In this podcast episode, we delve into the latest DOE report on offshore wind energy in the US, which presents four key initiatives to achieve ambitious targets of 30GW by 2030 and 110GW by 2050. The report focuses on reducing the costs of fixed bottom offshore wind by 30% and floating wind by 70%. The pressing question is whether these goals can be achieved within the specified timeline. Phil Totaro of Intelstor, offers his expert insights into the ups and downs of the offshore wind supply chain and discusses strategies to drive down costs and pave the way towards meeting these critical targets. Tune in to gain valuable knowledge on the current state and future prospects of offshore wind energy in the US.

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DOE Report – https://www.energy.gov/sites/default/files/2023-03/advancing-offshore-wind-energy-full-report.pdf

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Allen Hall: Welcome to this bonus edition of the Uptime Wind Energy Podcast. I’m your host, Allen Hall, president of Weather Guard Lightning Tech, and in today’s episode we’ll be discussing the Department of Energy’s ambitious strategy to lower the electricity prices of offshore wind energy. As you may already know, the DOE has recently published two significant Efforts, the NOW Program and the Forward program that present a set of technology and financial goals for offshore wind energy production. The NOW program seeks to reduce fixed bottom wind prices from their current rate of roughly $74, a megawatt hour by 30% to $51 per megawatt hour. While the Ford program aims to lower floating wind energy prices by an astounding 70% from the predicted rate of $150, a megawatt hour to $45 a megawatt.

Both programs are focusing on achieving these energy price reduction goals in the near term by 2030 and 2035. Respectfully, however, with only seven offshore wind turbines currently in the United States and limited offshore wind manufacturing in place. Meeting these now and forward goals will be a significant challenge to help us understand the Department of Energy’s goals and what can realistically be done to lower offshore electricity prices.

We have Phil Zaro, c e o of intra with us. Phil, 

Phil Totaro: welcome back. Thanks, Ellen. Great to be here. 

Allen Hall: So there’s, there’s a lot to this d OE effort and I, I wanted to bring you on in specifically to, to hash through some of the financial questions that pop up when we, when, when the DOE is asking for a 30% reduction in fixed bottom offshore and a 70% reduction in floating offshore.

Those are big numbers for a relatively developed product line. First 

Phil Totaro: of all, the. Turbine price still has room to come down. Right now, outside, let’s ignore China for a second, because they’re, they’re a pretty special case. But for offshore wind outside of China, right now you’re talking on average turbine prices, somewhere between 1.4 and 1.6 million per megawatt.

And, you know, steady to slightly climbing the. Effects of inflation on offshore wind hasn’t been as pronounced because turine prices in offshore were already pretty high. So there, there are, you know, the same type of supply chain issues that you see in onshore are also prevalent in offshore, just not as pronounced.

So that’s, that’s one area of reduction. So I mean, from, you know, between 1.4 to 1.6, you’re probably gonna need to get down into the, you know, one to 1.2 megawatt range. It’s, you know, that’s gonna take some cost out, that’s gonna take some supply chain efficiencies. I mean, to, to be honest. It, it’s not as big of a step as it necessarily sounds because with higher volume orders, you can necessarily reduce unit cost.

But the problem with higher unit orders is where are all the projects that are, are, you know, going to get built? I mean, we, we have had numerous auctions now in the United States. There’s a pipeline you know, of, of projects to be sure. But the investment hasn’t been flowing enough and it, it hasn’t really led to.

A lot of the capital commitments that need to be made in order to see economies of scale further reduce the overall project CapEx cost. So I mentioned turbine price is the, probably one of the single biggest areas, but keep in mind that in offshore wind, the turbine price is only around 45 to 50% of the overall cost.

Again, if you exclude You know, transmission costs and, and things like that. You know, your, your overall project CapEx is gonna be somewhere around like 2.6 to 2.8 million a megawatt right now again outside of China. But that has room to come down. You could theoretically build successful and commercially viable offshore wind project sites at.

