PPA dispute sows anxiety in US offshore

December is always busy for US offshore wind, and last month was no exception.

On 7th December, the US Bureau of Ocean Energy Management revealed the winners of leases for five sites off the California coast, for which it gained winning bids of $757.1m. The winners were Copenhagen Infrastructure Partners, Equinor, Invenergy, Ocean Winds and RWE. US Secretary of the Interior Deb Haaland said this was “proof that industry momentum… is undeniable”.

BOEM also last month published draft environmental impact assessments for the 2.6GW Coastal Virginia, 2.6GW New England Wind (which is made up of the Park City Wind and Commonwealth Wind) and up-to-1GW Sunrise Wind projects, which is a key step for each to gain federal consent. It did likewise for the up-to-2GW Empire Wind in November. This is a far cry from the delays of 2019 and 2020.

Finally, the 2.6GW Coastal Virginia project won final regulatory consent last month, despite concerns about the cost of the project. This is important for the US offshore industry given the uncertainty around Dominion Energy’s scheme for much of 2022.

Yet while these are good stories, we cannot ignore the high-profile debate about the viability of two US offshore wind projects that keeps dominating headlines. The US offshore wind sector would be wise to adapt the business adage: tenders are vanity, regulatory approvals are sanity, but financial closes are king.

In other words, big leasing auctions are vital and it is important that projects win the support of regulators. But we will only see steel in US water if projects can achieve financial close. This question is dogging Commonwealth Wind and Mayflower Wind.

PPA powwow

The 1.2GW Commonwealth project is being developed by Avangrid, and the 1.2GW Mayflower is being developed by Ocean Winds and Shell. These companies argue their projects are no longer viable under the terms of power purchase agreements they won from Massachusetts between 2019 and 2021. This is due to the impact of high inflation, surging interest rates and increase supply chain concerns in 2022.

Avangrid last month sought the cancellation of the Commonwealth PPA to re-submit the project in the next Massachusetts offshore wind solication, due in April. Ocean Winds and Shell did not go that far, but called for a “meaningful discussion” before they could decide on the future of Mayflower.

The saga took another turn last week when Massachusetts regulators ignored these concerns and approved the 20-year PPAs for both projects. Essentially, this means the regulators have concluded that the projects are financially viable in a reasonable timeframe. Avangrid said it is “disappointed” and is “assessing its legal options” in a statement that it shared with A Word About Wind last week.

Craig Gilvarg, spokesman at Avangrid, said the PPA would not enable it to secure the “significant financing needed to construction this critical project”.

We can see why Massachusetts would not want Commonwealth Wind to get its PPA scrapped so it can re-bid. It risks setting a precedent that developers would regularly seek to ditch PPAs in search of better deals. Nevertheless, the 2022 energy crisis is arguably an unprecedented ‘force majeure’ event that could not have been expected when the deal was signed; and Massachusetts may decide that its need to support the growth of offshore wind will trump these concerns.

The bigger point is this shows how the global economy is a challenge for the next generation of US offshore wind projects. Investors and developers in California were clearly confident enough that US offshore wind has an exciting future, as they were willing to bid large even with economic headwinds. But we expect anxiety too if the developers of Commonwealth and Mayflower cannot achieve financial viability.

This is still a new sector: the first commercial-scale offshore wind farm in US waters, the 800MW Vineyard Wind 1, is due to complete this year, but firms throughout the value chain want to know there is a steady project pipeline before investing.

We are still optimistic about US offshore wind. We are no longer in the mid-2010s, when one high-profile failure could set back the sector by years. But the result of this PPA spat will show how fast US offshore wind can accelerate in an ever-changing energy market.