Why offshore wind is facing headwinds

[The podcast transcript has been lightly edited for clarity.]

NPR: Today on the show – how did this flagship auction for the Gulf of Mexico attract such little interest? We investigate the possible causes, and, in the process, learn about one of the overlooked keys to the green energy transition.

NPR: The Gulf of Mexico is a massive patch of sea framed by the U.S., Mexico and Cuba. It’s mainly known for its oil industry, and it has a couple of advantages for offshore wind. First, it’s not too deep. Also, it’s got all that seafaring expertise and equipment from the oil and gas industry. Those could be repurposed for wind. We wanted to hear from others in the industry about why this auction for offshore wind energy failed to get any interest at all for two sites.

Mark: It was a little deflating.

NPR: We asked Mark Repsher, a partner at PA Consulting, which is a clean energy advisory that worked with some of the energy companies that were considering bidding for the auction. First, Mark says, there are some downsides to the area. If you think about what other kinds of electricity you could generate in the region, like in Texas, there are cheaper options than to drill giant windmills into the Gulf floor, like solar power.

Mark: If you look at the western part of the state, there’s a lot of empty land. There’s a lot of space to do all of this development. And you can do it at a fraction of the cost on a much quicker development cycle than you could develop that offshore wind in the Gulf of Mexico.

NPR: That being said, you generally can’t rely on just one source of renewable energy. When the sun isn’t shining, you need something else. So offshore wind likely has a place in a portfolio of energy sources.

NPR: Another downside to the area was that hurricane at the time of the auction, Hurricane Idalia. And Hurricane Idalia was, of course, not a one-off in the Gulf. Hurricanes can damage wind turbines. But even when there’s not a hurricane, it’s actually calmer than outside New York or Massachusetts.

Mark: Wind speed’s not as fast in the Gulf of Mexico as you see in the Northeast. So there’s a tradeoff.

NPR: All right. So the location had some disadvantages, but they surely can’t have been so bad as to warrant a 99.5% discount on their own. No. And so we were curious – was there an issue with the auction itself? Right. And being auction geeks, we learned that they use what’s called a simultaneous ascending multiple round auction. So I got to give the explanation. This is like a gold standard for government auctions. It’s basically like an eBay auction when you’ve got a lot of things selling all at once. But instead of things going on to the hammer and actually selling once the auction is over, that’s actually kind of like the dress rehearsal. So bidding companies will go back to the drawing board after the first auction. They’ll figure out what they’ve learned from that – you know, kind of almost like a practice round of an auction. And then they’ll bid again. Auction experts say that this maximizes government revenue because those practice rounds make the companies less risk-averse. We looked at all this and we thought, you know, there probably wasn’t a problem with the auction design itself. In fact, this might have brought in more money than if it had been a single-round auction.

NPR: Let’s look at some other possible culprits for why this auction drew so little interest. Mark Repsher says another issue is the cost of building the wind farms. Drilling into the seabed is never cheap. And lately…

Mark: Some of these initial cost estimates have slowly started to increase, sometimes quickly started to increase.

NPR: And you won’t be surprised to hear the blame put on supply chain snarls, which raise costs. High interest rates at the moment also increase the cost of borrowing. And once you’ve built the offshore wind farm, you’ve got to connect those high-voltage cables to land. And when they hit land, that means you’ll need to fence off the area. So finding and permitting that can be a challenge.

NPR: So those are the difficulties building the wind farms. But that shouldn’t fully stop developers from wanting to build them because these can be partially offset by federal subsidies.

Mark: The Inflation Reduction Act, it was a huge benefit to the industry. You’re knocking 30 to 40% off of the construction and installation costs to develop these projects.

NPR: And so the costs and the federal subsidies are more or less similar around the country. So we’ve ticked through the auction design, the pros and cons of the location, the construction costs, and we have finally hit the main answer for why the Gulf auction had so little interest.

NPR: Right. So Mark says it comes down to what the electricity can be sold for. Generally, states are in charge of how their electric grids operate. And so if you want to encourage offshore wind in your state, financial incentives matter. And the main financial incentive given around the country is a guaranteed price – a price of how much the electricity will be bought for. Mark says this is conspicuously minimal in Louisiana, Texas and Mississippi.

Mark: They haven’t done anything really on the offshore wind side to say, we’re going to provide an avenue for cash flow security. So when you kind of present that risk to a developer, when you’re talking about projects that are in the billions of dollars, the calculus changes for them and they kind of have a pause, if you will, on, well, do I really want to take that risk?

NPR: Every state basically has a different system for electricity. So even with the federal supports in place, if the whole country is to dramatically boost green energy, what this auction reveals is that the states are critical to creating the electricity markets where that can happen.

NPR: The experts we spoke to were clear that state-level deals to attract offshore wind energy were key. But, you know, as we’re exploring this clean energy future, we’re still figuring out what sources are viable. Even in the Northeast, offshore wind companies are struggling to find routes to profitability.