Ørsted won contracts to develop wind farms off the coasts of Connecticut, New York and New Jersey in late 2018 and 2019. Since committing to sell the power from these projects at a fixed price, permitting delays, rising costs and higher interest rates have torched the returns it expected to make.

The Biden administration wants to have 30 gigawatts of offshore wind capacity by 2030, from less than 50 megawatts today. Generous subsidies in the Inflation Reduction Act are meant to turbocharge investment. Ørsted hoped bonus tax credits in the climate bill for using locally produced components would paper over financial cracks, but now says its wind farms may not qualify.

The company says it will abandon projects if it doesn’t get more government support, and rivals are also rethinking their U.S. plans.

Shell and  Avangrid face multimillion-dollar fines for calling it quits on offshore wind-farm developments in Massachusetts that they can no longer justify. There is trouble further up the supply chain, too. Siemens Gamesa and Vestas, which together make roughly 80% of all turbine blades and nacelles for projects outside China, are losing money.

Of all renewable energy projects, offshore wind farms may be the most vulnerable to rising interest rates as they take longer to build and have higher upfront costs. According to George Bilicic, global head of power, energy and infrastructure at  Lazard , building a U.S. offshore wind farm can cost $4,000 per kilowatt at the midpoint of estimates, compared with $1,360 for onshore farms and $1,050 for solar facilities. Average costs to build an offshore wind farm have shot up 36% since 2019, compared with 5% for land-based ones, in part because of pricier debt.

Offshore wind is a promising clean-power technology because it should be highly productive once the capital is invested. As the ocean is windy, the capacity factor of offshore farms—a measure of how efficiently they generate electricity—is higher than both onshore wind farms and solar power. Installing wind turbines out at sea is also less controversial than on land, so the politics should be easier, in theory.

In reality, the industry is hamstrung by politics at all levels. Transmission bottlenecks to get power from offshore wind farms to land are now a major obstacle to delivering projects on time. Governments that dole out green subsidies with one hand set unfavorable terms for seabed auctions with the other.

There are also self-inflicted problems. Turbine manufacturers raced to make bigger and bigger models, driving down costs and making offshore wind nominally competitive with fossil fuels in many regions. But the rapid churn also made important parts of the supply chain obsolete: Older-installation vessels can’t handle the new, supersize turbine blades and towers.

While the industry needs to get better at understanding the hidden costs of innovation, governments will have to pay more if they want offshore wind power to help reduce carbon emissions. “Policymakers got used to 20 years of continuously falling prices for renewables. All of a sudden, that has reversed and they have been slow to react,” says Chris Seiple, vice chairman of Wood Mackenzie’s power and renewables group.

Contracts should be linked to inflation. Right now, developers take on huge risks when they win a bid: Their future revenue is locked in but they are exposed to rising input costs throughout the years it takes to get a wind farm up and running. If governments have to shoulder these costs, they might overhaul permitting processes that are causing delays.

Even in Europe, where the offshore wind industry is more mature, the rollout has slowed to a crawl. In 2022, the European Union installed 2.5 gigawatts of new offshore capacity, less than the 3 gigawatts it managed back in 2015.

Offshore wind power is becoming a prime casualty of the shift in financial markets away from the old world of smooth supply chains, low inflation and free money. The industry and its political backers need to work together to find a model better suited to stormier times.

***Carol Ryan at carol.ryan@wsj.com