Avangrid Inc. terminated power purchase agreements with utilities in Connecticut for a major offshore wind energy project in another illustration of the extent to which inflationary pressures have squeezed returns on offshore wind projects across the globe.

Avangrid said subsidiary Avangrid Renewables LLC's 804-MW Park City Wind offshore wind project was terminating the power purchase agreements (PPA), which it entered into in May 2020 with Eversource Energy and The United Illuminating Co. The project, selected in 2019, was to supply 14% of Connecticut's electricity by 2025 as the state shoots for carbon neutrality by 2040.

Avangrid said in a statement that the company, a subsidiary of Iberdrola SA, "was the first offshore wind developer in the United States to make public the unprecedented economic headwinds facing the industry including record inflation, supply chain disruptions, and sharp interest rate hikes, the aggregate impact of which rendered the Park City Wind project unfinanceable under its existing contracts."

"After exploring all potential solutions to the financial challenges facing the project, and engaging in good-faith and productive discussions with Connecticut state officials regarding these challenges, it is clear the best path forward for Park City Wind is in the termination of the power purchase agreements and a rebid of the project," the company said.

Avangrid, which did not return a request for comment, began raising red flags in 2022 about the economic viability of its 1,232-MW Commonwealth Offshore Wind Project in Massachusetts. After state officials there denied the company's request to renegotiate its PPAs, Avangrid in July agreed to pay $48 million to the distribution utilities of Eversource Energy, National Grid PLC and Unitil Corp. to terminate the contracts.

CFRA Research analysts said in an Oct. 4 note that although Avangrid intends to rebid both projects, the PPA terminations underscore "the price pressure on developers plus the hunger from states to meet specific mandates." They pointed to the Oct. 4 announcement that Connecticut, Massachusetts and Rhode Island will review offshore wind bids jointly.

Local, state and federal government demand for offshore wind is the primary driver for projects in the Northeast, the analysts noted. But with higher interest rates and other project challenges, "it is tough to see" President Joe Biden's goal of 30 GW of offshore wind by 2030 being fulfilled, they said.

"As investors settle into higher interest rates for longer, adjustments to the cost structure for offshore wind is a near certainty and will likely be borne by ratepayers," the note said. "Unsettled issues with the location of turbines too, which the US fishing industry is sensitive to, are likely to resemble some of the fights over pipelines or electric transmission across the country."

"With these issues, the incentive structure for offshore wind is more crucial than ever," the analysts added, pointing to federal loan guarantees and more flexibility in the US Treasury Department guidance on Inflation Reduction Act tax credits as possible solutions.

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