Orsted's CEO Reveals What Derailed US Offshore Wind and How to Fix It

Ørsted's Americas CEO reveals how rising interest rates, supply chain chaos, and bad timing derailed US offshore wind projects.

Key Takeaways

• Offshore wind projects are extremely sensitive to interest rate changes due to massive upfront capital requirements exceeding $6 billion per gigawatt
• Orsted cancelled late-stage projects like Ocean Wind after investing up to $1 billion when supply chain delays and cost inflation made economics unviable
• The Jones Act requires US-flagged vessels for offshore wind construction, creating bottlenecks when no compliant vessels existed initially
• Global supply chain imbalances for critical components like HVDC systems and specialized vessels created 30-40% cost increases across the industry
• The Inflation Reduction Act provides up to 50% tax credits through base ITC plus bonuses for domestic content and energy communities
• Despite political risks, offshore wind benefits span 40 states through supply chains, creating bipartisan economic development opportunities
• European offshore wind costs significantly less due to 30 years of infrastructure investment that US projects must bootstrap rapidly
• Orsted completed America's first commercial offshore wind farm (South Fork) while building two additional large-scale projects currently under construction

Timeline Overview

• 00:00–15:23 — Market Complexity and Energy Transition: Why electricity markets feel extraordinarily complicated compared to oil trading, the pseudo-government private hybrid nature of power grids, and how the Northeast's limited solar potential makes offshore wind critical for decarbonization efforts
• 15:23–31:47 — The Perfect Storm of 2023: David Hardy explains how Ørsted's aggressive US expansion coincided with rising interest rates, 30-40% industry-specific inflation, COVID supply chain disruptions, and the Ukraine war creating unprecedented headwinds for capital-intensive offshore wind projects
• 31:47–48:12 — Project Economics and Tough Decisions: The spread-to-WACC decision framework that determines project viability, why Ocean Wind was cancelled despite $1 billion invested while South Fork continued, and how supply chain delays create cascading contract renegotiation risks
• 48:12–63:35 — Global Supply Chain Crisis: How simultaneous US development and European energy security drives created severe imbalances in HVDC systems, specialized vessels, and turbine components, with the chicken-and-egg problem of demand signals versus supplier capacity investment
• 63:35–78:58 — Navigating the Jones Act: Why US-flagged vessel requirements created bottlenecks when no compliant ships existed, Ørsted's investment in building American maritime capacity, and the creative workarounds using barges and European vessels for early projects
• 78:58–94:21 — Building American Supply Chains: The debate over vertical integration versus supporting domestic suppliers, how a Danish company navigates building US industrial capacity, and the importance of persistent demand signals for supplier investment decisions
• 94:21–109:44 — Financing and Offtake Markets: How state-driven demand provides revenue certainty for project financing, the role of corporate renewable energy buyers, and the evolution from traditional tax equity to broader transferability mechanisms under the IRA
• 109:44–125:07 — The Inflation Reduction Act Deep Dive: Detailed breakdown of the 30% base ITC, 10% energy community bonuses, 10% domestic content bonuses, transferability provisions that expanded tax credit buyers beyond banks, and the crucial 10-year policy certainty
• 125:07–140:30 — Political Risk and Bipartisan Benefits: Why offshore wind transcends partisan politics through job creation across 40 states, rising electricity demand from AI and data centers, energy security arguments, and Republican support for economic development despite climate policy differences

2023's Perfect Storm: When Everything Went Wrong

The offshore wind industry faced unprecedented challenges in 2023, with Ørsted bearing the brunt as the world's largest offshore wind developer. David Hardy, CEO of Ørsted's Americas division, describes the confluence of factors that derailed multiple billion-dollar projects. The company had aggressively positioned itself in the US market based on its 30-year European track record, signing offtake agreements and committing billions in capital investment just as global macroeconomic conditions shifted dramatically.

• Rising interest rates proved devastating because offshore wind projects require massive upfront capital investments—typically $6 billion for a 1.2-gigawatt project—with no revenue until completion, making them extremely sensitive to cost of capital changes of 300 basis points
• Industry-specific inflation hit 30-40% across key components like turbines, foundations, and installation vessels, far exceeding general CPI inflation and eating into already thin project margins
• The timing coincided with COVID supply chain disruptions and the Ukraine war, which accelerated European demand for energy independence and further strained global offshore wind supply chains
• Early US offshore wind contracts lacked inflation protection clauses, leaving developers fully exposed to unprecedented cost escalations without corresponding revenue adjustments from state utility buyers
• Ørsted had to write off up to $1 billion in sunk costs on Ocean Wind 1, a late-stage New Jersey project, when supply chain delays pushed timelines from 2024 to 2026 and reopened all supplier contracts to renegotiation
• The company's aggressive growth strategy of building multiple projects simultaneously amplified exposure to these macro headwinds, with Hardy acknowledging in retrospect they "could have slowed earlier" and "not been as ambitious"

Project Economics: The Spread-to-WACC Framework

Ørsted's decision-making process centers on achieving a 150-300 basis point spread over their weighted average cost of capital (WACC), but the 2023 crisis compressed these margins to unsustainable levels. The company faced difficult choices about which projects to continue versus cancel, ultimately using forward-looking internal rate of return analysis that treated sunk costs as already written off.

