US renewable energy developer Avangrid has filed a motion with utility regulators in the state of Massachusetts seeking to cancel its 1.2GW Commonwealth Wind power offtake contracts in a last-ditch effort to negotiate better terms amid global inflation and interest rate pressure.
Avangrid, majority owned by Spanish utility Iberdrola, told the state Department of Public Utilities (DPU) that the giant project’s original power purchase agreements (PPAs) are unfinanceable and so violate Massachusetts law, necessitating that Commonwealth be voided.
“The PPAs do not meet the fundamental statutory threshold that they must ‘facilitate the financing of offshore wind energy generation’,” the company said, in a statement. “It does not appear that there is a viable pathway that would allow that threshold to be met.”
The company and the state have been at loggerheads for months over the economics of the PPAs that are still under DPU review.
Avangrid was awarded the Commonwealth development last December in Massachusetts’ round three solicitation, with the developer signing PPAs with local utilities in April for $72/MWh, a new low for the US market.
“Unprecedented challenges”, however, including “sharp and sudden increases in interest rates, prolonged supply chain constraints, and persistent inflation”, have made the PPAs “no longer viable”, according to the company, which has been unsuccessfully seeking to renegotiate the contracts.
The best path forward “is for the offshore wind energy generation capacity currently included in the PPAs to be procured in the next solicitation. Commonwealth Wind would bid into that solicitation”, the company said.
It’s a “risky” move, Wood Mackenzie senior wind analyst Samantha Wood told Recharge, noting that the state hasn’t confirmed it would allow Avangrid to rebid Commonwealth in next year’s round four tender, and that a new entrant could outcompete the developer in such a scenario.
The outgoing administration of Massachusetts governor Charlie Baker “is disappointed by Avangrid’s request to the DPU to dismiss the review of the Commonwealth Wind contracts, but remains committed to the deployment of commercial-scale offshore wind”, Danielle Burney, spokesperson for the Energy and Environmental Affairs executive office, told Recharge.
If the DPU does not dismiss the proceeding, “Commonwealth Wind will need to evaluate at that time its next steps,” an Avangrid representative told Recharge.
The state is mandated to procure 5.6GW by 2027, and as the Commonwealth project has been under development for several years, it is already nearing the end of its lengthy permitting process.
The Bureau of Ocean Energy Management (BOEM), the lead regulator of energy development in federal waters, yesterday (Monday) issued the draft environmental impact statement (EIS) for Avangrid’s 2GW New England Wind complex – which includes Commonwealth and the 800MW Park City Wind contracted to Connecticut.
The comprehensive, multi-agency EIS is the last hurdle for an offshore wind project before being issued a record of decision (ROD), which would enable it to begin construction. BOEM anticipates issuing the combined project’s ROD next October.
“Commonwealth was going to be a huge stride towards hitting the state targets,” said Woodworth. “They’re basically using the state solicitation process as a back door to potentially renegotiate their PPAs.”
Future price impacts
Commonwealth is the first major US project to walk away from a signed PPA but might not be the last as global economic conditions continue to negatiely impact long-term offshore wind PPAs.
“Offshore wind as a new a new industry is not immune to the impacts of global economic trends and certainly rising prices worldwide have had an impact,” said Josh Kaplowitz, head of trade group American Clean Power Association’s offshore wind unit.
Developers have “had the rug pulled out from under them, because they put in assumptions about steel, interest rates and everything, and those assumptions are [now] probably wrong,” noted Willet Kempton, professor at the University of Delaware and adviser to Special Initiative for Offshore Wind think-tank.
Avangrid’s efforts to gain a higher PPA are “an adaptation to [current] conditions”, said Kempton.
They will also give developers “food for thought going into upcoming state solicitations”, said Woodworth.
Several states are slated for offshore wind tenders next year, including New York, New Jersey and Massachusetts, and the industry will be watching for Commonwealth’s impact on future prices.
“Inflation and other cost considerations will start being included in bid prices, or perhaps there will be added contract language that would allow PPA renegotiation or re-bidding of a project for this kind of force majeure,” said Woodworth.
Kempton sees the next couple of rounds as “maybe they’ll be a little more expensive” but notes that with war in Ukraine resulting in surging natural gas prices, costs for many forms of energy are rising, and “relative to other power, [offshore wind] may not actually be any worse”.
Also, as offshore wind has no fuel component, “once these projects are built, they're going to be a buffer against price fluctuations,” said Kaplowitz. “Wind resources are immune from inflation.”
Kaplowitz said the lengthy timelines between projects bid several years ago and current economic conditions points to the need for permitting reform.
“You have this big gap between when PPAs are issued and when and when permits are issued,” he said. “And the longer that gap, the more likely that some unanticipated event that's going to happen. That could impact the economics of a project.”