Head Winds and Tail Winds in Offshore Development

Rebecca Walkley Headshot
Rebecca S. Walkley
Counsel, Administrative Law Department
Published: New Hampshire Bar News
September 20, 2023

Following President Biden’s ambitious goal to deploy 30 GW of offshore wind by 2030, several New England states have taken steps to promote the development of offshore wind.  Massachusetts, Rhode Island, and Connecticut passed legislation requiring electric utilities to issue RFPs to procure the output of wind projects being developed in relatively shallow waters off of Martha’s Vineyard and south to Long Island, with the first major project, the 800-MW Vineyard Wind project, currently under construction and due to begin generating power by the end of this year.  Maine and New Hampshire have focused on the longer-term goal of developing floating wind turbine projects in the deep water off the Gulf of Maine.  In 2021 Maine submitted a lease application to the Bureau of Ocean Energy Management (“BOEM”) for the installation of the nation’s first floating offshore wind research site in federal waters.

The federal Inflation Reduction Act of 2022 (“IRA”) includes a number of provisions to promote offshore wind development.  Among other provisions, $100 million has been earmarked for regional transmission planning and $760 million has been set aside for grants to speed up local siting processes.  In addition, the IRA extends and increases investment and production tax credits through 2024 for wind energy projects that begin construction prior to January 1, 2025.  In 2025, the tax credits for wind will be replaced with technology-neutral credits for low-carbon electricity generation, which will phase out in 2032, or when U.S. power sector greenhouse gas emissions decline to 25% of 2022 levels, whichever is later.

Recent decisions on major offshore wind projects both in New England and along the East Coast, however, suggest the current economic and market conditions could scale back previous expectations for the rapid deployment of offshore wind.  At the same time, grass roots activism and the resulting political considerations are generating opposition to offshore wind – a trend consistent with most large infrastructure projects.

In July of this year, state officials in Rhode Island decided not to move forward with a large scale offshore wind project in Rhode Island.  The proposed project involved a joint venture between Eversource and Ørsted to create 600 to 1,000 megawatts of offshore wind generation.  The joint venture project was the only project bid in response to an RFP issued by the state of Rhode Island back in October 2022.

Rhode Island’s decision not to proceed with the project was made following a four-month evaluation process, which was completed in consultation with the Rhode Island Office of Energy Resources and the Division of Public Utilities and Carriers.  This review is mandated under applicable federal regulations.  The Energy Policy Act of 2005 (“EPAct”) requires that BOEM coordinate with relevant federal agencies and affected state and local governments in order to obtain fair return for leases and grants issued, and to ensure that renewable energy development takes place in a safe and environmentally responsible manner.

The state determined that rising costs made the project too expensive for ratepayers and concluded the project was inconsistent with state law, specifically, the state’s Affordable Clean Energy Securities Act and its requirement to “reduce energy costs.”

The decision in Rhode Island is a glimpse of what is happening in terms of offshore wind development all along the east coast of the United States and globally.  Several developers in the United States have sought to renegotiate power supply contracts in response to rapidly increasing costs, due partly to supply chain issues and rising demand.  For example, BP and Equinor recently announced they would be renegotiating their power purchase agreements with respect to their development of the Empire and Beacon offshore wind projects, which have a total capacity of 3,300 megawatts.  Rising interest rates also means that financing the billions of dollars in investment that go into these installations has also become far more expensive.

In part, the challenges surrounding financing for offshore projects is amplified by the nature of such offshore development and the applicable regulatory approval process.  Offshore projects can require a decade to progress from planning stages to generating power.  The result of this lengthy development timeline is that necessary contracts that set the price of power, among other crucial factors, may be out of date before turbines are in place and generating electricity.  This sequence including the delayed return on investment worked when inflation was insignificant and demand for turbines and other equipment was relatively low.  As a growing number of developers look to secure project components, however, the rising demand for wind turbines, the services of specialized construction ships, and bank financing, results in much higher prices of construction compared to prices available until very recently.

As a consequence, developers are terminating projects, even in the face of hefty penalties, because it is more economical than moving forward with project construction.  Avangrid agreed to pay $48 million to terminate a power purchase agreement signed with the Commonwealth of Massachusetts just last year.  Avangrid, and others, cited the war in Ukraine, rising interest rates, and supply chain disruption as the cause for their inability to procure financing.  These same projects will likely be rebid in future state procurements, but at a higher price point.

These changing market conditions are unlikely to stop offshore development across the board.  In fact, the Department of the Interior just announced in July 2023 that it will hold the first offshore wind energy lease sale in the Gulf of Mexico.  The Department also announced in August its approval of the Revolution Wind project located approximately 15 nautical miles from Rhode Island with an estimated capacity of 704 MW.  BOEM is also forecasting that it will review at least 16 Construction and Operations Plans of commercial, offshore wind energy facilities by 2025, which would represent more than 27 GW of clean energy for the nation.  Nevertheless, it is likely we will see negotiated power purchase agreements and other related, essential contracts affected by these significant changes in the market.