The Biden administration’s climate goals and a new investment tax credit (ITC) have U.S. offshore wind developers bullish about the future of the industry, with proposed projects attracting strong interest from lenders, speakers told the Reuters U.S. Offshore Wind 2021 conference Tuesday.
In December, Congress approved a one-year extension of the production tax credit (PTC) for wind developers and a new 30% ITC for offshore projects that begin construction by the end of 2025. (See Wind, Solar, EE, CO2 Storage Win Tax Breaks.)
“For Vineyard Wind [the ITC] was a big relief,” Vineyard Wind CFO Alvaro Ortega Sebastián told the conference, saying it removed the uncertainty that faced wind developers in recent years as tax credits were reduced or expired.
“More [important] than the increase in the ITC … is certainty,” he said. “You know that you have until the end of 2025 to begin construction and then you have 10 years” to finish.
Vineyard got more good news on May 11, when the Bureau of Ocean Energy Management approved the final permit for 800-MW Vineyard Wind I, making it the first commercial-scale OSW project to win approval in the U.S.
With the permit in hand, Vineyard — a 50/50 venture of Copenhagen Infrastructure Partners and Avangrid Renewables (NYSE:AGR) — expects to close its financing by the end of 2021, with commercial operation targeted for 2023.
Hopes for the project were threatened in August 2019, when the Trump administration announced it would postpone Vineyard’s final environmental impact statement to conduct an expanded analysis of “cumulative impacts” from the multiple offshore projects proposed for New England. Sebastián said the company feared the delay would undermine the credibility of the OSW market in the U.S. “And we have seen quite the opposite. For the past two years, we have received more interest, more calls, more demand from lenders to participate in our project,” he said.
‘Attractive Opportunities’
With the Biden administration targeting 30 GW of OSW by 2030 — and Massachusetts, New York, New Jersey, Virginia, Connecticut, Maryland and Rhode Island having awarded contracts for 10.5 GW — Vineyard is far from the only belle at the ball. (See Biden Administration Marshaling Agencies in Push for 30 GW of Offshore Wind by 2030.)
“We’ve received extraordinarily strong interest already in the project from the lending community,” said Justin Johns, CFO of Mayflower Wind, which expects commercial operation in the mid-2020s under a 20-year 804-MW power purchase agreement with Massachusetts’ electric distribution companies. There has been interest “from American banks, from the European banks, as well as the Asian banks,” Johns said.
Mayflower is a partnership between Shell (NYSE:RDS.A), which entered the OSW market in 2000 in the U.K., and Ocean Winds, a joint venture between Madrid-based EDP Renewables (OTCMKTS:EDRVF) and French multinational ENGIE (OTCMKTS:ENGIY). Ocean Winds has 1.5 GW of OSW under construction and 4 GW under development in the U.S., Europe and Asia.
“These are really attractive opportunities” for lenders, agreed CIBC Capital Markets’ James Wright, managing director of renewables, clean energy and sustainability (NYSE:CM). “Every single major bank has significant green lending commitments. These are very sizable assets, which will require a lot of financing. The Biden administration’s plan to have 30 GW in nine years — that’s a lot of capital that’s going to have to go into this space.”
The size of the projects also means multiple lenders for each project, he added. “A solar deal or an onshore wind deal would probably have three to four lenders involved, maybe a single tax equity investor,” he said. “Here in the offshore space, you’re probably talking about double-digit bank groups; maybe more than one tax equity investor; multiple sponsor [companies]. There’s actually a lot of financing complexity.”
Wright noted that Europe has been building utility-scale OSW for 20 years. “So there’s a lot of experience from the European market which we can leverage,” he said.
European Experience not Fully Transferable
But Johns said knowledge of the unique challenges of the U.S. also is essential to developing successful projects.
“You can’t approach this with the [idea of a] ‘lift and shift’ of Europe to the U.S.,” he said. “We’ve got to bring European prices into the U.S. but recognize the uniqueness of the U.S. development. … In the U.S. you’ve got to figure out the Jones Act,” which requires that goods shipped between U.S. ports be transported on ships that are built, owned and operated by U.S. citizens or permanent residents. “You’ve got grid considerations; you’ve got ports that need to be built. You got manufacturing [that] still needs to be built out. From a developer’s perspective, you need to bring your experience but really bring that intimacy of the U.S. knowledge to it.”
That supporting infrastructure also presents opportunities for lenders and manufacturers, Johns said. “This buildout will be much bigger than just projects. It’s going to be into the whole supply chain. This will extend into the manufacturing side, into blades, into turbines, into ports and the grids. You name it.”
For developers, the U.S. market is a more complicated regulatory environment than, for example, the Netherlands. “The Dutch government … takes care of the transmission asset. They take care of a lot of that development risk, and you pretty much have one material government interface,” Johns said. “In contrast, [in the U.S.] you’ve got interface with federal agencies; you’ve got state interfaces; you’ve got local interfaces. … The stakeholder management perspective becomes much, much broader.”
Watching Steel Prices, Interest Rates
The developers say they are now keeping a close eye on factors that could raise project costs, such as increases in interest rates or steel prices.
There are also questions about lenders’ willingness to offer long-tenor debt and what kind of assurances they will require. “Will lenders seek 15- to 20-year” service and maintenance agreements? “How are they going to think about availability guarantees?” Johns asked.
Project developers should be careful “not to underestimate the financing timetable for projects of this complexity,” CIBC’s Wright said. “I’ve yet to see a single onshore renewable deal that meets its original financing timetable.”
Despite the increased complexity of OSW projects, Wright said he expects only a small premium in financing them compared to land-based wind.
For competitive reasons, however, he said he wouldn’t offer any specifics on the interest rates he expects. “There’s not much more I want to say on that that won’t come back to haunt me over the next 30 GW,” he joked.
