US offshore wind credit risks may materialize as industry matures

Construction and execution risks associated with U.S. offshore wind projects could create credit issues for the utilities developing them, particularly as the nascent industry struggles to create domestic supply chains and economies of scale, analysts at Moody's said in a pair of July 20 reports.

Project developers have so far announced plans to install more than 6 GW of offshore wind capacity, mostly along the U.S. Eastern Seaboard through 2029, according to a June 30 report from the U.S. Energy Information Administration, but at a significantly higher cost — and with more numerous permitting, financial and environmental risks — than onshore facilities.

Partnering with European offshore wind developers and using federal tax credits will help mitigate balance sheet stresses, but the U.S. sector's limited experience leaves room for even greater missteps, according to Moody's.

"A delay of more than a year would likely have more significant credit implications for an unregulated business segment than a regulated business, although the latter's ability to recover cost overruns on a timely basis through rate hikes could trigger pushback from customers, politicians and regulators," the credit rating agency wrote.

"If cost overruns, delays and other significant challenges were to demonstrate that offshore wind development carries more execution risk than we currently assume, we might consider downgrading the U.S. companies involved or raise the financial thresholds required for them to maintain their ratings, or both," Moody's continued.

Utility holding companies, the analysts said, should cut back on dividends and other capital expenditures and pour more equity into free cash flow shortfalls ahead of time to avoid implementing "reactive financial policies" in the future.

Proceeding with caution

Soaring project costs and supply chain disruptions are already forcing most U.S. utilities to take a more cautious approach to the country's offshore wind buildout as European competitors step in to bid on and win acreage.

In May, Eversource Energy began a strategic review of its offshore wind portfolio, which could result in the potential sale of all or part of its 50% stake in an offshore wind joint venture with Danish power company Ørsted A/S. The review decision came after record-setting prices during a New York and New Jersey lease area auction, which attracted mostly established European developers.

The joint venture with Ørsted includes three contracted projects with a total capacity of more than 1,700 MW, as well as up to 175,000 acres of offshore wind area not allocated to a specific project.

Avangrid Inc., meanwhile, restructured its offshore wind joint venture with Denmark's Copenhagen Infrastructure Partners K/S which gives the Iberdrola SA subsidiary the option to gain operational control of the 800-MW Vineyard Wind 1 project, now under construction, once it achieves commercial operation. Avangrid will also take full ownership of a lease area that includes two other planned projects.

Unless Avangrid finds partners for its existing projects, however, its financial metrics will face pressure "over the next five years," according to Moody's, which considers the company the "most vulnerable" among U.S. developers.

Though Public Service Enterprise Group Inc.'s unregulated business is building the Ocean Offshore Wind Farm, Moody's noted that "the strategy is not an overriding credit driver when compared to the roughly $3 billion of annual capital spending that the company will make on traditional utility transmission and distribution rate base."

Dominion Energy Inc., on the other hand, is minimizing its credit exposure by developing the 2,640-MW Virginia Beach Offshore Wind Project (Coastal Virginia Offshore Wind) at the regulated utility level under subsidiary Virginia Electric and Power Co., or VEPCO. Dominion is also building a Jones Act-compliant ship to avoid using third parties for turbine installation.

The project will be "conservatively financed" and will not experience cost overruns unless levelized electricity costs exceed $125/MWh, while construction costs will be passed on to rate-paying VEPCO customers. But Dominion could still jeopardize its credit profile by issuing debt for VEPCO to use as equity and by running into issues with regulators, the rating agency said in a separate report examining Dominion's offshore wind advantages over peers.

State and federal hurdles

Of the projects under development, only Vineyard Wind 1 and Eversource's South Fork Wind Farm have received records of decision from the U.S. Department of the Interior's Bureau of Ocean Energy Management, clearing the way for construction, while Coastal Virginia is operating a pilot project.

The Biden administration released a high-level permitting "action plan" on May 11 to accelerate renewable energy infrastructure permitting, and the U.S. House of Representatives recently passed bipartisan legislation to lift a Trump administration 10-year moratorium on offshore wind leasing in the Southeast.

But multiple federal headwinds persist, such as a proposal in Congress aimed at requiring wind power construction vessels to use American crews and Sen. Joe Manchin's decision to oppose a massive package of clean energy tax breaks. Most industry analysts are optimistic that Congress will pass a bill extending existing solar and wind tax credits by the end of the year, but some remain skeptical that a lame-duck session ahead of federal midterm elections will take action.

At the state level, offshore renewable energy credits, or RECs, are high enough to cover early debt requirements. But analysts at Regulatory Research Associates, a group within S&P Global Commodity Insights, said that could change.

"Drops in REC prices as states reach their renewable portfolio standards targets could leave offshore wind revenue well short of minimum debt targets by the end of the forecast period, requiring more stable long-term revenue streams from established robust power purchase agreements," they wrote June 13.

Beginning in 2026, for example, projects in service offshore Massachusetts "are forecast to barely surpass the debt service requirement through the period but never come close to a full equity return," RRA added.

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