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The disruptive potential of US offshore wind

State policies mean the US could be on the brink of a boom in offshore wind, with significant implications for power markets

1 minute read

“Whenever I find myself growing grim about the mouth… then I account it high time to get to sea as soon as I can.” Ishmael in Moby Dick says that when the pressures of life on land get too much for him, he heads out for the freedom of the ocean, and the global wind power industry has adopted a similar approach.

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Onshore, in developed country markets in particular, land-use issues and NIMBYism have placed obstacles in the path of the industry’s growth. Expansion offshore has been the logical solution. Offshore wind has been highly successful in Europe, and annual installations are still on a rising trend. The East Coast of the US is on the brink of a similar boom over the coming decade, with potentially significant impacts on power markets.

In Northern Europe, the price paid for electricity from offshore wind farms fell by about 11.9% a year over 2015-19, according to a study published in Nature Energy this week, meaning that the costs of the subsidies paid to support them have been falling, too. In Germany and the Netherlands, offshore wind projects are already subsidy-free, and last year the UK appears to have “auctioned the world’s first negative-subsidy offshore wind farm”, the study says.

Malte Jansen of Imperial College, London, the lead researcher on the study, said: “Offshore wind power will soon be so cheap to produce that it will undercut fossil-fueled power stations and may be the cheapest form of energy for the UK”.

Not all the elements that have made European offshore wind a success can be easily transposed into the US. Technological advances, including the latest giant turbines, are cutting costs on both sides of the Atlantic. But market structures, regulatory regimes, transmission planning and development approvals processes are often very different. There is only one small offshore wind farm operating in the US: Orsted’s 30 megawatt Block Island project off the coast of Rhode Island.

There is strong support from many states along the East Coast, however, and investment in US offshore wind is expected to rise strongly. Projects with about 9 gigawatts of capacity are already contracted or soon to be approved. Wood Mackenzie’s base case forecast is that nearly 25 GW of capacity will be added by the end of 2029. The federal Investment Tax Credit for offshore wind, available for any project that has started construction by the end of this year, requires developers to start generation or within four years or be prepared to prove “continuous efforts”, adding an incentive for them to move as fast as possible.

Prices for US offshore wind have already fallen sharply. The first few commercial-scale projects contracted in 2017 had levelised prices in the $150-$170 per megawatt-hour range, in 2019 dollars. More recent projects, such as Vineyard Wind and Revolution Wind off Massachusetts and Rhode Island, have levelised prices in the range $65-$80/MWh, again in 2019 dollars.

There are political and regulatory risks attached to the investment outlook. If federal and state governments and regulators fail to work together effectively to support the industry, growth could be significantly slower, says Max Cohen, Wood Mackenzie’s principal analyst for US wind research.

President Donald Trump is a vocal critic of wind power, and if he wins a second term he is unlikely to be pushing hard to support it. In the past couple of years there have been signs of foot-dragging over federal regulatory approvals, potentially putting projects at risk.

Meanwhile, the US International Trade Commission this week issued a decision that US manufacturers were being “materially injured” by imports of utility-scale wind towers from Canada, Indonesia, Korea, and Vietnam, a ruling that will lead to tariffs on those products, pushing up costs for developers.

Joe Biden, by contrast, is an enthusiastic advocate of offshore wind: his clean energy plan sets a target of having “thousands of turbines off our coasts” by the end of his first term in office. His platform also includes pledges that could raise costs in the industry, saying: “American workers should build American infrastructure and manufacture all the materials that go into it.” He also promises that all workers in renewable energy and related industries “must have the option to join a union and collectively bargain.”

Unionisation might not be much of a problem in offshore wind, as Amy Harder of Axios explained this week, but local content requirements could be more of an issue. The US does not yet have a single major factory for making offshore wind turbines, although Siemens Gamesa and General Electric have both been talking about building plants, and MHI Vestas Offshore Wind opened its new US head office in Boston last year.

But even in Wood Mackenzie’s base case, without supportive state and federal policy co-ordination, the total offshore wind capacity added by 2029 would still be 14.5 GW. With effective policy intervention, such as an extension of the Investment Tax Credit, new state renewables mandates, and support for an offshore transmission backbone, there could be about 34 GW added.

That much new generation capacity, added mostly in the northeastern and mid-Atlantic states where there is very little demand growth, could have a profound effect on power markets. Congestion on the grid could have a significant impact on electricity prices in some areas by the second half of the 2020s. Competing generation technologies, including gas-fired plants, nuclear and other renewables, are at risk of being squeezed out.

For more detail, Max Cohen and our head of global wind research Dan Shreve will be holding a webinar on August 5, giving an overview of the industry outlook with plenty of opportunity for Q&A. If you want to take part, register here.

