Greentech Capital - A Year in the U.S. Offshore Wind Revolution

Annual Report - 2018


PJ DESCHENES

A Year in the U.S. Offshore Wind Revolution

PJ DESCHENES

Boston: Opening Shot
I moved to Boston in 2002 and immediately witnessed a mega-scale renewable energy controversy playing out in the front page and op-ed section of The Boston Globe. A successful energy project developer had proposed the first major offshore wind farm in the U.S. – Cape Wind – to deliver 468 MW from a 24-square mile tract off the coast of Massachusetts. Although the state was adopting one of the most ambitious renewable energy targets at the time, public opinion backlashed against the ambitious project, which ultimately failed after over a decade of development effort.

The $1bn Year of Deals
Nearly 15 years later, in late 2016, Deepwater Wind brought the 30 MW Block Island project into commercial operation as the first offshore wind project in the U.S., portending a whirlwind of deals over the course of 2018 that saw over $1bn investment into development of new offshore wind farms in the Northeast U.S. In October 2018, Ørsted agreed to acquire Deepwater Wind for $510mm in cash, growing Ørsted’s offshore wind development pipeline in the U.S. to 3.3 GW. In November 2018, three bidding groups representing five major European energy and infrastructure companies collectively spent $405mm in an auction for three parcels off the coast of Massachusetts designated for offshore wind development. Then, near the close of the year, U.S. Wind, a developer backed by the Italian construction firm Toto Holdings, sold its New Jersey offshore wind lease to a consortium of Shell and EDF Renewable Energy for an upfront purchase price of $215mm.

What Changed?
Three main factors drove the change of positioning of U.S offshore wind. First, states in the Northeastern U.S. created a market by signaling their clear intention to procure offshore wind energy under long-term contracts. Massachusetts passed legislation in 2016 requiring procurement of 1.6 GW of offshore wind. That was followed by targets of 2.4 GW and 3.5 GW from New York and New Jersey, respectively, and solicitations of nearly 1 GW collectively from Connecticut, Maryland and Rhode Island.

Second, European energy companies proved over the previous five years that investment in supply chain, logistics, project design, and execution could lower costs of offshore wind to near parity with grid prices in Europe. For example, at the end of 2016, a consortium including Shell announced a subsidy-free wind project to be delivered by 2022 in the North Sea.

Third, technology evolved to lower the cost of energy further. In 2017, MHI Vestas released its 9.5 MW wind turbine and received billions of dollars of orders in 2018, while GE announced its Haliade X platform capable of 10 MW per turbine, followed by a 12 MW prototype of the same platform released in early 2019.

Why the Rush?

Competitiveness of offshore wind is a critical mix of scale of sales, scale of development and accessing the best sites.

Even given the evolution of state policy, industry experience and technology, the rush of deals and pace of industry consolidation in U.S. offshore wind during 2018 was exceptional. What pushed the pace in 2018? Competitiveness of offshore wind is a critical mix of scale of sales, scale of development and accessing the best sites. State-level policy translated into a wave of procurement with over 1.3 GW of awards granted in 2018, and two companies winning all of this volume. Large forward energy sales allowed offshore developers to commit to large upfront investments for areas such as permitting, cabling and port infrastructure that are supported by initial projects, and amortized over subsequent neighboring projects – a significant first-mover advantage. Finally, unlike most onshore renewable energy in the U.S., offshore wind is a site-constrained market. Developers must locate turbines on designated lease areas while allowing for the needs of the fishing industry and shipping navigation, as well as sea floor conditions (and in some cases, legacy unexploded military ordinances). Factoring in the best wind resources, and increasing costs of cabling and construction depth for going further offshore, we estimate that the last entrants to the market in 2018 likely paid over $100,000 per MW just for site access.

Offshore (Head and Tail) Winds

In spite of the boom in activity, challenges to growth still loom over the U.S. offshore wind industry. It will face constraints from a young supply chain, such as a shortage of skilled labor, installation vessels and equipment. Some of this will be addressed by investment, specifically in existing, underutilized port infrastructure. Further, the region is home to a robust fishing industry, and construction and operation of offshore wind must advance without impairing commercial fisheries. Finding right-of-way for landfall of export cables will have to thread highly valuable public and private beachfront real estate. Also, installation of foundations will have to accommodate seasonal marine mammal populations, especially if developers elect to drive large monopiles.

Project sponsors will navigate these challenges, and also see opportunities in several areas. Long-term power purchase contracts backed by investment-grade counterparties available to U.S. offshore wind developers are increasingly rare in the U.S. renewable power industry. As a result, low-cost, long-term investment capital will flock to the scale and risk profile of offshore wind, creating additional margin to developers from cap rate compression. Development of turbine technology, supply chains and project design will open additional development opportunities further south along the U.S. Atlantic coast. In addition, as the first floating offshore wind farms are being constructed in Europe, floating technology will bring opportunity for development on the U.S. Pacific coast and may take up a role in the build-out of projects in the Northeast U.S.

The New Outlook

The outlook for offshore wind in the U.S. shifted in the course of the last few years from being the object of public vitriol and the province of upstart project developers, to a high-stakes leg of the U.S. energy future. It is now led by major international energy companies committed to bringing forward over 9 GW, representing over $30bn of investment, by the end of the next decade. We expect the revolution experienced in U.S. offshore wind in 2018 to set up substantial opportunities for investment and M&A in the years to come.

A Year in the U.S. Offshore Wind Revolution

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