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INSIGHT: Promise of U.S. Offshore Wind Boom Also Brings Challenges

Aug. 6, 2019, 9:31 AM

Offshore wind in the U.S. has been a hot topic over the last several years, but with relatively little progress to show.

Far from the robust pace of the industry in Europe, which boasts 18.5 gigawatts of installed offshore wind generation capacity, the U.S. has seen only modest gains.

The only operational U.S. offshore wind project is the Block Island Wind Farm—five turbines located off Rhode Island that began operation in late 2016. Since then, no other offshore wind projects have been built.

Nevertheless, some landmark offshore wind transactions have taken place, and states have awarded major contracts, with more expected.

The Bureau of Ocean Energy Management now has 15 active wind leases in federal waters, representing nearly 2 million acres.

Advances in turbine technology have nearly tripled capacity in the last 15 years, dropping the cost of offshore wind dramatically. The promise of tens of billions of dollars of investment has finally started to materialize.

State Mandates Driving Development

The driving force behind the renewed momentum of U.S. offshore wind is individual state commitments. With a goal of over 18 GW of installed generation by 2030, East Coast states are hoping to narrow the gap with Europe.

New Jersey recently awarded its solicitation for 1,100 MW of offshore wind, the largest single solicitation among the states to Orsted. The state is targeting additional solicitations of 1.2 GW each in 2020 and 2022.

The New York State Energy Research and Development Authority held a solicitation in November 2018, garnering proposals for 18 projects from four participants. The contracts went to Empire Wind (Equinor) and Sunrise Wind (Orsted and Eversource).

To attract investment dollars, coastal states have also recognized the need to modernize coastal infrastructure. For example, Massachusetts has been highly supportive of offshore wind, spending upwards of $100 million to upgrade the New Bedford Marine Commerce Terminal.

In order to facilitate investments with New Jersey companies, the governor recently announced a program to connect offshore wind investors with the local supply chain. As the European experience has shown, concentrating industry around regional hubs helps accelerate growth and foster economies of scale.

Deal Making Heats Up

Recent deals in offshore wind illustrate what is at stake.

In October 2018, Orsted paid $510 million to acquire Deepwater Wind’s development pipeline. In December, U.S. Wind announced the sale of its lease off the coast of New Jersey to EDF Renewables North America for $215 million, plus a deferred variable payment. U.S. Wind acquired the lease in 2015 for about $1 million.

At the same time, EDF and Shell New Energies US LLC announced a joint venture, Atlantic Shores Offshore Wind, LLC, to co-develop the newly acquired lease. December 2018 also saw a record-breaking lease sale off the coast of Massachusetts, with three leases taking in $405 million.

As for actual projects, Vineyard Wind, an 800 MW project off the Massachusetts coast, is expected to begin construction this year and is reportedly seeking up to $2.15 billion in debt financing.

Not far behind is the 268 MW U.S. Wind project in Maryland that the company estimates will create approximately 7,000 direct and indirect jobs and represent an in-state investment of nearly $1.5 billion.

With over $3 billion of investment expected for near-term development projects, it is clear that momentum in offshore wind is building.

Challenges

As solicitation awards are announced and investment dollars begin to flow, several challenges remain for offshore operator collaboration, managing relationships with supply chains, and navigating the complex process of state and federal approval.

The major players have recognized the importance of marrying experienced developers in European offshore wind and companies that have long operated under the regulatory and political environment in the U.S.

This raises issues common to joint venture arrangements. Companies will need to be mindful of how deadlock mechanisms and exit transactions are structured and how to address issues of competition among their respective businesses.

Budgeting, major component contracting, key regulatory permits and similar decisions are all areas of potential disagreement in a joint venture.

The parties must craft decision-making mechanisms and should consider the options each has to buy or sell their interests in a dispute.

Even where there is agreement, one partner may have differing investment goals for the venture and wish to exit the arrangement before the other.

Consider Time, Geographic Limits

Parties should consider at what milestones and under what circumstances an exit can occur.

Since the opportunities in offshore wind are widespread, parties need to consider time and geographic limits, as well as a detailed line of business scoping, in non-competition clauses to ensure they can explore alternative ventures.

It will take an experienced supply chain to construct and operate the U.S. offshore wind projects, including veterans of the European build-out. U.S. developers must engage experienced advisers versed in the standard market and contractual positions and who can anticipate and mitigate the potential risks.

The complex regulatory landscape applicable to offshore wind development poses challenges.

Both federal and state programs will apply to offshore projects and the infrastructure needed to bring power to shore. This includes the Bureau of Ocean Energy Management leasing regulations and the environmental, land use, and energy project siting requirements in the coastal states.

Experience with critical infrastructure development and U.S. regulatory authorities will be necessary to designing a critical path analysis to ensure commercial objectives can be met and development timelines achieved.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information
Ram Sunkara is partner and Joshua Belcher is counsel in the Houston office of Eversheds Sutherland (US) LLP where they represent renewable energy project developers and investors in the development, financing and acquisition of utility-scale renewable energy facilities and associated infrastructure in the US, including wind and offshore leases.

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