US offshore wind: There's trouble at mill

US offshore wind has had project finance lenders salivating since the first and only deal of scale – the $2.34 billion construction-plus-seven-year senior debt financing for the 800MW Vineyard Wind 1 project – reached financial close in 2021. To say lender appetite was, and still is, strong is an understatement – what’s not to like about a solid pipeline of $1 billion-plus projects in the world’s strongest economy? But for the borrowers those lenders will service, the fledgling US market is losing its appeal.

The warning signs started mid-year in Massachusetts when SouthCoast Wind – a joint venture between Shell and Ocean Winds – and Avangrid started signalling they were looking to rebid the 1.2GW SouthCoast Wind 1 (formerly Mayflower Wind) and 1.2GW Commonwealth Wind projects respectively. Avangrid subsequently cancelled the Commonwealth project’s PPAs and agreed to pay $48 million in penalties in July. SouthCoast followed in August, agreeing to pay more than $60 million in PPA termination payments. Both Commonwealth Wind and SouthCoast Wind are hoping to rebid their projects in a Massachusetts offshore wind procurement scheduled for next year.

The problems that tarnished the Massachusetts projects – a global rise in supply chain costs and cost of debt, the size of which was not predicted when the projects were bid out (if anything the technology was expected to get cheaper) – have since spread to New York. Both Orsted and BP/Equinor have recently taken considerable impairments against US offshore wind projects. Orsted, having decided to cease development of the 1,100MW Ocean Wind 1 and 1,148MW Ocean Wind 2 projects, recognised impairment losses of DKK28.4 billion ($4.04 billion), with DKK19.9 billion of that related to the Ocean Wind 1 project. Orsted has also put its 880MW Sunrise Wind project on hold – which was lined up to service New York.

And Equinor took a $300 million hit on its US offshore wind projects being developed alongside BP – the 1,230MW Beacon Wind, 816MW Empire Wind 1 and 1,260MW Empire Wind 2 projects. BP followed suit with a $540 million impairment on the same projects.

Arguably the situation with these projects (other than those that have been cancelled outright) was a touch Mexican standoff. In the face of rising costs, existing power sales contracts would not cover the cost of building and financing the projects, so the sponsors asked NYSERDA for permission to up their power purchase agreements (PPAs) with the state by a total of around $25 billion over the life of the contracts. NYSERDA, not unexpectedly, refused and projects started getting cancelled or mothballed.

New York Governor Kathy Hochul has since stepped in to defuse the situation, announcing that New York State will issue a new offshore wind solicitation on November 30 with bids due in January 2024 – and most significantly that the tender will be open to all bidders, including those with existing contracts. This would allow Orsted, BP and Equinor to re-offer their planned projects at higher prices and exit their old contracts, although there is no certainty that they would win the tender given it is an open competition.

The TXF perspective

Despite the recent problems, the signals are that the disagreements are more hiccups than signs of a still-born US offshore wind market – albeit still worrying for contractors further down the US offshore wind supply chain. For example, Orsted is still moving forward with its 704MW Revolution Wind project, has taken the final investment decision and the project is expected to be in the market for tax monetisation in the next 12 months.

Furthermore, investor appetite for new licenses does not appear to be diminishing. New York recently announced conditional awards for three new offshore wind projects: Attentive Energy One (1,404 MW) developed by TotalEnergies, Rise Light & Power and Corio Generation; Community Offshore Wind (1,314 MW) developed by RWE Offshore Renewables and National Grid Ventures; and Excelsior Wind (1,314 MW) developed by Vineyard Offshore (Copenhagen Infrastructure Partners). Appetite is such that the American Clean Power Association (ACP) predicts a surge in offshore wind projects – totalling 51.3GW of expected capacity across 32 leases.

On the downside, inflationary pressure on costs – which is a global offshore wind phenomenon at the moment – is not the only hurdle the fledgling US market has to overcome. Orsted recently cited the Jones Act, which has long been a hurdle to rapid US offshore wind development, as another reason for its US problems.

The Jones Act is a protectionist 1920 law that restricts domestic waterborne transportation to vessels that are flagged and built in the United States.  The problem is that in the US it creates a huge bottleneck to development because of the lack of domestic wind turbine installation vessels (WTIVs). Creating WTIVs is not cheap – around $500 million per vessel – and the cost, coupled with global demand throughout Europe and Asia, drives up rates for US wind developers.

Developers are faced with three options to meet Jones Act rules. First, operate the WTIV out of a foreign port (thus making the voyage to the US installation site international rather than domestic); second, station the vessel at the installation site and have turbine components transported to it from a nearby US port via Jones Act‐compliant feeder barges; and third, build a WTIV in a US shipyard and register it under the US flag.

In the case of Orsted, it opted for the third option, only to find the vessel’s delivery has been pushed back to late 2024 or early 2025, and its price has jumped from $500 million to $625 million.

Will the US exclude offshore wind vessels from the Jones Act? It hasn’t yet. But given the US shipyards that engage in commercial vessel construction such as Philly Shipyard and General Dynamics‐NASSCO are already booked for years to come under government contracts – exempting WTIVs from the Jones Act would make life a lot easier for US offshore wind developers.