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30 January 2020

Rystad nods along with developers in ambitious offshore forecast

Rystad Energy has become the latest forecaster to fall into the trap of bumbling along with offshore wind promises in the US, stating an overestimate of capacity to be installed in the next decade. When the reality comes up short, investors need to be aware that Rystad overlooked several key hurdles which will stunt the market in the near-term, before the supply chain is ready to facilitate one of the largest global markets through the 2030s – a period which is beyond the scope of the Rystad report.

Rystad has predicted that the US will exceed 20 GW of offshore wind capacity by 2030 – with capital expenditure set to exceed that of the offshore oil and gas industry in the next 5 years. While we applaud the ambition behind such a forecast and agree that the US market will progress as one of the largest emerging offshore wind markets of the 2030s, the report overlooks the infancy of the country’s supply chain, and has assumed that projects will all come online within stated timelines.

Led by projects such as the 800 MW Vineyard wind project and Dominion Energy’s 2.6 GW project in Virginia, the report identifies state-led enthusiasm as an indicator of a national “energy revolution,” which will attract $15 billion of annual investment by the mid-2020s. In this timeframe, the report cites the 6 GW of east-coast offshore wind projects which have currently been sanctioned for development by 2025.

However, cracks are already starting to show within the early boom of US offshore wind. Back in December we wrote about the tap on the brakes enforced by the Bureau of Ocean Energy Management (BOEM), when it extended its impact assessment up to the end of this year, pushing back expected installation for projects such as Vineyard Wind by at least a year.

While this is somewhat accounted for by Rystad, we would anticipate further delays in the US, not exclusive to permitting issues. The offshore supply chain, especially within the maritime sector, is still fairly immature and while it can benefit from both the offshore oil and gas and onshore wind sectors, regulations like the Jones Act will inevitably provide a bottleneck as the pipeline grows.

The Jones Act mandates that vessels transporting goods between US ports – including offshore wind farms – must be US-flagged and operated by US crews. However, the US currently only has a single jack-up vessel for offshore wind installation. Developers Orsted and Dominion have been coy in detailing their construction strategy, while signaling an ongoing interest in the activities of the maritime supply chain.

In the short term, the way around this will follow the same model as the Block Island wind farm (the US’s only offshore wind farm to date), by using smaller vessels to transport goods to a larger, non-American vessel for installation offshore.

Larger components, including turbines, are currently only manufactured in Europe, despite GE potentially eyeing a new production facility back home. This means feeder barges from Europe will be needed in early projects, costing up to $10 million in transit, due to individual hire costs of over $150,000 per day.

Some of these vessels require over $300 million to be built over a three-year period. Manufacturers have so far been slightly reluctant to dive head-first into construction – after all, US vessels will be too expensive to use outside of the country.

At our latest count, there are combined promises amounting to 28 GW of offshore wind capacity in the US by 2035, led by New York with 9 GW. But this is consistently growing; both New York and New Jersey doubled their targets in 2019 – a trend which will continue as offshore wind becomes increasing economically viable. With this ambition becoming more and more prevalent, the risk for shipbuilders plummet and the race to build installation vessels will be a key part of the US’s offshore wind sector in the early 2020s.

We estimate that for a buildout of this scale at least 8 new construction vessels are needed by 2030, with an additional 200 smaller support vessels. Once constructed, both Capex and Opex costs for offshore wind projects will be slashed. Developers will be aware of this, and the industry won’t mind waiting through delays of a year or two if projects can benefit from the low costs brought by domestic vessels.

We anticipate that US installations fall short of what Rystad expects in the short term, and a cumulative installed capacity will only reach 13 GW by 2030, rather than the optimistic figure of 20 GW. Beyond this however, the east-coast of the US will be able to enjoy a developed supply chain, which may see annual installations top 2.5 GW in the late 2020s, before a market growth of 330% through the 2030s.