Dive Brief:
- After offshore wind in the U.S. experienced a rocky 2023, replete with project cancellations and contract renegotiations, project developers are looking for ways to manage risk before making big investments, Ørsted Americas CEO David Hardy said Tuesday at the BNEF Summit in New York.
- “I spent a lot of time with my board and my team on lessons learned and what can we do differently, but the biggest thing is derisking projects much earlier or spending a lot less until projects are derisked,” Hardy said.
- In a separate interview, Vinson & Elkins project finance attorney Eamon Nolan said that derisked offshore wind projects are also considerably more attractive to bank lenders as well as private equity firms.
Dive Insight:
Nolan said two recent offshore wind deals that Vinson & Elkins advised on — Eversource Energy’s sale of a 50% ownership share in two wind farms to Global Infrastructure Partners, and Dominion Energy’s sale of a 50% interest in the 2.6-GW Coastal Virginia Offshore Wind project to investment firm Stonepeak — involved derisked projects.
Dominion’s deal with Stonepeak contained “rate-based protection, so there’s cost recovery on your capital outlays and you’re not unprotected from a cost overrun perspective,” Nolan said. “Similarly, for the GIP and Eversource deal, Eversource agreed to retain some construction overrun protection in favor of GIP. So above a certain threshold, they’ll continue to carry their construction costs.”
“For both of those projects, you could actually go to the bank market and get debt, because there was not unlimited risk on the construction cost overrun side,” he said. “So I think that’s a key to why you’re seeing private equity being able to fish in those waters.”
Hardy said that after a difficult 2023 for Ørsted, which made the “really painful and tough decision” to terminate two projects offshore New Jersey and write down billions in impairments, the company is “confident” about its existing portfolio of U.S. offshore wind projects and examining strategies for derisking future development.
“The challenge with that is, it means the lead time of an offshore wind project will extend, and that’s difficult for federal and state policies if people are trying to get these projects deployed as fast as possible,” he said.
Adapting state policy
Despite the generous tax incentives for offshore wind development included in the Inflation Reduction Act and a bevy of states setting offshore wind procurement goals, the booming offshore wind industry was rocked last year by macroeconomic factors like inflation, supply chain challenges and a sustained increase in interest rates.
But states have begun to issue offshore wind solicitations with more developer-friendly terms that acknowledge the potential financial challenges faced by these capital-intensive projects, which take years to construct and make operational.
New York allowed developers with existing contracts to rebid them in its latest offshore wind solicitation in February, which relaxed the state’s policy on termination fees, and Connecticut’s latest solicitation included a provision allowing bidders to submit pricing at a rate indexed to the price of “listed macroeconomic factors and commodities and that would be fixed at a date certain in the future.”
“It has been, I’d certainly say, a challenging period of time,” Doreen Harris, president and CEO of the New York State Energy Research and Development Authority, said during the BNEF Summit panel with Hardy.
Harris said that the macroeconomic difficulties that plagued offshore wind last year were “multiple black swan events” that required a “comprehensive plan” by the state to reset its renewable energy portfolio and move forward.
“I think specific to offshore wind, and to David’s point, it is the timeframes,” she said. “These projects are much longer in their development cycle, and therefore changes that occur are necessarily going to cause challenges with the project’s ability to proceed.”
Nolan said that over the next five years, he expects the state of New York to be the most successful and active U.S. offshore wind market, as it’s a market where bank lenders will feel they are likely to recover their debt outlay and equity costs over the life of the project.
Other markets face additional complications, he said — in particular California, where waters off the coast are too deep for fixed-bottom wind turbines and will necessitate innovations in floating wind technology.
“Technology risk is a huge problem,” Nolan said. “California is years behind, I think that’s the reality. I don’t know how many, but it’s certainly not the case that somebody’s going to [take final investment decision on] a California offshore wind project in the next 12 months. But that’s not to say that offshore wind in California is not coming – it certainly is.”