US oil production stabilises

President Trump flew into west Texas on Wednesday for a speech on US energy, at a rig working for Double Eagle Energy. He highlighted the importance of the OPEC+ production cuts in stabilising crude prices, thanked Saudi Arabia, Russia and Mexico for their help, and declared that the oil industry was making a comeback. “We were very close to losing a very powerful, great industry, and we did a job. We did a great job all together,” he said. “And now we’re back and now we’re just going to keep expanding.”

Levels of activity and production in the industry suggest that its condition is stabilising rather than roaring back to life. The US active rig count, which had been plunging, has started to level off, but is down at its lowest levels this century. Last week’s total of 251 active oil and gas rigs, according to Baker Hughes, was the still down 73% from the equivalent week of last year.

Production data from Wood Mackenzie’s Genscape service show a similar picture. As of Monday, US oil production was down about 2.07 million barrels a day from its level in March. That is slightly more than the average drop for July as a whole, but less than the average drop for June.

The regional breakdown of production shows some interesting trends that lie behind the national picture. In the Bakken formation, production started to decline in April, but hit a low point in June and has started to recover since then.

In the Permian Basin, on the other hand, production also started declining in April, but apart from a spike in early July has not really recovered at all. Because production in the Permian is much higher than in the Bakken, it has a greater impact on the national total.

Oil majors’ earnings show effects of tough conditions

Back in the 2000s, some environmental groups and a few investors started arguing that oil companies faced the risk of having “stranded assets” that could not be economically developed. Those warnings have generally been rejected by the industry, but this week Total acknowledged that the threat is real.

It announced a charge of $8.1 billion for writing down the value of some of its assets, partly because it took a more conservative view of oil and gas prices, and partly because it has taken the view that some of the reserves at its Canadian oil sands projects Fort Hills and Surmont would be stranded.

The writedown was announced the day before Total reported a 96% drop in net income to $130 million for the second quarter; part of a wave of results from the European and US majors that reflected the tough conditions in the industry. Shell reported adjusted earnings of $600 million, before its impairment charge of $16.8 billion related to its more pessimistic assumptions on oil and gas prices and refining margins.

ExxonMobil reported a loss of $1.08 billion for the quarter. Reuters reported earlier in the week that the company was planning spending and job cuts to enable it to maintain its dividend. Chevron reported a loss of $3 billion, excluding impairments and other one-off items.

Earnings for some of the companies were helped by strong performances from their energy trading operations. Ben van Beurden, Shell’s chief executive, told investors that its trading results reflected the company’s ability to optimise its refineries and other assets in response to changing market conditions, and its comprehensive view of market information. The trading operations had benefited from the contango in oil futures markets, he said, “but we do contango on steroids”.

In brief

A carbon tax starting at $43 a ton next year and rising to $112 by 2035 would cut US emissions by 57% from 2005 levels, according to research from the Climate Leadership Council, a group backed by many leading companies.

Li Auto, a Chinese electric vehicle startup, has started trading on the Nasdaq after raising $1.1 billion in an IPO.

And finally: visual evidence of the energy transition. Hyperboloid steam cooling towers are the distinctive visual signatures of many coal-fired and nuclear power plants, and as Britain phases out coal for power generation, the towers are coming down. The Financial Times carried a nice photo-essay about these disappearing features of the British landscape.

Other views

Simon Flowers — Decarbonisation and peak gas demand

Alex Trembath — Alternatives to climate alarmism

James Temple — The US needs a green stimulus, but not right now

Jason Bordoff — It’s time to put climate action at the centre of US foreign policy

Martin Lambert — EU hydrogen strategy: A case for urgent action towards implementation

Energy Options Network — Zero-carbon hydrogen: an essential climate mitigation option

David Sandalow — China’s response to climate change: a study in contrasts and a policy at a crossroads

David Roberts — Microsoft’s astonishing climate change goals, explained

Quote of the week

“The weakness of investments in the hydrocarbon sector since 2015, accentuated by the health and economic crisis of 2020, will result by 2025 in insufficient worldwide production capacities and a rebound in prices. Beyond 2030, given technological developments, particularly in the transportation sector, Total anticipates oil demand will have reached its peak and Brent prices should tend toward the long-term price of 50$/barrel.” — Total, in announcing its $8.1 billion writedown charge, gave its view of the long-term oil price outlook: higher first, then lower.

Chart of the week

This comes from a fascinating report on the persistence of oil demand, written by Alan Gelder, Ann-Louise Hittle and Suzanne Danforth. In April of this year, at the height of the lockdowns imposed to curb the spread of Covid-19, oil demand for transport, and particularly air travel, was hit hard. For other uses, however, it remained remarkably resilient.

Energy Pulse is taking a break in August. I'll be back in September with more news and analysis of the week's biggest stories in energy. Have a great summer! Sign up to receive the Energy Pulse here to make sure you don't miss it when it returns.