Vineyard's pain 'will mean long-term gain' for US offshore wind

Will the US government's shock decision to delay its first utility-scale project for extra environmental review be a road-bump for industry or point to rough ride ahead, asks Richard A Kessler

Near-term pain but major long-term gain. That’s the prognosis the nascent but hugely ambitious US offshore wind industry faces as aftershocks subside from the US government’s surprise August decision to delay the nation’s first utility-scale project, the $2.8bn Vineyard Wind development off Massachusetts, for further environmental review.

Anxiety among project developers, state officials and supply chain executives that President Donald Trump was impeding a new, fast-moving renewables sector over his personal animus toward wind turbines or for political reasons, has given way to recognition and resignation that additional federal regulatory oversight was probably unavoidable at this early stage.

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“While it’s not been the most fun summer I’ve ever had, I think we’ve come to accept that this is one of the steps that needs to be taken to move this industry forward,” Lars Pedersen, Vineyard Wind’s CEO tells Recharge.

Vineyard Wind – a joint venture (JV) between Iberdrola-owned Avangrid and Copenhagen Infrastructure Partners – took some solace from reassurance by the Department of Interior’s chief industry regulator that offshore wind remains part of the administration’s “America First” energy strategy to achieve self-sufficiency through expanded domestic supply.

Furthermore, it is committed to a permitting process that minimises ocean user conflicts and establishes a strong foundation for the looming build-out, according to Walter Cruickshank, chief of the Bureau of Ocean Energy Management (BOEM), which oversees energy development on the outer continental shelf beyond state territorial limits.

“We expect that this analysis will serve as both a base and a model for future projects,” he told Recharge, and enable them to more smoothly navigate the federal regulatory process.

“That’s the goal. Vineyard is the first one out and there will be more after that, and it becomes, I won’t say routine, because there are always issues. But [the aim is] that people have a better understanding of what we’re looking for to approve a project.”

While BOEM is working expeditiously on the supplemental study, Cruickshank said the bureau wouldn’t “cut corners” in its efforts to identify best practices for project design in federal waters. A draft should be ready for public comment in early 2020, with future plans to further assess the cumulative impact of all potential east coast offshore wind developments and capacity procurement by states.

Since BOEM’s first environmental assessment for the 800MW Vineyard Wind project in 2018, the industry’s firm power off-take arrangements have quadrupled to 4.4GW, while Atlantic states’ offshore wind 2035 capacity commitments have soared to above 22GW. It’s a far cry from the present day, given the US only has a 30MW pilot project, Block Island, off the Rhode Island coast, online.

“It seemed almost weekly there were new announcements from states about their new goals and new RFPs (request for proposals),” notes Cruickshank, adding this has galvanised the federal government into taking a long-term view on how best to manage offshore wind activities so as to “get this right”.

"While it’s not been the most fun summer I’ve had, we’ve come to accept that this is needed to move this industry forward"
Lars Pedersen, Vineyard Wind CEO

The burgeoning industry is seen by many in the 350-year-old New England commercial fishing industry as a potential economic threat as the number of turbines proliferate in shallow coastal waters, particularly if they impede traditional practices such as bottom trawling. That concern, whether valid or not, helped prompt the new study.

Another trigger was the growing – critics say belated – awareness by regulators, stakeholders and state officials that more thought must be given to how future projects will get electricity into the mainland network and the scope of construction activity this will entail at sea. Equally important, limited grid infrastructure in place at some proposed landing sites can’t absorb the forecast influx of offshore power – and the total price tag for upgrades remains distinctly unclear.

Pedersen reflected on Vineyard’s permitting delay and the fallout for the US flagship project, its investors and suppliers.

“For better or worse, we are a victim of our own success,” he said, noting that Vineyard’s ability to offer record-shattering low electricity prices to Massachusetts played a big part in showing policymakers and public opinion that offshore wind can compete with traditional energy in the northeast. “It has spurred quick growth in the state RFPs and other projects.”

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The permitting delay has been costly for Vineyard’s JV owners partners as they wait for BOEM to clarify when it will end its review, what project modifications it may require and when it will issue the remaining permit necessary for construction start. The so-called final environmental impact statement (FEIS) that was due for completion in the summer and Vineyard was ready for 1 November financial close – a deadline now come and gone.

Pedersen said Vineyard was fortunate to team up with supply chain companies that took a strategic view that being first in the US market would give them advantages as the industry gains scale. “We lost quite a bit of money, people have lost quite a bit of money and it could have ended in a bad break-up. These people have been really supportive.”

MHI Vestas is supplying Vineyard Wind’s 84 V164-9.5MW turbines, Dutch contractor Sif the monopile foundations, and Danish steelyard Bladt Industries a 4,500-tonne jacket-based substation.

