This article originally ran on Forbes.com on November 7, 2023. All rights reserved.
Daniel B. Markind is a Forbes.com energy column contributor. The views expressed in this article are not to be associated with the views of Flaster Greenberg PC.
Since he took office in 2018, New Jersey Governor Phil Murphy has been a strong supporter of renewable energy, and an ardent opponent of natural gas development (Source). One of Murphy’s cornerstone projects has been a massive bet on offshore wind power to help combat climate change (Source). That bet took a huge beating last Tuesday when Danish wind energy developer Orsted cancelled two large offshore wind development projects for the New Jersey coast (Source). Orsted took this action, writing off $4 billion in the process, following massive losses it incurred in its North American projects, including New York as well, although it has not, yet, cancelled its projects in that neighboring State as it has now done in New Jersey (Source).
Orsted’s initial project in New Jersey, called Ocean Wind 1, would have been that State’s first offshore wind farm. Ocean Wind 1 would have generated enough electricity to power 500,000 homes. The project was expected to come online in 2025. Ocean Wind 2, which was supposed to be the same size, was scheduled to begin generating energy for New Jersey in 2028 (Source). However, on October 31, Orsted CEO Mads Nipper issued a statement in which he blamed the cancellation on “significant adverse developments from supply chain challenges, leading to delays in the project schedule, and rising interest rate.”
The sudden Orsted wind farm cancellation left the wind farm market in disarray and was a huge blow to Governor Murphy’s energy policies overall. Having previously taken strong action to kill natural gas projects such as the proposed Northeast Supply Enhancement Project in 2020, (Source), in heavy reliance on the expected benefits of wind power once Orsted 1 and 2 came online, Murphy now has nothing to replace that lost energy that would have been otherwise available – at generally lower cost – from the vast Marcellus Shale reserves in nearby Pennsylvania. The Governor’s policies, seemingly grounded more on wishful thinking than on reality, now look likely to throttle any New Jersey economic expansion in the short and medium term. Simply put, there are no feasible alternatives waiting in the wings to power New Jersey’s economy and serve its citizens, after Murphy put essentially all of his eggs in the wind power basket and lost that bet.
Meanwhile, the problems at Orsted are not unique to that company. Two other companies that signed contracts to build offshore wind projects in New York State also recently announced huge losses. Collectively, Norway's Equinor and BP of the United Kingdom, announced a total of $840 million in write-offs on their separate New York projects (Source). Siemens, the large German consortium, has also announced worse-than-expected losses in wind energy for fiscal year 2024. Indeed, the entirety of the wind industry globally appears to be running headlong into a huge economic problem. Even with the Inflation Reduction Act subsidies, given the convulsions in the wind market recently, there is no guarantee that any of these projects will work financially.
According to Russ Mould, AJ Bell’s investment director, “(t)he laws of physics are coming into play with regard to how the wind turbines are made. They require large amounts of concrete, steel, rare-earth-based magnets and lubricants to ensure they work reliably in potentially hostile environments, but the costs are going up, thanks to inflation, and this is taking its toll on manufacturers.” (Source). In addition, having signed long-term, large-scale Power Purchaser Agreements before the project construction began, the developers now find themselves having to go hat-in-hand to state agencies to seek amendments to those agreements to cut the financial obligations that they undertook when the promise of easy money from plentiful wind power seemed more feasible. However, these agencies have not been as supportive as the developers would have liked, and indeed now appear to need, given how increased energy costs may play politically. In New York, the Public Service Commission rejected requests by Orsted, Equinor, and BP to increase the payments they would receive under their power sales contracts with that State. The PSC said that it denied the requests because the increases would have led to a 6 percent increase in electric bills for residential customers and a 10 percent increase for businesses.
In New Jersey, Governor Murphy has continued to pledge to move the State’s power generation to 100% renewable by 2035. However, in the face of Orsted’s recent withdrawal, that goal looks increasingly unlikely to be reached. Most importantly from the standpoint of New Jersey, its residents and businesses may have to face a painful reality over the next few years when their energy costs are now expected to skyrocket. This, despite being only hours away from one of the largest sources of relatively inexpensive natural gas on the planet in the Marcellus Shale reserves, whose gas – while not as “green” as wind power would have been – would still have been a vast improvement over continuing reliance on more polluting and less “renewable” alternatives like coal burning.
In a word, his situation has now become inexcusable. Governor Murphy, and policy makers like him, owe it to their constituents to act in a responsible manner, dealing with the world as it actually is, and not as they would like it to be. Faced with a potentially existential crisis like climate change, wishing does not make it so, which should have been apparent to the Governor and his advisors all along. Already one of the states whose citizens are leaving in the highest numbers nationwide, New Jersey could now face an expected “emptying-out” of even greater proportions over the next few years, further damaging the State’s economy, the overall affordability of living, and the quality of life for its citizens. The choice on how to proceed is now with the Governor. Historically, those who choose based on reality fare better in the long run than those who choose based on their hopes and dreams.
