Will the IRA Unlock Offshore Wind?

Within a week of taking office, President Biden signed an executive order laying out an ambitious plan to establish 30 gigawatts of offshore wind capacity by 2030—a significant increase for the US, though still lagging behind EU offshore wind targets. As part of this effort, the US Floating Offshore Wind Shot aims to deploy 15 gigawatts and reduce costs up to 70% by 2035. Floating offshore wind (FLOW) represents a huge source of unharnessed energy, about two-thirds of America’s offshore potential (2.8 terawatts for FLOW versus 1.5 terawatts for fixed-bottom offshore wind). As of November 2022, the US has two small offshore wind projects, with the first commercial-scale project expected to come online in 2023.

Tax credits included in the 2022 Inflation Reduction Act (IRA) are expected to accelerate offshore wind grid-scale deployments. While developers and component producers benefit from the provisions included in the IRA, overcoming remaining regulatory barriers will be critical to reaching offshore wind ambitions.

IRA Benefits

The Production and Investment Tax Credits (PTC and ITC) were extended by the IRA with added requirements to receive full credit value. Developers can elect between the PTC and ITC, while component producers can benefit from the new Advanced Manufacturing Production Tax Credit established by Section 13502 of the IRA:

• PTC: Operating offshore wind projects that began construction prior to 2017 can receive a tax credit of 2.5 cents per kilowatt-hour for the first 10 years after the facility entered operation. Credits are adjusted annually for inflation, and diminishing credit steps are applied to projects launched between 2017 and 2021.

• ITC: A one-time 30% tax credit may be applied when equipment is placed in service. To qualify for the ITC, offshore wind construction must begin by 2026. Developers may elect the ITC due to the high upfront costs of offshore wind projects.

• PTC/ITC Eligibility: Wind projects must incur at least 20% of costs domestically and begin construction prior to 2025 to earn credits for a 10-year period, after which the domestic content percentage required for a bonus credit increases incrementally. Prevailing wages and qualified apprentice labor are required to receive an additional bonus percentage. The Treasury secretary will release guidance for domestic content and labor provisions in late 2022 or early 2023.

• Section 13502: A new tax credit is available for domestic production of wind components, including for 10% of the sales price of offshore wind installation vessels. Additional benefits are determined by component type and capacity.

Jones Act Hurdles

Despite significant tax incentives made available by the IRA for production and installation of wind energy, the 1920 Jones Act poses a major additional regulatory hurdle. The cabotage provision of the act mandates that only US built, registered, owned, and operated vessels can transport goods between domestic ports. As discussed by Guidehouse Insights, because of a lack of wind turbine installation vessels (WTIVs) that meet this criteria, US wind plants must rely on European WTIVs to travel across the Atlantic, creating huge supply chain inefficiencies and expanding project costs. Dominion Energy’s Charybdis, set to be completed by the end of 2023, is the sole Jones Act compliant WTIV project underway in the US; at least six WTIVs and dozens of Jones Act compliant service vessels are estimated to be required to meet the Biden administration’s 2030 offshore wind goal. Shipbuilding yards have limited capacity and are prioritizing military and other more profitable contracts, forcing domestic industry to compete with accelerating offshore demand spurred by the European energy crisis.

The Jones Act poses a unique regulatory obstacle that increases the costs and difficulty of offshore wind in ways that federal stimulus cannot easily overcome. Although WTIVs are considered a major bottleneck for fixed-bottom offshore wind, they are not typically needed for FLOW installation, as turbines are mounted on the foundations at port and floated out to the installation site. However, the Jones Act still applies to FLOW projects’ service and crew transfer vessels.

As the domestic supply chain ramps up, states can take advantage of the Federal-State Offshore Wind Implementation Partnership to share resources across emerging regional wind energy hubs. For additional information on the FLOW market, check out the Guidehouse Insights Floating Power Plants report.