• The spread-to-WACC model adjusts the corporate cost of capital for project-specific risks, market conditions, and technology factors, creating a hurdle rate that projects must clear to justify continued investment
• When interest rates rose 300 basis points while project costs simultaneously increased 30-40%, the economics became "pretty tricky" to maintain even the minimum 150 basis point spread target
• Ocean Wind 1 faced cascading supply chain delays where foundation delivery pushed from summer 2024 to 2025, requiring rescheduling of hundreds of interconnected contracts and potentially triggering cost renegotiations across the entire supply chain
• South Fork Wind avoided cancellation because it didn't face the same "new supply chain risks on the horizon" that plagued Ocean Wind, despite both being tight margin projects financially
• The decision framework evolved during the crisis to consider strategic value and market position, not just pure financial returns, as management weighed sunk costs against forward-looking investment requirements
• Risk modeling using P50 and P99 scenarios showed Ocean Wind's probability distribution had uncomfortably wide standard deviations between best-case and worst-case outcomes compared to other projects in the portfolio

Supply Chain Bottlenecks: A Global Imbalance

The offshore wind industry's rapid global expansion created severe supply chain imbalances, particularly for specialized equipment like HVDC transmission systems and installation vessels. These bottlenecks were exacerbated by the industry's long development cycles and reluctance to commit to take-or-pay contracts before achieving final investment decisions.

• HVDC systems became critically constrained as both US offshore wind development and European energy security drives (post-Ukraine invasion) created simultaneous demand spikes that suppliers couldn't accommodate
• Installation vessels, monopiles, and other specialized equipment face a chicken-and-egg problem where developers won't commit to take-or-pay contracts until projects achieve final investment decision, but suppliers need demand certainty to justify capacity expansion
• Many supply chain companies lack "super large well-funded balance sheets" and cannot simply scale production in response to demand signals without long-term contractual commitments from project developers
• The US planned to build domestic supply chain capabilities to reduce reliance on European and Asian suppliers, but project cancellations eliminated the demand base needed to justify these investments
• Global supply chain challenges have particularly impacted specialized components where only a few suppliers exist worldwide, creating single points of failure that can delay entire project portfolios
• The industry is now in a "reset period" where most US projects except Revolution Wind and a few others have had to recontracting and push out timelines to accommodate supply chain realities

The Jones Act: Regulatory Complexity Meets Market Reality

The Jones Act requires US-flagged, US-built, and US-operated vessels for transporting equipment between US ports, creating significant challenges for an industry where no compliant vessels initially existed. Ørsted has taken a pragmatic approach, supporting the Act's goals of building American maritime capacity while developing workarounds for immediate project needs.

• The Jones Act applies to offshore wind projects built in the US outer continental shelf, requiring compliant vessels for transporting equipment from US ports to project sites
• When the industry began, "it's difficult to build offshore wind with Jones Act requirements when there are no Jones Act vessels that exist," forcing developers to create expensive workarounds
• Ørsted became the first charter customer for the Charybdis, a Jones Act-compliant wind turbine installation vessel built by Dominion Energy, helping secure the business case for vessel construction
• The company has invested in building over a dozen crew transport vessels and recently completed a large service operation vessel in Louisiana, working to build compliant fleet capacity
• Current workarounds include staging equipment outside US waters, bringing materials directly from Europe, or using US-flagged tugs and barges to transfer equipment to European vessels
• Despite compliance challenges, Ørsted supports the Jones Act because "part of the value proposition of offshore wind is the economic benefits to Americans and job creation" rather than relying solely on foreign supply chains

Financing Revolution: The Inflation Reduction Act's Impact

The Inflation Reduction Act transformed offshore wind project economics by providing substantial tax incentives and introducing new mechanisms like transferability that expanded the pool of potential tax equity investors. These changes offer up to 50% of eligible project costs in tax credits, but require complex third-party monetization strategies.