You know, 2 million, a megawatt, 2.2 million, a megawatt. But the rest of the cost reduction is necessarily also gonna have to come from a lot of the other project development and construction costs. You know, project management fees have been steadily climbing. You know, e p c contracting fees are climbing, obviously, bigger vessels means higher cost and a longer period of time for amortization of that cost for, you know, a vessel that has the ability to install like 14, 15 plus megawatt wind turbines versus, you know, an eight, nine or 10 megawatt turine.

You know, there’s, there’s things that still need to happen in order for a significant amount of scale to be achieved particularly in the United States. And unlocking investment is the, the single biggest driver of achieving economies of scale On 

Allen Hall: the wind, Turbin, O e, em, front, ge Vestis, Siemens Kasa are.

Necessarily making bundles of cash on the existing product line. And so they’re, they’re, it’s particularly in GEs case, so they’re losing money, not that they’ve done a, a whole bunch of offshore projects. It’d be hard pressed to think that with the drivers that exist today, that they’re not going to increase prices just to stabilize and, and, Show a positive bottom line at the end of the year and said they kept prices right now at the current, which is changing day to day, the current price as they sit today, they’re still not gonna break even.

They’re still gonna lose money. So on the, on the O e M front, they have to raise prices or, or is just a huge margin in the supply chain they can go after. And I hard to believe that GE has up money on the table, on the supply chain. 

Phil Totaro: No, it’s again, there. What, what happened with offshore is that, for instance, in onshore wind, your, your margins got squeezed tighter faster, if that makes sense.

Like over, since like 2018 till now, your margins got squeezed quite heavily and they took out as much margin as they could in offshore, the margins have been squeezed, but they’ve been squeezed softer, I guess is the way to say it. Or more slowly. So that they didn’t necessarily take margin out as quickly.

And so that’s why their prices haven’t dropped as precipitously. Cuz if you, again, if you look at onshore wind, the prices were at one level, then they dropped precipitously, then they bounced back up to, to reclaim some of that lost margin In offshore, the prices never really cratered and, and bounced back up.

They. Decreased. Decreased, decreased, but very steadily. And it was more or less a, a decreasing margin that was driving some of that. So yes, there is still room for price growth in offshore wind turbines. It’s obviously not gonna make the independent power producers happy, but this is also one of the challenges.

I mean, you, you started off by saying that we’re currently at, you know, an average of 74 and we’re looking at going to 51. That 74 number is predicated on all the deals that have been signed that all the IPPs are trying to renegotiate right now. So, you know, I don’t know if that 74 is, is actually a firm number at this point, and I don’t know that 51 is, is actually achievable in the timeframe that d O E says it is.

But this is also one of those things where, you know, the government you. Classically and historically has, has put out a, an ambitious target to try and see if, if it can spur the industry into action, which is a lovely sentiment. But in reality, the only way that you get that level of cost reduction is to see investment happening at a level that it, it currently isn’t.

We did a study back in 2015, Intel Sort did that. Analyzed, I think it was something like 600 and let’s call it 680 million in port upgrades alone. That would be necessary. And that was back then eight years ago. You know, the number is now well over a billion in port infrastructure upgrades in all the different ports around the United States that are gonna need to see.

You know, improvements to be able to handle offshore wind, you know, the volume of offshore wind that, that the government wants to, wants to see. So I want 

Allen Hall: to get to an example. Cause I think if you. Put some flesh on the strawman, you can actually work through a problem set and, and see where money can be saved.

And I, I would like to talk about leading light and leading light. Wind is in venter energy and energy repro on one of the bite leases and, and because there’s been some recent news about it, there’s more updated data. They paid 645 million for that lease. And, and that lease is just the upfront money.

They still have to pay a rental on that property as they start to produce energy. They plan on putting in 2.1 gigawatts of turbines and. That all sounds great, but that energy doesn’t have anywhere to go, so they have to ask or bid into the state of New York. Right. There’s a couple states, they get offload to New York being the closest, and so New York Hold holds an auction and they pick winners and losers.

And so in order to be a winner there, you have to sweeten the bid, which is what Leading Light did. They promised 13 billion in economic benefits for New York. Eight point 0.2 from the project alone, plus another 5.1 billion from the supply chain Invest. They promised up to 25,000 job years for the project and supplier investments over the contract life.

