States Adjust Offshore Wind Strategy After Project Cancellations

State officials are confronting a wave of offshore wind project cancellations by allowing developers to resubmit bids that can adjust to inflation while pledging to scrutinize their promises.

States have been put into a bind in recent months as macroeconomic factors like higher interest rates and supply chain bottlenecks derailed projects they planned to use to meet clean energy goals. Demand from utilities in the Northeast and Mid-Atlantic coastline are key drivers of meeting the Biden administration’s target of 30 gigawatts of offshore wind by 2030.

But now that developers have pulled the plug on projects — and other developers are seeking to renegotiate deals — states are readjusting their expectations.

The latest blow came last week when Ørsted, a Danish company, walked away from plans to develop Ocean Wind 1 and 2, projects off the coast of southern New Jersey that promised 2.2 gigawatts of power capacity. The wind developer took a $4 billion write-down, largely due to the cancellation of those two projects.

That news followed Avangrid Inc.'s July decision to pay about $48 million in fines to get out of its deal to supply power from its Commonwealth project off the coast of Massachusetts, as well as the company’s October decision to pay $16 million to terminate contracts for its Park City project near Connecticut.

In August, a Shell Plc unit and its joint-venture partners agreed to pay more than $60 million to exit their own deals.

New Jersey could follow the lead of states such as Massachusetts and Connecticut, which now allow offshore wind bids to be adjusted for any inflation the developer experiences between securing the bid and beginning construction, said Timothy Fox, a vice president and research analyst at ClearView Energy Partners, an independent research firm in Washington.

Massachusetts also put in place rules to penalize developers who previously canceled projects and are re-submitting bids. Developers can receive up to 10 negative points on a 100-point scale, according to the solicitation published in August.

“The breadth of how many projects have now disputed contracts and/or have canceled contracts suggest that state regulators and state policymakers are very aware of this prospect in the future and are likely to design contracts to address or severely limit this from happening again,” Fox said.

While Fox characterized the Massachusetts scoring criteria as “surmountable” for developers, states are effectively telling developers: “In our next solicitation, you can re-bid, but we’re going to remember this. We’re going to remember you pulled out. So if there are other bidders, you are at a competitive disadvantage.”

Few Options

Following the cancellation of the Ocean Wind projects, New Jersey Gov. Phil Murphy (D) pledged to “review all legal rights and remedies and to take all necessary steps to ensure that Orsted fully and immediately honors its obligations.”

Ørsted’s decision is “outrageous and calls into question the company’s credibility and competence,” Murphy said. The state declined to comment on its legal strategy.

The main legal implication for developers pulling out of projects is paying a termination penalty outlined by the power purchase agreement with the state, said Ed Roggenkamp, a Washington-based partner with Nossaman LLP.

New Jersey’s agreements with Ørsted don’t appear to include a termination penalty, but The Associated Press reported Monday that the company is trying to get out of a $300 million assurance it previously agreed to pay the state in the event it didn’t go through with its wind farm.

The wind project faced opposition from local residents. Last month, the County of Cape May, N.J., and several local groups filed a lawsuit alleging federal agencies violated multiple laws when approving the 161,000-acre project.

States that see offshore wind as a cornerstone of their clean energy futures are left with few options but to plow ahead with solicitations.

Massachusetts’ solicitation for up to 3,600 megawatts of offshore wind generation proposals is its largest to date, representing 25% of Massachusetts’s annual electricity demand. The bid “allows for flexibility in proposals to reduce risk to ratepayers and bidders, and lays a solid foundation to get additional projects up and running,” said Lauren Diggin, external affairs manager for the Massachusetts Department of Energy Resources.

Rhode Island and Connecticut also issued final requests for proposals last month after signing a memorandum of understanding with Massachusetts for the three states to jointly select offshore wind projects — another move intended to help the industry.

“We think that by pooling our buying power, we may be able to attract more competitive pricing,” said Katie Scharf Dykes, commissioner of Connecticut’s Department of Energy and Environmental Protection.

Connecticut’s RFP included an indexed pricing option that can adjust for changes, such as inflation, that may occur after the bid due date but before the project reaches financial close, at which point project costs for the developer are more locked in, the state said. The state also increased its penalties for terminating power purchase agreements, Dykes said.

“These economic headwinds impacting offshore wind at such a critical time is of course something that calls for states to be very nimble,” Dykes said. Since these projects are so important for ratepayers, the state wants “better assurance that developers will carry forward.”

Lessons Learned

The same day Ørsted pulled out of Ocean Wind 1 and 2 in New Jersey, it committed to start construction on the 704-megawatt Revolution wind farm off the coast of Rhode Island. The facility will supply 400 megawatts of power to Rhode Island and 304 megawatts to Connecticut.

The Revolution project’s completion may be all but guaranteed. But the trio of states that recently finalized solicitations — Rhode Island, Connecticut, and Massachusetts — is keeping a close eye on the market into 2024 as proposals roll in, said Christopher Kearns, energy commissioner at the Rhode Island Office of Energy Resources.

“There’s certainly been some lessons learned over the last 12-18 months” when it comes to the national and global landscape for energy projects, he said.

Maine — which passed summer legislation requiring 3,000 megawatts of offshore wind energy under contract by 2040 — is watching what’s happening in other jurisdictions and looking to the language of its other clean energy contracts to see what has worked best for the state previously, said Dan Burgess, director of the State of Maine Governor’s Energy Office.

Vermont, a landlocked state, currently does not issue RFPs to offshore wind developers. But it still has a stake in the industry’s success, since the resources created by wind farms would supply residents, said June Tierney, commissioner of the Vermont Department of Public Service and a former attorney.

“In my world, bidders would have to accept greater limitations on their ability to withdraw” from projects, she said. “The economics may not be there, but climate change isn’t going to wait.”