Orsted, a leading developer of offshore wind farms, said Wednesday that it will scrap plans to build two wind farms off the coast of New Jersey, a significant setback to the state’s efforts to reduce greenhouse gas emissions.
The move, which will force Orsted, a Danish company, to write down up to $5.6 billion, was further evidence that offshore wind projects in the United States are undergoing a major upheaval and will undermine Biden’s plans -Government to nix wind turbine manufacturing industry a crucial part of plans to reduce greenhouse gas emissions. High inflation and rising interest rates are making planned projects that looked like winners a few years ago no longer profitable.
“The world has turned upside down in many ways from a macroeconomic and industry perspective,” Orsted Chief Executive Mads Nipper said in a call with reporters on Wednesday.
The two projects, known as Ocean Wind 1 and 2, were intended to provide New Jersey with green energy. They were strongly supported by the state governor, Phil Murphy, a Democrat with national ambitions who emphasizes his environmental credentials but has recently drawn scorn for falling short on tackling climate change. On Wednesday, he suggested that Orsted was a dishonest broker and insisted that the “future of offshore wind energy” along the state’s 130 miles of coastline remains strong.
Mr. Nipper said Orsted assumed losses on the New Jersey projects would increase over time, so “the only sensible thing to do was draw a line in the sand.”
In total, the Biden administration wants to install 30 gigawatts of wind power in the United States by 2030, and officials in New Jersey had aimed to produce 11 gigawatts by 2040.
Offshore wind and other areas of the renewable industry have encountered some problems in Europe, particularly in the UK. But Mr. Nipper said the problems were more acute in the United States because early contracts lacked inflation protection and developers incurred high costs due to delays in approvals during the Trump administration.
The company’s stock price fell nearly 26 percent on Wednesday after the company reported a loss of about $3.2 billion for the third quarter and warned that writedowns – essentially an impairment of the company’s investments – were increasing would impact Orsted’s finances.
Orsted is currently writing off 28.4 billion crowns, or about $4 billion. The company assumes that a further charge of up to 11 billion crowns could arise later this year.
Orsted isn’t the only one facing danger in the fledgling offshore market in the United States.
On Tuesday, London-based energy giant BP said it would write down $540 million on three planned wind projects off New York after state authorities refused to renegotiate their terms. BP says it is reviewing future plans for the projects in light of the decision.
In its announcement, Orsted said it would advance a $4 billion project called Revolution Wind that would provide electricity to consumers in Rhode Island. And other developers have projects under construction, like Vineyard Wind, which will eventually have 62 turbines in the waters off Martha’s Vineyard, Mass.
Offshore wind is not dead, but the industry and its supporters certainly have some hard lessons to learn. The ambitions of the Biden administration and East Coast states like New York, New Jersey and Massachusetts to install large amounts of clean electricity generation from offshore wind in the coming decades are likely to suffer a setback.
The industry is grappling with equipment shortages due to pandemic-era supply chain problems and trying to cope with a growing number of orders for wind turbines as governments try to meet green energy targets. And rising interest rates as central banks around the world try to curb inflation have caused financing costs to rise.
Consumers are also likely to pay more into their electricity bills for power from offshore wind as developers demand higher prices and protection from inflation.
Mr Nipper said the resurgence of interest in developing offshore wind energy off the East Coast depends on “a realignment of the cost of offshore energy”.
New York state refused to renegotiate existing offshore wind contracts in October, but a subsequent auction awarded contracts to supply electricity at significantly higher prices and with various provisions designed to protect developers from inflation.
Still, there is little doubt that the confluence of challenges, which Mr. Nipper described as a “perfect storm,” is weighing on an industry that governments expect to produce large amounts of clean and relatively cheap electricity to combat climate change.
Orsted was both a pioneer and a leading developer of offshore wind turbines. After building the first offshore wind farm off Denmark in the early 1990s, the company has built a global portfolio with projects in the United Kingdom, Poland and Taiwan, as well as the United States.
Mr. Nipper said the company would consider various cost-saving measures, including a redesign of its portfolio. At least in the short term, the company is likely to be more cautious in its investment plans.
Orsted’s problems do not arise in a vacuum. Siemens Energy, a major German maker of electricity equipment, recently said it was seeking government help to fund guarantees for orders and forecast big losses due to problems at its Siemens Gamesa wind turbine unit.
In Orsted’s case, the writedowns are largely due to the company’s decision to cancel its ongoing major project off New Jersey, Ocean Wind 1, and a sister project, Ocean Wind 2.
Depreciation includes investments that the company has already made in the construction of the project, payments to suppliers for goods already ordered or delivered, as well as penalties for withdrawing from contracts.
The projects were politically controversial in New Jersey. Many Jersey Shore residents were concerned about tourism revenue and impaired ocean views, and fishermen were worried about the impact on their livelihoods. When Orsted broke ground in Ocean City, New Jersey, in September, workers were greeted by about 60 protesters, including six who were arrested after refusing police orders to retreat.
Jeff Tittel, a longtime New Jersey environmental activist and former head of the Sierra Club’s state chapter, said Orsted’s withdrawal is a significant setback to the state’s efforts to produce more green energy.
“There’s really no Plan B right now,” he said. “It’s a political catastrophe.”