What does the lukewarm Gulf of Mexico offshore wind lease auction response portend for future lease sales?
Written by: Bob Grace, Managing Director and Mary McMahon, Senior Analyst
Publish Date: August 31, 2023
Estimated Reading Time: 7 minutes
On August 29, the U.S. Bureau of Ocean Energy Management (BOEM) conducted an auction for offshore wind leases in the Gulf of Mexico, offering three lease areas for bid in the federal waters off the coast of Lake Charles, Louisiana and Galveston, Texas. The result was two companies submitting bids for the Lake Charles lease, with RWE prevailing with a $5.6 million bid, while two Texas lease areas received no interest. This result raises the question, what should we take away from the lack of response?
Current Challenges Facing Offshore Wind Costs
For the past few years, numerous drivers have exerted upward cost pressures on offshore wind development. The COVID-19 pandemic, Russian invasion of Ukraine, supply chain competition from countries desperate to decouple from Russian gas and oil dependence, and rising inflation and interest rates have strained project financing throughout the development pipeline. Notably, these factors impact all alternative sources of electric supply to varying degrees. Offshore wind developers have begun citing these cost drivers in their numerous contract repricing requests across states. In states with the most advanced offshore wind development pipelines (i.e., New York and Massachusetts), offshore wind developers have concluded that their projects are no longer financeable under contracted prices – seeking pricing adjustments or terminating contracts – due to the confluence of these sudden and unanticipated pressures.
Potential for Gulf of Mexico Offshore Wind – the Good and the Bad
Attention has turned to offshore wind in the Gulf of Mexico for compelling reasons, most notably a proximate supply chain with ample offshore experience and transferable capabilities. The region already is home to existing offshore oil & gas industry and infrastructure, massive manufacturing bases, and ports. Add to that the potential for offshore wind as a clean power source for generating green hydrogen (looked to as a key tool to decarbonize industrial processes and maritime transportation in the near term, as well as contributing a clean fuel for buildings, transportation, and electric generation) and the region seems to be a compelling next location for the offshore wind industry. However, the Gulf of Mexico is less windy than other markets where leases have been offered, a significant factor in offshore wind economics, and has the added challenge of the risk of extreme weather events (particularly hurricanes), where limited experience to date means to cost to insure this risk is not well understood.
Context + Analysis: What Makes a Worthwhile Offshore Wind Opportunity?
The period between investing in the acquisition of a lease and generating revenue can take up to a decade or more. So, what makes an offshore wind lease worthy of a developer’s interest? Let’s look at what the data can tell us—Table 1 summarizes the U.S. offshore wind leasing experience to date.
Table 1 – Winning Bid Prices for Offshore Wind Leases in the Past 10 Years
Past offshore wind lease auctions have demonstrated the impacts of circumstances, context, and timing. Auction results have ranged from no interest, to $1 per acre, to over $10,000 per acre. The reasons behind these differences are transparent, and, with the benefit of experience, can be understandable and (to a degree) predictable.
Past Examples: Massachusetts Offshore Wind Lease Auctions
Consider the Massachusetts-adjacent auctions in 2015 and 2018, for example. In 2015, four leases were up for auction and two sold for a few hundred thousand dollars, or around $1 per acre—with the other two lease areas receiving no interest. Fast forward to 2018, and all three leases up for auction sold, for more than $1,000 per acre.
What changed? Most importantly, visibility of a path to long-term demand and an identifiable source of revenue. A 2016 Massachusetts law, “An Act to Promote Energy Diversity,” mandated offshore wind procurements and set the initial target of 1.6 GW by 2027 (which has increased twice since, in line with long-term clean energy goals). At the time of the first auction, there was no clarity as to how, to whom, or under what motivation a lease owner might sell their power. By the time of the second lease auction the policy motivation and visibility to future revenue was far clearer. As was the region’s intent to create a long-term industry – and prospects of repeat business – that would justify developers setting up shop in the region and investing in local supply chains.
Past Examples: New York Offshore Wind Lease Auctions
Similarly, in 2016 BOEM auctioned one lease area off the coast of New York, in the absence of clear long-term policy but in the presence of a state commitment to buy the offshore wind output under a to-be-determined framework. The result was significant interest and a final lease price just over $500 per acre. In 2022, BOEM auctioned off six lease areas in the New York Bight—the most areas BOEM has offered in a single offshore wind auction to date. The auction lasted three days, involved 14 bidders, and all six areas sold for a collective total over $4.3 billion, roughly $10,000 per acre. What happened in between? Passage of New York’s 2019 Climate Leadership and Community Protection Act which established a goal of procuring 9 GW of offshore wind power by 2035, along with comparable goals in nearby New Jersey.
Even the most recent auctions have had strong bidder interest in locations where the policy and demand outlook has at least some degree of clarity.
Of course, revenue certainty is not the only factor: wind speeds; water depth; distance from shore; availability of nearby interconnection infrastructure, ships, and labor force; electric demand; market prices for electricity in the region—these are key factors. In addition, experience shows that lease areas can grow more valuable over time as they are subjected to intensive study of the interconnection opportunities, wind/weather and wave conditions, seafloor and geophysical landscape, wildlife, and other factors that must be understood, as this information reduces investor uncertainty. But a path to understand the duration and landscape of buyers – the long-term revenue opportunity – has proven to be perhaps the most telling.
What to Take Away from the Gulf of Mexico Offshore Wind Lease Sale?
Despite the key advantages of the nearby Golf of Mexico industrial base, the lackluster interest in the Gulf of Mexico auction likely stemmed from a confluence of:
- A uniquely turbulent period in the cost of offshore wind, factors largely common to all inputs to all power plants
- The lack of clear path for long-term interest and revenue mechanisms, combined with a lack of encouraging policy mechanisms—such as local state or utility procurement targets, or a strong commitment to secure low-emissions power supply
- A region with relatively low electricity prices, meaning that revenue uncertainty is much higher than in higher power cost states
As noted earlier, bidding on an offshore wind lease requires that investors take on material investment without much clarity as to payoff—and with a great deal of risk. Experience has shown that interest has been strong when there is a clearer path to return on the investment, and additional factors that narrow the risk exposure of investors.
In that way, the result is a function of timing. We are in a period of maximum uncertainty about the cost to deploy offshore wind. The supply chain for offshore wind in the U.S. also remains immature, even in the Gulf of Mexico region despite its infrastructure advantages from offshore oil & gas efforts.
The lessons learned? The conditions for success need to be in place, and timing is everything. Perhaps as we have seen in the Northeast’s auctions, with the benefit of insights gained and the maturity of the landscape, another auction at another time in the future may experience a very different result.