SouthCoast Wind Energy is moving to end its offshore wind power purchase agreements with three Massachusetts electric distribution companies.

The company said it will continue developing the project in federal waters south of Martha’s Vineyard while the parties seek a solution, but that the terms of the PPAs they negotiated in 2020 and amended in 2022 are untenable, given rising costs.

SouthCoast, formerly Mayflower Wind Energy, is a joint venture of Shell New Energies and Ocean Winds North America. It holds an offshore wind lease area with the potential for up to 2,400 MW of power generation and was to supply 1,200 MW to Eversource Energy, National Grid and Unitil.

In October, SouthCoast asked the Massachusetts Department of Public Utilities to suspend the PPA proceedings for a month so the parties could consider recent economic changes — including inflation, interest rates and material shortages — that made the PPAs financially untenable.

Around the same time, Avangrid made a similar request for the 1,200 MW of PPAs with the same three utilities for output from the Commonwealth Wind project it is developing.

The utilities declined to negotiate, and the DPU rejected the requests.

Avangrid dug in its heels and moved to terminate the PPAs, setting in motion a process that landed in Suffolk County Supreme Judicial Court four months ago. The company says it remains committed to Commonwealth and would like to rebid the project in Massachusetts’ next offshore wind solicitation.

SouthCoast backed down after the DPU rejection, at least publicly. It maintained that the financials were untenable but said it would work toward a solution. Apparently, it did not find one.

As of press time, there still were no official filings posted by the DPU, but SouthCoast CEO Francis Slingsby on Friday submitted testimony to the Rhode Island Energy Facility Siting Board, which is considering SouthCoast’s request to run one of the project’s export cables underwater and underground through Rhode Island on its way to Massachusetts. Slingsby argued that the board should not suspend its consideration of the transmission line application until new PPAs are in place because doing so would delay or jeopardize the project.

Even as it seeks better financial terms, SouthCoast has secured interconnection queue positions for the offshore wind farm and continues preparatory work, with more than 75 full-time employees on the job and a roughly $100 million development budget for 2023, Slingsby said. He expects the U.S. Bureau of Ocean Energy Management to issue a Record of Decision on the project in December.

But SouthCoast cannot attract financing with the existing PPAs, he said, because they are low-priced and have no indexation. The latest Massachusetts offshore wind solicitation addresses those concerns by allowing for inflation-indexed pricing, Slingsby said. SouthCoast plans to compete in that and/or other future rounds of bidding in New England, he said.

In a statement SouthCoast said it is open to solutions other than terminating the PPAs. But even after factoring in the cost of termination, any resulting penalties and lost tax incentives, terminating the PPAs is a better option than proceeding with them as written, it said.

Economic Headwinds

This latest development will not help Massachusetts reach its statutory goal: 5,600 MW of offshore wind online by 2027.

Gov. Maura Healey last month announced the draft of the state’s fourth offshore wind solicitation would seek proposals totaling up to 3,600 MW of generation capacity.

That — combined with the 800-MW Vineyard Wind 1 now under construction and SouthCoast — would reach the desired number of megawatts, if not the deadline.

Without SouthCoast or Commonwealth, Massachusetts falls short.

A spokesperson for Healey’s Executive Office of Energy and Environmental Affairs on Tuesday said, “We encourage all parties to find clarity on the next steps before the fourth offshore wind solicitation becomes active.”

The U.S. is late to the offshore wind sector: 32 years after the first commercial offshore wind farm went online in Denmark, U.S. waters host just 42 of the 63,200 MW of offshore generation installed worldwide.

As the public and private sectors try to create an industry almost from scratch, costs and logistics are proving to be challenges. The Northeast coast is the early focal point of development efforts, and the projects and proposals there are feeling the brunt of headwinds facing the industry.

Besides SouthCoast and Commonwealth, recent examples include:

• • • Rhode Island’s latest offshore wind solicitation attracted just one proposal, and the wording of Rhode Island Energy’s public response indicated it might be expensive.
    • Avangrid has said it would ask Connecticut for a PPA adjustment on its Park City Wind project.
    • Ørsted has said it would take a $365 million cost impairment on its Sunrise Wind project in New York and has said returns on its Ocean Wind 1 project in New Jersey were not what it had hoped for.

On a brighter note, Avangrid has said Vineyard Wind 1 locked in supply contracts before the economic headwinds rose, averting a financial crunch.

The Electric Power Research Institute told NetZero Insider the financial problems experienced by SouthCoast and other projects are not unique to them or to the offshore wind industry but are exacerbated by the newness of the sector in the U.S.

“Offtake agreements are negotiated when the project is in the relatively early stages of permitting, with a five- to seven-year lag before permits are approved and an eventual final investment decision is made,” Offshore R&D Lead Curtiss Fox said via email Tuesday. “With the continuous and dramatic cost declines for offshore wind over the past decade, it would be reasonable to assume those would continue with some limited risk. However, the implications of economy-wide inflation seen over the past two years have changed those underlying assumptions.”

Fox said last year’s Inflation Reduction Act will likely boost momentum in the U.S. offshore wind industry and expand its supply chain, but the rest of the world will be attempting to do the same thing at the same time.

“The global demand for offshore wind continues to expand dramatically, with Europe alone looking to expand capacity in the North Sea to 120 GW by 2030, up from nearly 28 GW today, and to reach 300 GW by 2050,” he said. “With the initial tranche of U.S. projects heavily leveraging EU supply chain capacity, the U.S. may not be able to rely on global excess capacity and will need to continue investments into offshore wind manufacturing, vessels and port infrastructure to achieve a sustainable offshore wind industry.”

[This story has been corrected. A previous version incorrectly identified the developer of the Commonwealth Wind project.]