Compounding financial pressures cause struggles for US offshore wind sector

US offshore wind developers face mounting financial hurdles to meeting President Joe Biden's target of 30 GW of the resource by 2030, reflected most recently in Ørsted A/S' Aug. 29 announcement of anticipated impairments worth up to $2.3 billion.

The Denmark-headquartered offshore wind developer cited supply chain problems, investment tax credit uncertainty and higher interest rates facing its three northeastern US projects: the 1,100-MW Ocean Wind 1 off New Jersey, the 924-MW Sunrise Wind off New York, and the 704-MW Revolution Wind off Connecticut and Rhode Island.

Industry analysts questioned whether Ørsted management could turn its US East Coast portfolio around after shares plunged 25% following the announcement.

"With high ambitions in the US, Ørsted neglected the risks inherent to a new offshore wind market and in turn destroyed its goodwill built on a solid execution track record," analysts at Morningstar told clients Aug. 30. "This calls into question the company's risk management."

Wells Fargo analysts expressed surprise at the steep stock price drop, which "speaks as much to a growing loss of confidence in [management] after perceived missteps as it does to the financial impact of the disclosures," they wrote in an Aug. 30 report.

If interest rates stay at current levels and Ørsted's projects do not get the domestic content and energy community tax credit bonuses, Morningstar added, the company could write down another $2.3 billion of its investment.

Ørsted is more confident that Revolution Wind will qualify for the 30% investment tax credit's energy communities adder than will Sunrise Wind "unless the language/interpretation around the ... provision is expanded," Wells Fargo noted.

New Jersey lawmakers passed a bill in June that would allow Ocean Wind 1 to retain the domestic content bonus credit, but Ørsted acknowledged that "continued discussions with senior federal stakeholders about additional [investment tax credit] qualifications for Ocean Wind 1 ... are not progressing as we previously expected."

Spain-headquartered Iberdrola SA, which owns US utility and offshore wind developer Avangrid Inc., recently reassured investors that it has no need to book similar impairments in its US business, Reuters reported Aug. 30. In a document aimed at reassuring investors following Ørsted's disclosure, Iberdrola reportedly said it had already secured all key supplier contracts for upcoming projects with no delays, and its final investment decisions on which projects should proceed were made conservatively.

Other developers struggle

Ørsted's announcement came shortly after northeastern US utility Eversource Energy, a partner in the Sunrise Wind and Revolution Wind projects, recorded a $331.0 million after-tax impairment related to its offshore wind business for the second quarter.

The write-down assumes that Eversource will qualify for investment tax credit adders like the 10% domestic content bonus and that the New York Public Service Commission will reprice offshore wind renewable energy certificates for Sunrise Wind to account for inflation.

The US developer still plans to divest its 50% stake in the joint venture with Ørsted, which includes South Fork Wind, as part of a strategic review, but Wells Fargo said the Ørsted news "raises concerns" about that sale.

During the first half of 2023, renewables developers struggled to unload preconstruction projects as potential buyers were deterred by clogged interconnection queues, limited tax equity financing availability and higher debt expenses, according to a LevelTen Energy Inc. report.

Other northeastern US projects like Avangrid's Commonwealth Wind and SouthCoast Wind, a joint venture between Shell PLC and EDP - Energias de Portugal SA, are terminating power purchase agreements (PPAs) due to inflation, supply chain bottlenecks and ballooning financing costs.

On Aug. 28, SouthCoast Wind asked the Massachusetts Department of Public Utilities to approve agreements it made to pay Eversource, Unitil Corp. and National Grid PLC utility subsidiaries a combined $60 million to cancel the PPAs.

In response to an earlier announcement that SouthCoast Wind intended to terminate the contracts, however, the Rhode Island Energy Facility Siting Board decided to pause a review of a transmission line that would connect the project to New England's regional grid.

SouthCoast Wind argued in a petition to the Rhode Island Supreme Court in August that PPAs are not a prerequisite for obtaining a permit for the nonmerchant transmission line under state law.

SouthCoast Wind and Commonwealth Wind will rebid the contracts during Massachusetts' next offshore wind solicitation in January 2024, but analysts at ClearView Energy Partners said both projects have a "surmountable structural disadvantage" after regulators retained a proposed 15% PPA adjustment cap and added a point system "to penalize previously awarded projects that default on finalized PPAs."

"These projects are farther ahead in obtaining necessary federal and state permits than other potential bids," they told clients Aug. 31.

Gulf Coast auction

While interest in East Coast projects remains strong, an Aug. 29 US Interior Department offshore wind energy auction for the Gulf of Mexico only received one winning bid.

An RWE AG affiliate gained control of the Lake Charles, La., lease area that has the potential to generate roughly 1.24 GW with a $5.6 million bid. The two additional lease areas up for auction in Texas, called Galveston I and Galveston II, did not receive any bids.

"There's just not a lot of offtake for offshore wind in the [Electric Reliability Council of Texas Inc.] market," Norton Rose Fulbright LLP attorney Becky Diffen said in an interview.

"It's hard to know whether the timing was impacted by some of these challenges that the much farther along projects in the Northeast are running into" as opposed to the nature of Gulf Coast markets, Diffen added.

France's TotalEnergies SE, one of the companies that had registered for the auction, said it declined to participate because of several factors that made it impossible to bid on the Gulf of Mexico leases at this time.

"Our assessment factoring in wind speeds, competition from other onshore renewables and competitive power market conditions does not, at this time, justify submitting an offer," a TotalEnergies spokesperson told S&P Global Commodity Insights on Aug. 30.

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