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NY regulators reject efforts to raise offshore wind contract prices

With offshore wind projects across the US Northeast floundering due to higher costs, New York regulators dismissed a request by several developers to raise the contracted offtake price they accepted in their contracts following competitive solicitations.

In an Oct. 12 order, the New York Public Service Commission rejected a petition filed June 7 by BP PLC and Equinor ASA, which are developing the Beacon Wind and Empire Wind projects, and a separate petition from Sunrise Wind, a joint venture between Eversource Energy and Ørsted A/S, to hike the prices in their contracts. The PSC also smacked down a third petition for a price increase filed the same day by the Alliance for Clean Energy New York.

"The requested amendments to the contracts would have provided adjustments outside of the competitive procurement process; such relief is fundamentally inconsistent with long-standing commission policy," PSC Chair Rory Christian said in a statement (Dockets 15-E-0302, 18-E-0071).

Christian added that "competition in the procurement process is necessary to protect ratepayers and provides the soundest approach to mobilize the industry to achieve our critical state goals dependably and cost-effectively."

According to the PSC, approving the developers' request would have led to significant cost increases for utility customers, with residential bills rising by as much as 6.7% and commercial and industrial customers paying up to 10.5% more.

The first two of the projects to be awarded, Empire Wind 1 and Sunrise Wind, signed agreements with the New York State Energy Research and Development Authority (NYSERDA) in October 2019 to sell Offshore Wind Renewable Energy Certificates (ORECs) for $118.38/MWh and $110.37/MWh, respectively. The certificates are meant to quantify the environmental benefits from one megawatt-hour of electricity generated by offshore wind.

The Empire Wind 2 and Beacon Wind contracts were signed in January 2022 at OREC prices of $107.50/MWh and $118/MWh, respectively.

In their requests to increase those prices, the developers blamed inflation, global supply chain disruptions, and high interest rates for boosting project costs beyond expected levels. The firms also said lengthy permitting delays and unexpected interconnection costs exacerbated the situation.

However, the PSC rejected the requests to apply an adjustment formula to the already-agreed contract prices. In addition to raising utility customer costs, the regulator said the formulas suggested by the petitioners "might result in various unacceptable outcomes, such as overpaying developers who have dodged the worst effects of inflation or granting relief to developers whose problems arose from their own delays or unrealistically low bid prices (rather than inflation)."

Furthermore, the PSC said that granting a price increase after the projects' bids were accepted "would arguably be unfair to losing bidders who may have appropriately considered the risk of inflation in their bids."

Approving a price hike could jeopardize the integrity of future auctions by sending a signal to developers that they can underprice their bids and seek price adjustments later if needed, the PSC added.

Surging project costs have been a huge issue for offshore wind across the Northeast, with developers of three major New England projects — Park City Wind in Connecticut and SouthCoast Wind and Commonwealth Wind in Massachusetts — canceling power purchase agreements with local utilities. In all three cases, the developers said the original terms made the projects economically unviable.

Most recent auction included cost-adjustment tool

To avoid such an outcome in New York, NYSERDA added new language establishing a cost-adjustment mechanism in its most recent offshore wind auction, launched in July 2022.

With the PSC rejection of the petitions, project developers are facing decisions about whether to continue with "uneconomic" contracts or cancel them and likely pay termination penalties.

For its part, NYSERDA President and CEO Doreen Harris said Oct. 12 that the agency "recognizes the critical competitive principles" cited in the PSC order and vowed to "act swiftly to continue advancement of large-scale renewable energy projects" to meet the state's climate goals.

"NYSERDA will assess impacts on the contracted portfolio, and with input from the Department of Public Service and the renewable energy industry, proceed swiftly with an accelerated procurement process that prioritizes competition, simplifies bid requirements, incorporates inflation indexing, all while coordinating with transmission planning initiatives," Harris added.

In an Oct. 12 note to clients, financial consulting firm ClearView Energy Partners said most of the project developers are likely to cancel the contracts and rebid them in future solicitations. "The projects' advanced stages of development could give them an advantage over other potential bidders. That said, the PSC would still have to determine that resubmitted bids at higher prices are 'just and reasonable,'" ClearView said.

The American Clean Power Association criticized the PSC's decision. "With one shortsighted decision, the NYSPSC has thrown New York's environmental and clean energy future into peril," association CEO Jason Grumet said in a statement. "Absent a robust offshore wind industry, it will not be possible for New York State to achieve its climate or environmental justice goals. Moreover, critical economic benefits from new manufacturing facilities and the revitalization of ports will be squandered along with the creation of good paying union jobs. New York State has been a national leader in the clean energy transition. We urge New York State to maintain its clean energy commitment and reconsider this decision."

S&P Global Commodity Insights reporter Jason Fargo produces content for distribution on Connect by S&P Global. S&P Global Commodity Insights is a division of S&P Global Inc.

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