They signed at m MOU with union labor for local job creation and they set up or will set up a 300 million fund for local initiatives and really things to. Around that New York area. So in order to sweeten the pot, they’re, they’re putting a lot of money on the table, almost what they paid for, the, the lease they’re putting back into into the state of New York, just for the right to deliver power.

All these things add up to a significant amount of money. And if, if I think your numbers filled to me earlier today, we’re saying for two gigawatts you’re looking at five, 6 billion to get that in the water, roughly. Does that sound ballpark, right? Yeah, 

Phil Totaro: about five and a half billion for you know, the, the overall project CapEx I forget precisely what it would be off the top of my head for like annual turbine maintenance costs, but it’s like, you know, I mean, average price right now, like per turbine per year is around, you know, a hundred and well between 110 and 130,000 as well.

So, you know, it’s you, you’re talking about close to 6 billion worth of investment at the end of the day, over the lifetime of the of the asset. Yeah, absolutely. 

Allen Hall: If there bid price for the powers, 74 70 $5 a megawatt hour, their ROI on that is out in the more than 10 year. 12, 13 years, ballpark. 

Phil Totaro: I mean, assuming that they’re gonna be able to achieve at least a minimum of like a 46 or 48, you know, percent average net capacity factor over its lifetime, the ROI should be somewhere in the like, you know, 15 to 18 year timeframe on what is theoretically a 30 year asset life.

Yeah. Well, doesn’t that 

Allen Hall: drive out? 

Phil Totaro: That’s, that’s kind of the point. CapEx will have to necessarily come down. So there’s,

Allen Hall: there’s a catch 22 here, right? Essentially there in order for any return on investment to be happen, and that’s gonna happen out in probably years 18, 19 20, if the, if the price goes down to $51 a megawatt hour, you’re talking about probably year 25 out of a 30 year project.

So you got five years of making money way at the tail end. Does that make any sense for developer to get involved with? 

Phil Totaro: Well, it’s, that’s a great question. You could also pose the same one for onshore wind in the United States at the moment, where you’ve got kind of similar economics with you know, like less than $20 megawatt hour power purchase contracts.

And, you know, I, it’s really without production tax credit revenue to the independent power producers, they would not be making any money at. But they’re also in, in onshore wind, taking advantage of the fact that they can repower the project after 10 years. It’s unlikely that if you’re standing up one of these, like leading light, for instance, if you’re putting this project out there, you’re not gonna repower it after 10 years just to, you know, get more P T C revenue.

Or at least I would presume you aren’t. Maybe, you know, you, you have to do something to it refurbish it or something after 10 years if you wanna try to requalify. But it’s, yeah, it’s absolutely a challenge. And the question that you pose, does it make sense? It’s making less and less sense as the, you know, PPA price keeps going down and the project CapEx price keeps inching.

So you can see why some of these independent power producers and their partners have kind of pulled back and even pulled out of some of the projects that have been announced recently. The 

Allen Hall: Commonwealth Wind is the big one here on the East Coast because they’ve really have pushed back hard on the state of Massachusetts at the $74 megawatt hour number.

They’re saying they have to increase that substantially to make that project worthwhile. And, and the state of Massachusetts, at least on the legislative le level has discuss. Preventing Avan grid from bidding on any future projects. So it’s a little tit for Tad, I guess. But again, if, if you want an operator to put wind turbines out in the water, they, they, they’re going to have to have a return on investment at, at least at year 10.

Hopefully at year seven probably is where they would like to be in a, in a dream scenario, what does that mean in terms of energy prices, if they were going to be at, at a year seven roi? Oh, 

Phil Totaro: I, that’s a, that’s a fantasy at this point in the, then the stage of maturity of the industry. I don’t think you can get a pay pack in year seven anymore onshore or offshore.

I think what we’re talking about are gonna be thinner margins for the independent power producers. And any kind of cost increases are gonna end up being absorbed by, you know, power off takers. And at the end of the day, consumers who are, you know, the, the bulk of the, the power consumption, you know, consumers and, and industrial You know, are, are the two biggest chunks of, of power offtaker in the, the US market.

