The U.S. offshore wind industry is, in a sense, an admission of failure.

Consider that onshore wind-power potential in the U.S. is estimated to be as much as 2.28 terawatts - roughly double the entire capacity of all types of generation operating today - and perhaps as much as 15 terawatts. Offshore wind power potential, in the Lower 48 states, is estimated at 4.2 terawatts. The latter is also a huge number but suffers one disadvantage: Offshore wind costs about two to five times that of its onshore counterpart, which is the cheapest source of electricity to build in the U.S. today, according to BloombergNEF's 1H 2023 Levelized Cost of Electricity (LCOE) Update.

So why head offshore when we have so much untapped potential on land? Being offshore does have some intrinsic advantages such as steadier winds, which mean more power from a given turbine, and the potential to offset variability from other forms of renewable power, such as addressing California's evening "net peak." But the primary factor is that the vast majority of onshore wind power potential lies within a band that snakes north-to-south through the center of the continent, far from coastal cities. We are going to the trouble and expense of bringing wind power in from the sea largely because we struggle to transmit it out from the plains.

The question of who pays for the relatively high cost of generating wind power offshore has gotten more contentious as it expands: The expense associated with a typical U.S. offshore project, before bonus tax credits related to the Inflation Reduction Act, has increased by 57% since 2021, according to BloombergNEF. Inflation in the cost of components and labor explain about 40% of that and the rest is tied to rising interest rates. Hence, developers of a number of projects off the coasts of New York and New England who signed long-term contracts before the surge in inflation and borrowing costs now seek to renegotiate them or, in one case, have paid to simply walk away.

Costs associated with developing all types of clean technology have increased. This isn't surprising given that, unlike traditional fuel-burning generation, the cost of generating renewable power skews heavily toward upfront construction. But it is a shock given the long history of falling costs for wind and solar projects (down 69% since 2008), which has become a critical part of the pro-renewables case alongside combating climate change. Some degree of sanguinity is called for, since all types of energy - and any industrial project - face volatility in costs, especially capital costs, over time. If sustainable energy is to sustain itself, it must learn to live with such vicissitudes.

Offshore wind is an outlier though because, unlike onshore wind and solar power, it was still at the high end of the cost curve before this financial shock. The U.S. offshore wind industry is, at this stage, more of a political project than an economic one. States such as New York and Massachusetts have ambitious decarbonization targets but also the nimbyism typical of any reasonably densely populated area. Going offshore helps to some degree. However, they also want to build the nuts and bolts of the offshore wind industry - manufacturing, assembly, port facilities - within their states, since job-creation is another big bullet point in the decarbonization pitch. This, along with the complications of meeting the onerous requirements of the antiquated Jones Act with regards to shipping people and parts around coastal waters, add to inflation.

The jump in rates represents the final straw. "Most developers assume some interest rate fluctuations to ensure it is worth their time to develop a project; maybe 100 to 200 basis points," Jereme Kent, chief executive of One Energy Enterprises, which develops on-site wind-projects for industrial customers, wrote in an emailed response to questions. "I am yet to see a developer who was planning for a 400 to 500 points increase. That means they need to reprice the project to make it viable."

Developers with large balance sheets, such as oil majors pushing into offshore wind, can afford to maybe take a longer view where others can't. Even so, the larger scale of upfront spending associated with offshore wind projects is risky for any developer. NextEra Energy, the biggest renewable-energy developer in the U.S. and the biggest utility in the world by market capitalization, avoids offshore wind for that reason.

Speaking at an analyst conference in October 2019, former NextEra Chief Executive James Robo said this in response to a question about offshore wind power: "So I don't like the risk/reward in offshore. Never have ... I'm not a giant fan of a project where you need to have $100 million or $200 million into the development of it before you know whether it's good or not, right? Just on a risk/reward basis, we can do that for multiples less in onshore and with better returns, I think."

In that sense, offshore wind suffers some of the same issues that hamstring new nuclear projects: long lead-times, spiraling budgets, big upfront checks. The other characteristic they share is the heavy role of government. In resolving the problem of offshore wind's higher cost, developers will have to take some of the hit, either by absorbing lower returns or paying, in terms of dollars and reputation, to walk away. But the states, having made their political commitments, are also on the hook. The developers know this, which adds an element of moral hazard to the mix.

New Jersey retroactively reformed its offshore wind-power solicitation to address inflation to date, Timothy Fox of ClearView Energy Partners, a Washington-based analysis firm, points out. Fox thinks New York may do the same. On the other hand, Rhode Island's recent rejection of the proposed Revolution Wind 2 project off Block Island suggests regulators won't take just any price.

In all likelihood, the pace of offshore wind power development will not meet President Joe Biden's target of 30 gigawatts by 2030. There is roughly 0.1% of that installed today. Of about 15.5 gigawatts of state-contracted offshore wind power projects, a third was in dispute as of mid-June by ClearView's count.

Still, the need to meet decarbonization targets, both in practical and political terms, means the industry won't drown entirely. The power business has a long history of dealing with stranded assets, meaning those rendered uneconomic by changing circumstances, Andrew DeVries, an analyst at CreditSights, points out. These ones are a little unusual in that they are stranded to some degree before they've even been built. But the logic holds. In theory, utilities obliged to purchase offshore wind power at high prices to comply with renewable portfolio standards could, for example, be permitted to securitize those contracts to at least reduce some of the associated capital cost. Specific carve-outs for offshore wind in renewable portfolio standards - meaning a certain amount of power would have to be procured from turbines out at sea - could act as a mechanism forcing utilities to literally get their feet wet.

Yet it should be lost on no one that these would just be a means of mitigating the extra cost taken on by energy users to subsidize offshore wind. Some of that reflects the cost of decarbonization which, like it or not, has to be borne. For too long, we've treated the atmosphere as free landfill, deferring the cost. But the other part of that cost reflects our collective failure to construct the transmission lines that would allow us to better tap the vast, and cheaper, wind resources available inland. Think of that premium as the externality of permitting paralysis.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities.