A Massachusetts offshore wind farm says it may not be viable without changes to a power contract with the state, citing escalating global energy costs and a supply chain crisis that could chill the fledgling market as it prepares to raise turbines in the U.S.
Avangrid Renewables said its proposed Commonwealth Wind farm off the coast of Martha’s Vineyard “would not be able to move forward” without changes to a power purchase agreement filed earlier this year that locks in how much Massachusetts’ utilities will pay the wind developer for the electricity it generates, a critical detail in securing financing for the wind farm.
Now, it may want to renegotiate.
In a filing with the Massachusetts Department of Public Utilities (DPU) on Oct. 21, the company asked for a one-month freeze on the state’s review of its previously filed power purchase agreement, citing “unprecedented commodity price increases, interest rate hikes, and supply shortages” as factors affecting whether the wind farm “remains economic and whether it can be financed under current terms.”
Avangrid’s warning — echoed in part days later by Mayflower Wind, the developer of the state’s other upcoming offshore wind project — is the strongest signal yet that a chilling trend on renewable energy projects may migrate into the offshore wind sector.
“The overall environment, not just for offshore wind, is very much so focused on these macroeconomic issues and how this is affecting the ability for projects to move forward,” said Chelsea Jean-Michel, a wind analyst for Bloomberg New Energy Finance.
Energy costs and supply chain constraints have bogged down the global economy — collateral damage in the wake of the yearslong Covid-19 pandemic. The Russian war against Ukraine has also upended the global oil market, lifting fuel costs around the world and driving up inflation, with a depressing impact on many clean energy projects in the pipeline.
The offshore wind sector has been somewhat shielded from immediate impacts, due to the long runway for projects — only two offshore wind projects are currently approved for construction in the U.S., though more than a dozen are seeking a federal green light.
Wind developers enjoy a politically favorable position right now. Growing offshore wind is a priority for the Biden administration, which has committed to lifting 30 gigawatts of offshore wind by 2030. It’s also key to many state goals, including Massachusetts’ target of net-zero greenhouse gas emissions by 2050.
Commonwealth and Mayflower — developed by Shell New Energies US LLC and Ocean Winds North America — could generate up to 1.6 GW of power and offset 2.7 million metric tons of carbon dioxide, according to the state.
Massachusetts chose the 1,200-megawatt Commonwealth wind project and the 400-MW Mayflower project last year in the state’s third round of wind solicitations. Contracts called power purchase agreements were filed with the state regulators in May (Energywire, May 26).
The Mayflower contract came in at $77 per megawatt-hour of power, and Commonwealth committed to deliver power for $72 per MWh, according to the state.
The state had forecast the wind projects will drive down customer electricity bills by approximately 0.1 percent to 0.8 percent.
The DPU did not respond to a request for comment by press time.
In its filing request, Avangrid stressed that Commonwealth Wind could still be a project offering cost savings to state customers with “modest changes” to the power purchase agreement.
“Commonwealth Wind expects to demonstrate to the parties that the Project, even with a modest increase in the [contract] price needed to achieve viability, will continue to be cost-effective, to reduce ratepayer bills, and to insulate ratepayers from the kinds of price spikes the Commonwealth is currently experiencing due to natural gas cost increases,” the company said in its filing.
The filing did not come as a complete surprise. The Boston Globe reported last month Commonwealth and Park City Wind, an offshore wind farm to serve Connecticut customers, would likely be delayed due to supply chain issues and contract negotiations.
In a filing last week, Mayflower agreed with Avangrid that a one-month delay would be prudent. A spokesperson for Mayflower Wind said in an email that the wind project was “subject to the same supply chain, price, and economic challenges that other offshore wind developers are facing.”
“It’s about the economics. The goal of temporarily suspending and revisiting the PPA will ensure that the Mayflower Wind project continues to be based on sound economics and safeguard its financeability,” said Kelsey Perry, the community liaison coordinator for Mayflower Wind.
“Given the Mayflower Wind project’s importance to helping the state meet its 2030 clean energy goals, and the offshore wind industry’s importance to the Massachusetts economy, we have opted to support Avangrid as it seeks to modify its PPA with the Commonwealth of Massachusetts so that both its project and ours can share in any resulting changes,” Perry said.
The company said determining that the projects remain viable under the contract terms is particularly critical because Commonwealth and Mayflower are “first-mover offshore wind projects in the region,” impacting state public policies like greenhouse gas reduction targets and boosting the state economy.
Jean-Michel, with BNEF, said what the wind farms are proposing is likely being closely watched by other states and the industry.
The issue puts pressure on Massachusetts, which may want to avoid undermining what was a competitive bidding process as well as opening the “floodgates” for other renegotiations, she said.
Onshore, global economic pressures have driven a spate of renegotiations for power purchase agreements, as well as delays in signing turbine contracts, she said.
The overall effect is that global economic conditions are dampening renewable projects. Next year is expected to be a much slower year for renewable growth than 2022, and that trend could persist for several years before flipping, she said.
The offshore wind outlook is more “complex” compared to onshore, because lead times to develop projects are twice as long, spanning shifting economic and political environments, she said.
The recently enacted Inflation Reduction Act’s bundle of tax credits adds certainty for offshore wind projects, but it’s still being factored into projects. Meanwhile, elevated costs are expected to stay elevated, but that’s not certain.
“No one can predict how macroeconomics are going to shift,” Jean-Michel said. “It could really could go either way.”
Correction: Due to a reporter error, an earlier version of this story did not include a statement provided by Mayflower Wind before publication. The story has been updated to include its comment.
