Welcome back, climate leaders.

In today’s edition:

• 💨 Offshore wind suffering from high interest rates and rising costs

• ⚡️ Biden admin’s green policies driving significant economic returns

• 🌎 A look at what record-breaking temps mean for natural gas usage

Read time: 5 minutes

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WIND POWER

Rising costs pose a new challenge for offshore wind

Driving the news: The US offshore wind industry is grappling with a surge in costs, regulatory delays, and challenges in grid connectivity, resulting in dwindling returns.

What's happening: Inflation, supply chain disruptions, and escalating interest rates have significantly increased capital and financing costs. Many developers are reconsidering their existing offtake agreements, with some even opting to cancel their contracts.

• Avangrid, a subsidiary of the Spanish electricity group Iberdrola, recently settled a $48.9 million fine to Massachusetts to terminate its involvement in the "Commonwealth Wind" offshore project.

• Over half of the contracted offshore wind projects across New York, Massachusetts, New Jersey, and Connecticut, equivalent to about 9.7 gigawatts, are up for renegotiation or cancellation.

• BP and Equinor might abort US offshore wind projects unless they hit 6%-8% return thresholds. They're renegotiating PPAs for Empire Wind and Beacon Wind, totaling 3.3 GW capacity.

• Siemens Energy's CEO, Christian Bruch, admitted that the rapid introduction of new offerings led to an approximate $2.4 billion cost from quality issues, escalating the company's annual net loss to around $4.9 billion.

Why it matters: This move might set a precedent for other companies to exit their power purchase contracts, putting several US states at risk of not meeting their offshore wind targets.

• The cost of electricity from a subsidized US offshore wind project has surged by nearly 50% since 2021, reaching $114.20 per megawatt-hour in 2023.

• New York aims to add 9GW by 2035 but now sees developers of 95% of its contracted capacity seeking contract renegotiations.

• Similarly, in Massachusetts, 75% of the contracted capacity is under renegotiation or cancellation.

What's next: The high-interest rate environment, which is not expected to ease soon, coupled with the rising costs of materials, labor, and logistics, will continue to challenge developers.

• There's a growing call among developers for regulators to incorporate inflation adjustment mechanisms in contracts to improve project economics and mitigate risks.

• But it’s not all bad! The first turbines at Dogger Bank, the globe's largest offshore wind farm in the North Sea, have been deployed.

🌶 Hot take: High interest rates are a significant risk for the energy transition. Decarbonization requires new construction of capital-intensive climate solutions like wind, as well as other renewables, charging infrastructure, battery systems, and more.

HOT TOPICS

1. 🛢️ Big Oil: Western oil giants, now under increased scrutiny for their energy transition plans, anticipate a decrease in profits as the commodity crisis triggered by the Ukraine conflict settles. With second-quarter profits plunging approximately 50%, the market focus is shifting back to decarbonization.

2. 📈 Economy: Biden's infrastructure and green energy initiatives sparked a substantial private investment surge aiding economic growth. $299 billion in federal support has engendered $503 billion in business investment, with a noteworthy 56% rise in business infrastructure spending.

3. 🔋 Batteries: Iontra, a Colorado-based battery charging tech firm, raised $67M in Series B funding led by Volta Energy, Riverstone, and others. The startup enables manufacturers to improve battery performance and cut costs.

4. 🗳 Policy: The IRA has boosted the climate tech industry, though the 2024 elections inject uncertainty. Investors consider two strategies: preparing for possible IRA repeal or remaining optimistic about IRA benefits despite potential GOP victory.

5. 🚗 Tesla: As a cunning tactic to counteract state laws, Tesla has started constructing showrooms on tribal lands, offering a new sales platform in previously unfriendly locations.

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CHART OF THE DAY

Soaring temperatures link to record-breaking summertime natural gas consumption in the U.S. for air conditioning, according to S&P Global Commodity Insights.

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