After Securing State Contracts, Wind Developers Demand Subsidies and Higher Rates

Offshore wind companies along the East Coast are seeking to re-trade deals with state governments, arguing that projects they previously committed to will fold without additional support. Some developers with existing state contracts have already convinced states to fork over more cash, while others have backed out, planning to bid on future solicitations at higher prices.

Clean-energy developers including BP, Equinor, and Ørsted have filed petitions to regulators that emphasize permitting delays and the short-term rise in inflation and commodity prices, as well as pandemic-induced shortages in key electronic components from Asia. They say these will make it hard or impossible to build projects at prices they had earlier negotiated with utilities.

Several petitions also warn of longer-term troubles facing the wind industry, including what developers describe as extended difficulty obtaining components primarily manufactured in China. Major equipment manufacturers have recently announced lackluster profits and even lossesdespite a bonanza of subsidies in the US and Europe.

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Last week, Massachusetts utilities reached an agreement with the developer Avangrid to exit power purchase agreements (PPAs) for a project just south of Martha’s Vineyard. Avangrid had planned to charge 7.2 cents per megawatt hour for its 1,200-megawatt project, a price it locked in April 2022, but by December had decided the rate was too cheap.

Avangrid agreed to pay $48 million in penalties to the utilities for backing out, and plans to bid on the state’s next solicitation, which is expected to be New England’s biggest offshore wind procurement to date. Another Massachusetts offshore wind project—a joint venture between Shell and Ocean Winds—is also looking to end its PPA and rebid at higher prices.

Regulators should ask whether companies are dropping out of deals because they are truly nonviable, said Rich Sweeney, an economist at Boston College who specializes in renewable energy, or because they are now seeking better deals in a hot market for wholesale electricity.

Sweeney pointed to the fact that after several major offshore wind deals were signed in 2019, Russia invaded Ukraine and power prices soared.

“If you sign a deal and your costs change, but also, your option of doing something else and getting out of your deal has changed, you have an incentive to make it look like you’re backing out due to costs, and it’s really hard to know if that’s true or not,” Sweeney told the Prospect.

Higher demand for clean energy could provide wind companies an opportunity to bid up prices beyond what we would compensate them for inflation.

Developers have protested that they are merely seeking adjustments to new macroeconomic conditions. Sunrise Wind, a joint venture of Ørsted and Eversource, has petitioned New York’s Public Service Commission for relief from higher prices due to inflation and interconnection issues. Its petition insists that the company “will not receive any ‘windfall’ as a result of the requested amendment.”

But in states where regulators allow developers to scrap existing contracts and try again, experts say a higher demand for clean energy could provide wind companies an opportunity to bid up prices beyond what we would compensate them for inflation.

Several states are now fighting to keep high-profile offshore wind projects afloat, including by giving developers money that was originally slated to be used to lower customers’ energy bills.

In New Jersey, state legislators last month narrowly approved a budget allowing Ørsted to use federal renewable-energy tax credits for its Ocean Wind 1 project, in an effort by Gov. Phil Murphy’s administration to save the project.

“When Ørsted received approval to build Ocean Wind 1, they agreed to apply for and return to ratepayers any federal tax incentives that might become available costs to offset the higher rate that ratepayers are paying today for the development of wind energy,” state Sen. Edward Durr, a Republican, told the Associated Press. “Ørsted is realizing that wind farm projects don’t make economic sense without major government subsidies.”

DESPITE THE DOLDRUMS IN OFFSHORE WIND, Maryland Gov. Wes Moore in May signed the POWER Acta law aiming to quadruple the state’s development of the resource.

Environmental groups applied the measure. Less discussed was a provision in the POWER Act modifying a law that had required developers with existing state contracts to pass along 80 percent of the value of any new tax credits to ratepayers. The act authorized the Maryland Public Service Commission to grant exemptions and give developers such as Ørsted the entirety of new Inflation Reduction Act tax benefits—even though they were passed after the contract was signed.

The change in Maryland is already being cited as precedent. In New York, all four offshore wind projects contracted with the state energy agency, including Sunrise Wind, are asking for higher payments from electricity users.

