United States

United States

How permitting delays are hitting US offshore's ‘pathfinder’ project

The US’s nascent offshore wind sector is struggling to stick to its timetable as it faces new permitting obstacles and opposition from the fishing industry. Ros Davidson explores the ramifications for the 800MW Vineyard project

The US's powerful fishing lobby on the Atlantic seaboard is raising objections to offshore wind development
The US's powerful fishing lobby on the Atlantic seaboard is raising objections to offshore wind development

Vineyard Wind will almost certainly still proceed in the Atlantic Ocean off New England, but the permitting delay announced last year will mean hundreds of millions of dollars in delayed income. The joint-venture owners of the $2.8 billion project are Avangrid Renewables LLC and Copenhagen Infrastructure Partners K/S.

The 800MW offshore project in federal waters south of Martha's Vineyard was to come online in two phases in 2021-2022. The original plan was for the first phase get get a 24% Investment Tax Credit (ITC), and the second phase to qualify for an 18% credit. The ITC, which is expiring, is for a percentage of the capital expenditure of a project.

In August, the Bureau of Ocean Energy Management (BOEM) unexpectedly announced that it would delay Vineyard's final Environmental Impact Statement (EIS), expanding the review to include a "cumulative impacts analysis" for all offshore wind projects in the region with power purchase agreements (PPAs) and slowing Vineyard by at least a year. The document had originally been expected in July.

Vineyard will be the first utility-scale offshore wind project in the Americas. So far, only one 30MW development, off nearby Block Island, has been installed although the fast-growing US offshore pipeline now amounts to a hefty 26GW

At a wind conference in Boston last autumn, BOEM acting director Walter Cruickshank said the Interior Department expected to have Vineyard's supplemental draft Environmental Impact Statement on the cumulative impacts out for public comment "early" in 2020. BOEM had initially said that the document might be issued in late 2019, so this represented a delay.

Teething problems

BOEM's surprise request for a cumulative impacts analysis is probably only a sign of teething problems in the nascent US offshore sector. Still, it is hugely significant for Vineyard. Income from selling electricity will be delayed, and some development costs may be higher because of a stretched timetable and if additional mitigation measures are required. That's although newer and more efficient technology may ultimately be used.

Vineyard Wind declined an interview in December, saying it needed more clarity on the project timing before commenting.

The project is now expected online in 2022, or perhaps 2022-2023. For its part, Vineyard is hoping to have the entire 800MW completed in 2022 and is talking to the Internal Revenue Service (IRS) about an extension of the ITC to cover the full build-out in that timeframe, James Torgerson, CEO of Avangrid, has told analysts.

Vineyard is also known to be reviewing the impacts of the recent federal spending law, passed in late December. The law extends the ten-year Production Tax Credit (PTC) — originally worth $24 per megawatt hour, and which is also being phased out — at 60% of that value for projects that start construction or invest 5% by the end of 2020. For 2019, the PTC had been at 40% of its original value. Vineyard had met the 5% "safe harbour" standard before the end of 2019.

The PTC has typically been used by onshore wind developers, with the ITC preferred by offshore developers because they have such high upfront capital costs. However, an offshore project can elect to use the PTC through a provision sometimes known as the "PTC-as-ITC" loophole. The law gave a one-year PTC-as-ITC extension at 60% of its original 30% value (18%), with the same step-down schedule as the PTC.

According to Rachel Shifman, North America wind analyst at the consultancy BloombergNEF, offshore developers are still likely to opt for the ITC over the PTC, despite the ITC having been extended at only 60% of its original 30% value for a year, a disappointment for the offshore wind sector, which was was seeking the credit to remain at 30% until 2024.

On the likelihood of Vineyard being commissioned before the end of 2022, Shifman said: "It will be tight, but it should be manageable." The US offshore industry "will not crumple if they don't make it, but there's a lot riding on their success", she said, adding that it would send out a positive signal to legislators, the supply chain and investors.

Vineyard could speed up construction, for example, suggested Tom Harries, who leads BloombergNEF's offshore wind research, by using two vessels to overlap installation of foundations with installation of turbines.

But Anthony Logan, senior analyst for North America wind power at Wood Mackenzie Power & Renewables, is less optimistic, saying it would be a "tall order" to have the project complete in 2022 and that there is a "strong chance" that some of the turbines may not be installed until 2023.

Tight timetable

BloombergNEF estimates that it takes two years from a project's final investment decision (FID) to commissioning, and 18 months from a turbine order to commissioning. Vineyard must therefore have an FID by end of 2020 – and thus a final EIS — to make the 2022 commissioning deadline, says Shifman.

Financing is not typically finalised until permitting is complete. More than 100 banks were interested in providing debt for the project, and tax equity was more than two times oversubscribed. Vineyard announced last summer that its shareholders were still backing the project, despite the delayed timetable.

Vineyard would need a firm order of turbines by mid-2021 for a COD in 2022, according to BloombergNEF's estimates. MHI Vestas is the project's preferred turbine supplier, originally offering its V164-9.5MW turbine, a model that it has said may now be upgraded with a 174-metre rotor because of the delay. However, Vineyard coming online in 2022-23 with 9.5MW turbines would be running behind the technological curve with 10-12MW machines likely to be operating.

Be that as it may, at this point Vineyard's income from selling wind power will be delayed. Under the terms of $6 billion in offtake contracts, the project was to start selling the output of 400MW of the project's nameplate capacity by 15 January 2022, followed by the remaining 400MW of output a year later. The contract price for the first phase started at $74/MWh and increased 2.5% annually, and the price for the second phase started at $65/MWh before increasing at the same rate.

