The United States has no offshore wind farms -- all of its domestic wind power comes from land-based turbines. The United Kingdom has taken a vastly different approach. This relatively small country leads the world in offshore wind power, accounting for roughly half of the Earth's offshore power generation. And just when it looked like the United States was getting ready to join the party, U.S. offshore wind stumbled.
A big goal
The United Kingdom has invested heavily in offshore wind. And industry forecasters are expecting the country to maintain its leadership role through 2020, as investment in the space is projected to double its 2013 level between 2016 and 2020. There's plenty of room to grow, too; offshore wind provides just about 3% of the country's total power today.
But why the fascination with offshore wind? Notably, offshore wind has some benefits over onshore wind. For example, according to utility giant E.ON SE (ADR) (OTC:EONGY), offshore winds tend to be more consistent and more powerful than onshore winds because they don't have to contend with obstacles like buildings and trees. A telling example is that E.ON estimates that offshore wind farms can handle turbines as much as twice as large as onshore.
The drawback, however, is cost. Onshore wind is cheaper to install because it doesn't have to contend with the harsh conditions of the world's oceans. That issue spans turbine integrity, installation, maintenance, and transmission lines. Although opposition groups have proven to be one of the first big hurdles in the United States, cost has now become the biggest hang-up.
A lack of funds
Cape Wind, which was scheduled to be the first large-scale offshore wind farm in the United States, was stuck in courtrooms for over a decade. Opposition groups, concerned more with aesthetics than the environment, were doing everything in their power to stop construction. And that fight may have proven successful, not because such groups won in the court room (they didn't), but because they delayed Cape Wind long enough that the money may have run out.
What happened was that Cape Wind missed a financing deadline that allowed utilities National Grid plc (NYSE:NGG) and Northeast Utilities System (NYSE:ES) to back out of power purchase agreements. These two customers would have accounted for nearly 80% of the wind farm's power sales. Caroline Pretyman, a Northeast Utilities spokesperson, explained to the Boston Globe that Cape Wind missed critical milestones, and "...Cape Wind has chosen not to exercise their right to post financial security in order to extend the contract deadlines. Therefore the contract is now terminated."
Cape Wind considers the contract terminations invalid based on other terms in the agreements. But that just means more time in court and, for now anyway, no customers. That's a potential death blow to the project, and a body shot to the entire U.S. offshore wind market. And that should concern companies like Siemens AG (OTC:SIEGY), one of the world's largest offshore turbine makers and installers and a leader in the U.K., and General Electric Company (NYSE:GE), which is in the process of absorbing Alstom's energy business -- notably to get a piece of the offshore wind market. Without the United States, offshore wind's potential growth is considerably smaller.
Not the only project
To be fair, Cape Wind isn't the only offshore project in the United States. But it was one of the largest and furthest along. For example, with this snafu, it's likely that the first offshore installation in the United States will be a six-turbine project off of New Jersey with a capacity of around 25 megawatts. Alstom is working on this project and others, which will give GE a place at the domestic offshore table -- if the industry ever takes off.
The problem is that Cape Wind was expected to produce over 450 megawatts of power. That's a huge difference. The delay leaves offshore wind as more of a curiosity than a real power option at this point. And if delaying tactics worked so well with Cape Wind, it's a good bet that they'll get repeated elsewhere and even more aggressively.
While small offshore projects might get built, the U.S. will be missing the boat until it gets a meaningful offshore system in place. Cape Wind's troubles have pushed that off -- the question is for how long? The answer could have a big impact on General Electric and others' offshore aspirations since it could materially change the global offshore wind industry's outlook.
Putting some numbers to that, there are 14 (perhaps now 13) offshore wind projects on the drawing board in the United States for a total of around 4.9 gigawatts of power. Industry watcher Global Data expects the world's offshore industry to increase from roughly 7 gigawatts in 2013 to nearly 40 gigawatts by 2020, based partly on new markets like the United States and China joining the party. The 4.9 gigawatts of U.S. offshore currently in planning represents about 15% of the industry growth Global Data is forecasting. If Cape Wind's troubles lead to a material falloff in U.S. offshore wind development, a fairly large chunk of the industry's growth could be delayed or worse.
If you are looking to invest in the offshore wind industry, the Cape Wind saga isn't a particularly positive story. But it is one you should be watching. Until the United States gets a sizable offshore wind farm up and running, it will not only be an also ran in offshore wind, but it means the real opportunity is still in foreign markets like the United Kingdom.