MHI Vestas director of US sales Jason Folsom said while he took the permitting delay “very personally,” he was confident the project and budding industry whose ambitions could open a $70bn supply chain opportunity opening next decade, will overcome the hurdle.

“Do we like it? No. Does it have an impact financially or otherwise? Yes,” he said. “At the project level, it’s a real challenge. It has impacts. But its’s manageable. These things happen in market development.”

Without a clear timeline – industry and state officials expect federal approval “sometime” in 2020 while Avangrid executives are hopeful for early Q2 - Vineyard is grappling with two immediate issues.

First, its low delivery prices - $74/MWh on a levelised basis in the first year of a 20-year contract for the initial 400MW capacity and first-year $65/MWh for the balance – hinge on the project qualifying for the one-time federal investment tax credit (ITC) worth a “blended” 21% of capex.

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There is a four-year project completion window to earn the credits. In this case, at 24% in 2017 and 18% in 2018 for the two 400MW tranches of capacity it is contracted to deliver by the end of 2022. Once prequalified, the US tax authority generally doesn’t allow the same project to again seek eligibility at lower ITC value to extend its timeline. Moreover, the ITC now at 12% value for wind expires at the end of this year.

ITC language does, however, allow for “excusable disruptions” such as permitting delays, according to Wood Mackenzie analyst Anthony Logan. “In that case, it might make it a little easier to claim the tax credits,” he said. Pedersen says Vineyard will try to obtain an extension at 24% value given the extenuating circumstances the project has faced.

“I think it is difficult to say what kind of flexibility there could be. We think we were a special case. It was not something we were in control of. We hope we can get relief,” he said.

The second and related issue is that Vineyard is unlikely to meet the delivery deadline for all 800MW capacity by the end of 2022. Failure to do so could result in costly financial penalties depending on clauses in contracts. Still, there is a strong chance an amicable solution will be found given state officials led by Governor Charlie Baker have a vested interest in seeing through the nation’s flagship project, which enjoys public support.

On a recent conference call, Avangrid executives said if BOEM does require more spacing between turbines to address fishing industry concerns, Vineyard may adopt a larger rotor for its turbines - 174 metres versus 164 metres now - and this could improve the project's capacity factor and financial return.

Despite the early trials and travails, the industry is finding its voice in the US and project developers have begun collaborating to address common challenges such as permitting and anticipate others that could short-circuit future growth.

“We are fierce competitors, but the time has come to be a joint industry to achieve the goals we all have,” said Christer af Geijerstam, head of the US wind operations at Norway’s Equinor, which has a 25-year, 816MW power purchase agreement (PPA) with New York State.

Pedersen said over the summer developers realised they can only address certain issues as an industry – a sign it is maturing. “It was not long ago that we all sat in the room together for the first time. It was a little bit awkward. We were more used to having the boxing gloves. But it’s moving in the right direction,” he said.

Meanwhile, critical to its future success is the vote of confidence from global lenders. At least 100 big and small banks have committed or may provide debt and tax equity finance for offshore wind projects. That represents a sea change from the cautious few involved with the Block Island pilot project in 2016.

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Today’s project financiers along the Atlantic coast are large corporations with big balance sheets and successful track records building utility-scale arrays in Europe. The 20-25-year revenue streams are double or triple available tenors onshore and the power buyers are strong creditworthy counterparties.

Winds are also steadier and stronger in the maritime environment and rapidly advancing turbine technology promise more energy capture, adding to projects’ revenue potential. Vineyard alone believes it can harvest 3GW of capacity from its project area and 2GW from another nearby zone.

“Who isn’t interested in providing debt for offshore wind? Europeans and other banks have been waiting for this growth market to open. There is a lot of pent-up demand for investing in these projects,” said Nuno Andrade, head of structured finance in the Americas at Santander Bank.

While not ignoring risk in the project development phase, they see the Vineyard case as a speed bump and expect offshore wind to evolve much as onshore wind and solar PV have done to achieve widespread scale within a decade. Once affordable clean energy and economic development benefits become apparent, offshore wind energy will sell itself.

Industry players recognise that won’t happen overnight. Still, offshore wind is among the largest new sectors emerging in the US economy and the potential is enormous, says Thomas Brostrom, president of Orsted North America, which has multiple projects in the US Atlantic, including the 1.1GW Ocean Wind mega-development off New Jersey and, through its Sunrise Wind JV with Eversource, recently sealed a PPA with New York State for 880MW.

“Nobody can challenge that the market fundamentals are as good as there are anywhere in the world. For me, the mission is to get the job done,” he said.

· With additional reporting by Darius Snieckus

Updates with Avangrid hopeful of Q2 BOEM project approval, capacity estimates for leased zones off Massachusetts coast and maybe increasing turbine rotor size from 164 metres to 174.

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