So either, you know, you can sign a fixed price, p p a if you’re a corporate or industrial power offtaker. If you’re a consumer and you’re going through a power marketing firm, You might be able to get a fair deal, but that price can necessarily fluctuate. 

Allen Hall: Well, does the bid process for these offshore leases drive up energy prices?

Did did that make sense to have those bid prices be so high where half a billion dollars plus does, isn’t that just adding to the CapEx costs and, and blowing these 

Phil Totaro: numbers up? Yes and no. I mean, it’s funny because they’re, they’re paying per acre, and when you kind of calculate that out, it’s. It’s definitely more than onshore wind, for instance, or solar or any other, you know, land-based technology.

But they’re also bidding those prices in places where the, the cost of energy is typically significantly higher. I mean, you know, but even going back like 10 years, your average cost of electricity in, in places in Massachusetts, You know, well over a hundred dollars a megawatt hour. So it’s not unreasonable to have an offshore wind project that’s got, you know, an.

You know, close to $80 megawatt hour PPA with, you know, a, a multimillion dollar or close to billion dollar. I mean, these were the, the, the billion dollar price tags were more in New York, New Jersey, and, and other places in the east coast. But you know, you, you, you’re, you’re still with, with the deployment in the northeast, in the United States, you’re, you’re talking about you know, electricity markets that have traditionally, Pricier and better able to absorb that type of cost to begin with because consumers are already paying, you know $140 a megawatt hour plus for their electricity and it’s being produced at, you know, Close to a hundred, if not, you know, $80 a megawatt hour already.

Well, 

Allen Hall: where, where do they go? Where do the operators and developers go to push down these prices? Obvious. Obvious, number one is to use Chinese, develop wind turbines. 

Phil Totaro: Well, it’s, that’s one option. You know, even just having the Chinese active in the market would create price competition. But inevitably what would happen with that is the same thing that you’re already seeing in, in Europe, for instance.

Electrical cable vendors are being precluded from even bidding on some of the auctions for offshore wind interconnections and. In, in some European, you know, EU member country auctions that have been proposed, you know, Denmark is, is one, they were talking about blocking some of the Chinese OEMs from participating.

So if you’re gonna. Well, if you’re gonna have a global market, then we need to have a global market. If you’re gonna be protectionist, then you’re gonna have to create a market environment where people are incentivized to invest. And you know, I, I don’t see the, I see the government trying to have a global market, but also protectionist.

You know policies in place that are necessarily precluding a lower cost from being achieved quickly. You know, eventually cost will come down. You know, unit cost of energy will come down, but it, again, that can only be achieved with scale. The quickest way to get to scale is to create more competition in the market.

Allen Hall: Yeah. And on the engineering side we’ve talked about it behind the scenes on the Uptime podcast. To see where some of these cost savings could be, right to get something this dramatic. And if you’re talking about 30% on fixed bottom, 70% on floating you’re talking realistically about using Chinese wind turbines on Chinese platforms built in China, floated over here and installed by non-US workers.

That’s what it’ll equate to. And you’ll, you’ll buy your, your transmission cables from non-US sources. The factories won’t open in the United States. And, and so the, the administration’s got themselves into a corner. By pushing these numbers, they’re either forcing non-US equipment into the water, or by backing off of them and letting the prices be the, whatever the prices are, they’re gonna see a lot of wind into the water.

So they need to make up their. And right now they’re playing both sides of it. That can’t go on for much longer. The operators and the investors and the bankers associated with these projects have to be scratching their heads saying, what in the world is going on? And 

Phil Totaro: you know what I, I will concur that, you know, inviting China to the party can potentially create some price competition.

But I don’t know that, I mean, certainly if you source everything from China, you can get pretty. Cheap prices on things. But the question is, is there a way that we can necessarily, you know, drive an industry through facilitating domestic investment? And, and you can do that without having to rely entirely on like, you know, Chinese or you know, Indian or Malaysian or wherever, you know, you’re, you’re getting your, your cheaply made goods from.

There’s a way that we can do this in the United States, even with union labor. I mean, you know, You’re correct that, you know, unions aren’t the cheapest thing in the world, but there’s, you’re also talking about you know, maintaining an offshore wind turbine isn’t the cheapest thing in the world in, in general.

