Avangrid Inc. told Massachusetts regulators that the planned 1,232-MW Commonwealth Offshore Wind Project farm is not viable under its current contracts with state utilities as macroeconomic pressure has sent project costs soaring.
The Iberdrola SA subsidiary on Oct. 20 asked the Massachusetts Department of Public Utilities for a month-long pause to proceedings on whether to approve power purchase agreements, or PPAs, for the offshore wind farm so the company can renegotiate the contracts. (DPU Docket Numbers 22-70, 22-71 and 22-72)
"As has been publicly reported in recent weeks, global commodity price increases, in part due to ongoing war in Ukraine, sharp and sudden increases in interest rates, prolonged supply chain constraints, and persistent inflation have significantly increased the expected cost of constructing the project," Avangrid said in its request. "As a result, the project is no longer viable and would not be able to move forward absent amendments to the PPAs."
The PPAs are with the Massachusetts distribution utilities of Eversource Energy, National Grid PLC and Unitil Corp. They set an energy price of $47.68/MWh for the first year, which would escalate to $76.22/MWh in the project's 20th year, according to state filings. And they set renewable energy credit prices at $11.92/REC for the first year, escalating to $19.06/REC in the 20th year.
Avangrid maintained it is "fully committed" to the Commonwealth Wind project, though a recent decision by the company to push the project's commercial operation date back by a year, to 2028, has put at risk Massachusetts' goal of 4,000 MW of offshore wind power by 2027.
"Even with a short delay to these proceedings, the project, with its expected commercial operation date in 2028, can greatly help the Commonwealth in meeting its 2030 greenhouse gas emission limit of 50% below 1990 levels," Avangrid said.
Even new, lucrative incentives for renewable energy projects in the Inflation Reduction Act are "not anticipated to make the project economic absent other changes to the PPAs," Avangrid said of its Commonwealth Wind project.
During the requested one-month extension, "Commonwealth Wind expects to demonstrate to the parties that the project, even with a modest increase in the PPA price needed to achieve viability, will continue to be cost-effective, to reduce ratepayer bills, and to insulate ratepayers from the kinds of price spikes the Commonwealth is currently experiencing due to natural gas cost increases," Avangrid added.
Soaring costs
During a September conference, Avangrid CEO Pedro Azagra Blázquez cited inflation and soaring commodity prices as driving the decision to delay the project to 2028. Avangrid has restructured its joint venture with Danish infrastructure developer Copenhagen Infrastructure Partners K/S on several offshore wind projects, including Commonwealth Wind.
"We don't have enough resources to do everything we have on the table," Blázquez said. Avangrid subsidiary Avangrid Renewables LLC now fully owns the Commonwealth project.
Global economic and geopolitical turmoil is pressuring the economics of other projects as well, just as the offshore wind industry, buttressed by unprecedented political support, blossoms in the U.S.
An Oct. 17 General Electric Co. filing in a wind turbine patent infringement lawsuit brought by Siemens Energy subsidiary Siemens Gamesa Renewable Energy SA noted that as recently as two years ago, it was not a market practice to subject prices to escalation in turbine supply agreements. In December 2020, GE scored such an agreement to supply turbines for the 1,100-MW Ocean Offshore Wind Farm, a joint effort of Ørsted A/S and Public Service Enterprise Group Inc. The contract provided GE with 10% escalation coverage.
But, GE said, with "today's highly inflationary environment, the price of the Ocean Wind 1 contract would need to increase by 19.1% to account for the increase in costs resulting from the large increases in commodity costs and inflation." GE said its unrecovered costs net to 14.2% of the project's price. GE noted the cost of fuel has jumped 65% since 2020, the cost of steel 85% and the cost of PrNd, a rare earth alloy, by 114%.
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