Higher financing and equipment costs are compelling more developers of US offshore wind power to renegotiate or terminate power purchase agreements in an attempt to keep their renewable projects viable.

As of June 12, about "one-third of the total offshore wind capacity contracted on state-sanctioned procurements to date is now in dispute," according to ClearView Energy Partners.

In 2022, the Massachusetts Department of Public Utilities declined requests from Avangrid Inc., developer of the 1,232-MW Commonwealth Offshore Wind Project, and Shell PLC and Energias de Portugal SA (EDP), developers of the 1,600-MW SouthCoast Wind Energy Project, to dismiss and renegotiate supply contracts with the distribution utilities of Eversource Energy, Unitil Corp. and National Grid PLC.

Both projects have since asked the department to terminate those power purchase agreements (PPAs) and rebid the projects in Massachusetts' fourth offshore wind solicitation in 2024.

"The current PPAs are not economic, in light of significant and unforeseen inflation, supply chain and financing cost increases affecting the US offshore wind industry," Southcoast project CEO Francis Slingsby told the Rhode Island Energy Facility Siting Board on June 2. "Further negotiations with the [utilities] and the Commonwealth of Massachusetts will not result in solutions that will address the challenges presented by the adverse economic conditions impacting the PPAs from the time they were bid, negotiated and executed."

Changing circumstances

US and European firms planning installations offshore New York have followed suit, with BP PLC, Equinor ASA, Ørsted A/S and Eversource recently asking the New York State Public Service Commission to adjust final PPA costs for three projects under development due to inflation and interconnection delays.

Compared to the New York petitions, which are "simpler, clearer and more finite," the "fairly open-ended requests" made in Massachusetts will likely be less successful because the plans by the companies to rebid the projects could be disadvantaged or "precluded" in the request for proposals for the next solicitation, ClearView told clients.

These contract disputes were inevitable, Wells Fargo Securities Managing Director of Utility Equity Research Neil Kalton said in an interview, driven in part by the process of state solicitations, bids and awards creating "long lead times" for locking in equipment and labor costs.

"A lot of these projects were awarded and then inflation just skyrocketed so they were forced to hedge all of the equipment and labor at far higher prices than would be anticipated," Kalton added. "If the states don't concede a bit [on contract terms] there is a risk that these companies will exit those projects."

While utilities should be able to financially handle offshore wind generation construction, Bank of America Securities analyst Paul Zimbardo noted that the first wave of projects has left investors with "a not so great taste in their mouth."

Keeping the existing PPAs for projects under development in Massachusetts and New York, he continued, would require the "unhedged pieces to decline by unrealistic amounts," so sponsors' "last resort is to go back to the states and ask for higher compensation."

Unregulated versus regulated

Under New York's offshore wind tender program, the New York State Energy Research and Development Authority agreed to purchase Offshore Wind Renewable Energy Certificates from each project at a fixed price. But those contracts can no longer viably finance BP and Equinor's 2,400-MW Beacon Wind and 2,076-MW Empire Wind, and Eversource and Ørsted's 924-MW Sunrise Wind Offshore Farm.

Eversource and Ørsted told the New York Public Service Commission on June 7 that Sunrise Wind cannot reach a final investment decision without higher offtake prices. The following day, however, Ørsted President and CEO Mads Nipper told investors the Danish renewables giant does expect to greenlight the project by the end of 2023.

David Hardy, Ørsted's CEO for the Americas, said the company has secured the capital expenditure for most scopes of the projects in its US near-term award portfolio, which includes Sunrise Wind. "Although those scopes are secured, that doesn't mean that we're not ... working with our suppliers to try to continue to reduce cost, reengineer, optimize, et cetera," he said during the June 8 presentation.

Any retrospective inflation indexing for Sunrise, Nipper said later in the presentation, would be "essentially neutralizing what has happened."

Ørsted did not respond to requests for comment concerning how the June 7 petition and Nipper's June 8 remarks about a final investment decision may relate.

In January, the company wrote down its investment in Sunrise Wind by 2.5 billion Danish kroner in the face of cost inflation and rapidly rising interest rates

Unlike the Massachusetts and New York projects, Dominion Energy Inc.'s 2,587-MW Coastal Virginia Offshore Wind project will be included in Virginia Electric and Power Co.'s rate base. Virginia regulators in 2022 approved the project and authorized VEPCO to recover the first $500 million of incremental costs above the $9.8 billion estimated capital cost for the project, or up to $10.3 billion. If the total project costs reach $13.7 billion, only $10.8 billion would be eligible for recovery from ratepayers, and if the price tag runs higher still, regulators can revisit the disposition of costs.

Due in part to that regulatory certainty, Dominion was able to hedge, procure and fix costs early on and keep the project on time and on budget, Bank of America's Zimbardo said.

Dominion is also building the only Jones Act-compliant installation vessel. Under US maritime law, only US-flagged vessels are able to operate out of the country's ports, and there is not yet a vessel capable of installing offshore wind turbines in the market. When the ship begins operations in 2023, other offshore wind developers will also be able to use it to cut costs by eliminating feeder vessels that supply equipment but cannot enter US ports.

Strategic shifts

Some utilities participating in merchant projects are divesting their stakes as the high-cost environment persists.

Eversource is reviewing its offshore wind portfolio that comprises a 50% interest in a joint venture with Ørsted to build the Sunrise Wind, 130-MW South Fork Offshore Wind Project and 704-MW Revolution Wind Offshore installations and said it expects to announce two transactions by the end of the second quarter.

Wells Fargo said May 24 that it expects Eversource to receive $2.7 billion of gross proceeds from the sale.

With the divestment, Eversource will pivot to investing in the transmission required for connecting projects to customers.

"We see a tremendous opportunity for ... de-risking and focusing on the regulated assets," Eversource President and CEO Joseph Nolan told investors May 4.

Public Service Enterprise Group Inc. exited the sector in January when it agreed to sell its 25% stake in the 1,100-MW Ocean Offshore Wind Farm in New Jersey to Ørsted for about $200 million in a deal that will make the Danish power company the sole owner of the project.

Like Eversource, PSEG plans to pursue transmission investments.

"Our transmission system is robust enough to take that injection of offshore wind generation into it," President and CEO Ralph LaRossa said May 2. "Our engineering team has done a really nice job of readying the system for what might come and here it is."

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