And so leveraging technology that can reduce o and m cost, I mean, right now again, we’re somewhere around, you know 120, 125,000 per turbine per year in, in average cost of, of offshore wind maintenance. That’s gotta come down well below a hundred thousand a year. You know, you’re, you’re a lot of the project development and permitting costs you know, have room to come down.

Your, your project management fees have gone up. I mean, fees have basically gone up across the board as CapEx has gone up across the board. There’s room to go with EPC contractors. There’s. And logistics. I mean, everywhere there’s still room to go. There’s no room to go with the current levels of prices and the current margins that companies are getting.

The only way we get further L C O E reduction is through scale. And the only way that scale can be facilitated is to make, you know, get the barriers outta the way and make the permitting of projects faster so that people can deploy capital faster. They can see returns faster, and. You know, it’s, there’s, there’s clarity.

There needs to be clarity for the industry to be able to start investing meaningfully in you know, the, the infrastructure that’s going to help facilitate these type of cost reductions. I’m 

Allen Hall: with you. There is the one example right now what is happening in Denmark where they’re basically their open door policy for projects.

You bring in a project, you define all the parameters around it. We make sure that it meets all the regulatory requirements, and so it’s an upfront process. Yes, we know all the regulations, we meet all the regulations. We’re applying for this plot of water, yes or no. Looks like most of the time, Denmark.

Yes. So they have like 30 projects that are offshore there pretty rapidly. Is that the kind of model that we should be looking at in the United States? 

Phil Totaro: It’s, it’s interesting cuz with the, with the recent pause that they had it, it caused a, a bit of chaos. But I, in, in. Short answer to the question, it’s something that might be worth looking into because this is also done in other areas of the world for like onshore wind or solar permitting as well.

You know, you get your, you know, you, I. Project developer or i p p, get your act together, get all your, you know, project requirements defined, you know, there’s more kind of upfront work before you ever approach the government to say, Hey, we wanna do a project here. So it’s, it’s a bigger commitment from the developer in terms of capital expenditure, if they’re going to go and present a project that’s not gonna get, you know, approved.

It’s, you know, it, it would significantly increase the pace at which projects could be approved because then everybody will start getting used to the level of requirements that the government and various state and local agencies are gonna put in place. In terms of their regulatory approval process for, for a project like that.

The limited 

Allen Hall: number of projects that are out there right now are driving prices higher. They need to get more projects in the water. They need to have a. Chain of projects that make sense on a schedule that makes sense so that the OEMs can produce turbines at a more efficient rate and the project developers can then support them at a more efficient rates.

That’s the only way we’re gonna drive down this cost, but the, the model we exist in right now, Is not going to produce those kind 

Phil Totaro: of results, not if we don’t unlock investment in the factories and all the supporting infrastructure that’s gonna be necessary. And I think, again, the reason that investors have been reticent about that, or even companies from Europe or Asia have been reticent about that is.

They don’t have a firm enough understanding of, you know, okay, what are the rules gonna be for offshore wind vis-a-vis the PTC and You know, are we going to be forced into a situation where we have to accept these, you know, very inexpensive PPAs, or are we gonna have some price flexibility moving forward?

There’s, there’s all kinds of things that are, you know, creating uncertainty and investors hate uncertainty. So, you know, if we can just take little steps to remove bits and pieces of that uncertainty it would, you have no idea how far it would go to start. I mean, there’s a lot of capital that. You know, companies are even starting that, that have been focused on onshore wind.

Duke Energy is one good example of it where, you know, they’re, they’re selling their onshore wind and solar portfolio to try and raise cash to support their offshore wind ambitions. But they’re not gonna deploy that cash anytime soon if they don’t have certainty. And the same goes for a lot of other independent power producers, investors, and foreign manufacturers that are gonna have to be part of this conversation because they can’t domesticate that fabrication capability for foundations, for vessels, for turbine components if they don’t have.

Allen Hall: Phil. Hey, I really appreciate you being on the program. Everybody. Check out intelstor.com and if you have any questions about the economics of offshore wind. Phil Totaro is your guy, and you can find Phil Totaro also on LinkedIn, so to reach out to him on LinkedIn.