“Notably, the State of Maryland has taken steps to improve the economics of previously awarded offshore wind energy projects,” Sunrise Wind wrote, citing the POWER Act.

Sunrise Wind says it is asking for “inflation and interconnection cost adjustment mechanisms comparable” to the ones offered by the state energy agency in its current offshore wind solicitation. It cites the higher costs of inputs: Steel prices have increased 48 percent since it submitted its proposal, it says, while labor costs have increased 18 percent.

The rising costs of offshore wind have also caught the eye of labor groups looking to secure contracts that will benefit local workers.

Francis Eanes, a labor organizer in Maine who helped labor unions forge an agreement requiring contractors to pay collectively bargained rates at new offshore wind development, said he is concerned by developers threatening offshore deals throughout the East Coast.

“The greatest bulwark against some of those inflationary risks is to invest in domestic manufacturing of components,” Eanes said.

“The federal government can do more when it comes to transmission planning, funding this at scale, and then making sure we’re holding developers accountable to their commitments,” he added. “If we had a planned, coordinated, rational approach, this could be amazing.”

DEVELOPERS HAVE SOUGHT TO EMPHASIZE HEADWINDS that are for the most part temporary, such as inflation and interconnection problems. Media coverage and industry reports by clean-energy consultants such as Wood Mackenzie have echoed that framing, arguing that higher costs will soon dissipate.

But developers and original-equipment manufacturers in wind are also quietly signaling the need to shift expectations for industry permanently higher costs.

Current filings hint at these issues. “EBITDA margins across the offshore wind supply chain have been squeezed since 2015. The low margins, combined with macroeconomic dynamics that drive up cost of capital, facility and vessel capex, challenge new investments into the sector,” reads one filing to the New York Public Service Commission.

The report, written by Wood Mackenzie for developers Equinor and BP, projects that “the offshore wind sector is approaching a longer lasting challenge of ramping up significantly to match both government and developer ambitions for offshore wind.”

Wind turbine manufacturer Siemens Gamesa announced last month that a bevy of quality problems with its components could cost more than $1 billion to fix. The news knocked out more than a third of the company’s market value. Vestas, another major manufacturer, recorded losses of 1.2 billion euros last year after rising warranty costs, mostly due to an issue with one of its units.

States have held competitive auctions, but agreed-upon prices may have been too low to make it worth companies’ while. Last week, Rhode Island Energy rejected a bid from Danish developer Ørsted and Eversource to build an offshore wind project, citing high costs. It was the only bid the utility had received in the solicitation.

States have held competitive auctions, but agreed-upon prices may have been too low to make it worth companies’ while.

A recent report by renewable-energy insurer GCube, reviewed by the Prospectlinks some cost challenges in wind to the growing size of wind turbines.

Dramatic growth in the height of turbines has raised power output, helping wind to compete with conventional power stations. But bigger may not always be better. GCube reports that offshore wind insurance claims have increased in frequency and severity over the past decade, hitting historic highs in 2021, the last year they analyzed. One reason is that larger turbines tend to experience component failures sooner than smaller ones.

In the past, the absence of profits for top wind manufacturers was attributed to development costs. Wind profits were expected to materialize through learning-by-doing.

“Now, several years later, when the reward for that investment should be materializing, extensive multi-billion-dollar losses have been reported due to increasing warranty, repair and maintenance costs on larger machines,” the GCube report explains. “At the heart of the issue for manufacturers is the focus on continually increasing MW output, which perpetually keeps new technologies within their prototypical phase.”

That is a more favorable outlook than what critics of wind energy believe, since it implies that once projects exit the “prototypical” phase, deployment will still bring costs down. Skeptics argue that operational expenditures for offshore wind could stay high, making it hard to turn a profit.

“Wind companies may be ethically and politically wrong to ask for more money, but they’re not lying when they say they’ll fold and die if they don’t get more money,” Mark Nelson, an energy consultant and pro-nuclear advocate, told the Prospect. And yes, this will blow a giant hole into the energy plans of states that signed up for this.

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