According to Shifman, the PPAs are worth almost $244 million a year for the entire 800MW project, assuming an annual capacity factor of around 50%. The offtakers are Eversource Energy's NSTAR Electric Co, National Grid PLC's subsidiaries Massachusetts Electric Co and Nantucket Electric Co, and Unitil Corp's Fitchburg Gas and Electric Light Co.

Fishery objections

Slightly higher development costs are possible, including the fact that some local hires have been made in anticipation of the original timetable. Federal regulators could require more mitigation for fisheries and fishing boats following the additional review by BOEM, noted WoodMac's Logan, which would be an additional cost. Additional community engagement might be needed.

Two federal agencies, the National Marine Fisheries Service (NMFS) and the National Oceanic and Atmospheric Administration had already refused to endorse BOEM's draft EIS of Vineyard because it said that fishing companies' concerns were not fully addressed, a scenario that helped lead to the federal government's ongoing cumulative impacts analysis.

To allay fishing industry criticisms, Vineyard and other offshore wind leaseholders in the region in November proposed uniform spacing and layout for offshore wind farms across seven lease areas off New England. Their proposal, submitted to the US Coast Guard, suggests a layout with turbines installed one nautical mile (1.9km) apart and arranged in east-west rows and north-south columns, in line with the traditional routes of many of the region's fishing vessels.

If regulators require the one nautical mile layout for the first 400MW of Vineyard, a change in permitting would not be needed — that layout is an alternative included in Vineyard's original submission to BOEM — but more surveying work would be required.

Some fishing representatives have also reacted unfavourably to the developers' proposal, saying it is inadequate. There is a consensus that the industry needs transit corridors through wind projects that are at least 4 nautical miles (7.4km) wide to ensure there is no interference with their radar, says Meghan Lapp, fisheries liaison with the fisher and processor Seafreeze Ltd. The Rhode Island company has been a subsidiary of the European conglomerate Grupo Profand since March 2019 and is a major critic of the project.

"For the developers to ignore all the input they received... and say 'we are being responsive to fishing industry needs' is extremely disingenuous," she says. It is conceivable that they could sue.
Even so, additional development costs would likely be "peanuts" for as sizeable a project as Vineyard, said BloombergNEF's Harries. "It would be a few million here or there," he said.

The supply chain has clearly been rattled but has held together. "This delay...I really took it very personally," said Jason Folsom, director of US sales at MHI Vestas, told the same conference, convened by the American Wind Energy Association. "Welcome to the US offshore wind market. The US market won't develop just like Europe — this market will remain dynamic." He added: "Do we like [the delay]? No. Does it have an impact financially or otherwise? Yes. We have to manage it."

Sif Group, which will manufacture the monopile foundations, announced on 17 December that Vineyard would no longer be in its 2020 order book because of the BOEM review. CEO Fred van Beers said: "We remain in dialogue with our customer. As it is still not clear when and in what configuration the project will continue, we consider this project to be part of our mid-term opportunity list."

Most of the project's risk lies in securing the final EIS, says BloombergNEF's Harries. He does not see a major problem in Vineyard renegotiating the PPAs. Vineyard's PPAs were already signed for amounts similar to contracts in Europe. And if nothing else, the cost of offshore wind power is constantly declining.
A deadline is looming. In March 2018, BOEM filed a Notice of Intent that it will prepare an environmental impact statement for the project's construction and operations plan (COP), which is basically the last step before the COP plan gets approved. The government requires that it completes the final EIS within two years of the March 2018 notice.

"For now everything is hunky dory and good between BOEM and the wind industry, but we'll see what happens in March if the permits get delayed even more," said BNEF's Shifman. Asked if Vineyard might sue BOEM if the final EIS is delayed, the joint venture declined to comment.

The outcome of the talks with the IRS is uncertain, although analysts agree that Vineyard has a good case for arguing an extension of the 24% ITC. "I think that they have a sober case that in principle should be a safe bet," said Woodmac's Logan, noting – among other caveats — that the case is unprecedented. In its talk with the IRS, Vineyard is almost certainly citing circumstances beyond its control, an argument that has had success with onshore wind project owners seeking a minor extension such as for a construction delay because of weather.

The IRS does not typically announce a decision on an extension until after a completed project has been audited, but Vineyard's lengthy delay because of unforeseen permitting is atypical. That is, the IRS could make an earlier decision. WoodMac's Logan noted: "Wrapping financing without clarity [from the IRS] would be a tough proposition."

For vessels, Vineyard would use the same model as Block Island to get around the archaic Jones Act, an old federal law that requires only US-flagged ships with American crews can transport goods between domestic ports. For Block Island, then owner/developer Deepwater Wind — now owned by Orsted — used smaller vessels to transport goods from shore to a larger vessel that stayed offshore at the project site. In Block Island's case, it was Fred Olsen Windcarrier's Bold Tern, a Maltese-flagged jack-up wind farm installation vessel. BloombergNEF does not foresee a shortage of vessels until 2025, and so Vineyard should be fine despite the delay.

Vineyard's trials are being watched closely because of its size and front-runner status. The delay is hitting Vineyard hardest but should benefit the entire US offshore sector, said BloombergNEF's Harries. "[Vineyard is] a pathfinder that will guide future projects. Most of these new [offshore wind] markets have hiccups such as policy delays."

Indeed as Vineyard CEO Lars Pedersen told the offshore wind conference in Boston regarding the previous few months and BOEM's unexpected announcement: "While it's not been the most fun summer I've ever had, I think we've come to accept that this is one of the steps that needs to be taken to move this industry forward."

He pointed to a sign of hope despite the delay. "We have definitely as a group started collaborating more on [certain] issues instead of only focusing on competing with each other," he said. "I hope we can find solutions that span across projects because that is what is needed."

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