• The base Investment Tax Credit provides 30% of eligible project costs, significantly improving project returns compared to the historical Production Tax Credit system
• Energy Community bonuses add an additional 10% for projects built in areas with historical fossil fuel activity, including former coal mines, oil and gas locations, or contaminated brownfield sites
• Domestic Content bonuses provide another 10% tax credit for meeting requirements around US steel, domestic manufacturing, and American labor with apprenticeship programs
• Transferability provisions allow any taxpayer with sufficient tax liability to purchase tax credits directly from developers, expanding beyond traditional tax equity banks to include "toothpaste companies" and other corporate entities
• The 10-year time horizon provides crucial certainty compared to historical stop-start extensions of one or two-year tax credits that created planning uncertainty for long-cycle offshore wind development
• Third-party monetization typically involves some discount from face value, with negotiated rates varying from 90-99 cents per dollar of tax credit depending on market conditions and buyer competition

Political Winds: Navigating Policy Risk

Despite concerns about potential policy changes under different administrations, Hardy argues offshore wind has strong bipartisan fundamentals based on electricity demand growth, job creation across multiple states, and energy security benefits. The industry's supply chain spans 40 states, creating distributed economic benefits that transcend partisan politics.

• Electricity demand is "significantly increasing" due to EV adoption, electric heating, manufacturing reshoring, and particularly AI data centers requiring massive power consumption regardless of political preferences
• Offshore wind provides "near baseload electrons onto the grid" that America needs as a country, offering large-scale power generation potential independent of environmental considerations
• Job creation and infrastructure investment in "steel and ports and ships and factories" represents bipartisan priorities, with supply chains supporting employment across red, purple, and blue states
• Energy security arguments favor domestic renewable capacity that maintains America's position as a net energy exporter while reducing dependence on volatile commodity markets
• Hardy regularly speaks with Republican officials who "understand the importance of the sector" and recognize the economic development benefits despite potential policy differences on climate issues
• The company has "mitigation plans regardless of any outcome" and has produced board papers analyzing various political scenarios while maintaining confidence in long-term industry fundamentals

The 2023 offshore wind crisis reveals an industry experiencing severe growing pains rather than fundamental structural problems. Ørsted's experience demonstrates how macroeconomic timing, supply chain immaturity, and regulatory complexity can derail even well-planned projects worth billions of dollars. However, the successful European model proves offshore wind's commercial viability once infrastructure matures and costs decline. Hardy's insights suggest the US industry stands at an inflection point where early mistakes are providing valuable lessons for building a robust domestic offshore wind sector capable of delivering clean energy at scale.

Practical Questions and Answers

Q: Why are offshore wind projects so sensitive to interest rate changes compared to other energy investments? A: Offshore wind requires massive upfront capital—typically $6 billion for a 1.2-gigawatt project—with no revenue until completion years later. Since developers pay interest on this capital throughout construction while their "fuel is free," rising rates by 300 basis points can eliminate profit margins entirely.

Q: How does the Jones Act specifically impact offshore wind development timelines and costs? A: The Jones Act requires US-flagged, US-built vessels for equipment transport between US ports. When the industry started, no compliant vessels existed, forcing expensive workarounds like staging equipment outside US waters or using barge-and-tug transfers to European vessels, adding months to project schedules and millions in costs.

Q: What specific tax benefits does the Inflation Reduction Act provide for offshore wind projects? A: Projects can receive up to 50% of eligible costs through combined incentives: 30% base Investment Tax Credit, plus 10% for building in "energy communities" (former fossil fuel areas), plus 10% for meeting domestic content requirements. The transferability provision lets any taxpayer buy these credits, expanding financing options.

Q: Why did Ørsted cancel Ocean Wind after investing $1 billion while completing the smaller South Fork project? A: Ocean Wind faced cascading supply chain delays that would have shifted the project from 2024 to 2026, forcing renegotiation of hundreds of contracts and exposing Ørsted to 30-40% cost increases across all suppliers. South Fork didn't face the same "new supply chain risks on the horizon."

Q: How does offshore wind project economics in the US compare to Europe? A: The same 1.2-gigawatt project that costs $6 billion in the US costs significantly less in Europe due to 30 years of infrastructure investment. European projects benefit from established supply chains, existing ports, mature vessel fleets, and don't require the bespoke transmission and grid upgrades that US projects must build from scratch.

Q: What makes offshore wind development particularly complex compared to onshore renewable projects? A: Offshore projects must build the generating plant, bespoke transmission to shore, onshore grid upgrades, specialized ports, Jones Act-compliant vessels, and entire supply chains simultaneously. Each component has different permitting requirements, specialized contractors, and interdependent timelines where delays cascade throughout the entire project sequence.

Conclusion

The offshore wind industry's current challenges reflect growing pains rather than fundamental flaws, with successful European precedents proving the technology's commercial viability. As supply chains mature and regulatory frameworks stabilize, costs should decline toward the subsidy-free levels already achieved in established markets.