being profitable, they’ll get out of the game.
That’s where offshore wind power companies stand now regarding projects they successfully bid on years ago. They see no potential for profitability at current strike prices, so they either must get those prices changed or walk away from the projects. What Sunrise and Equinor-bp are specifically asking the Public Service Commission to do is to authorize the New York State Energy and Development Agency (NYSERDA) to amend the agreed upon contracts to allow an inflation adjustment in the strike price.
The PSC is in a tough spot. If Sunrise and Equinor-bp are forced to cancel the agreements they’ve made with New York, the projects will have to be rebid, delaying completion of the projects. The strike price will increase anyway, because any firm submitting a new bid will incorporate recent cost increases into its proposed price. And because of Sunrise’s and Equinor-bp’s advanced state of planning, they will be in a strong position to win the bids again.
So, if the PSC says no to the request, the potential outcome is the same firms getting the same price bump they’re asking for, but with the completion of the projects being delayed, hindering the state’s effort to achieve its goal of 70 percent renewable energy by 2030.
The PSC is in a no-win position, but what is certain is that whatever choice it makes, offshore wind prices are going to rise, and every New York ratepayer will pay their share of the increase.