Shell-Ocean Winds JV seeks to pull gigascale project as US offshore pressure mounts

The Shell-Ocean Winds joint venture (JV) behind Massachusetts’ 1.2GW SouthCoast Wind array will petition to withdraw the project due to declining economics and lack of financing.

“While SouthCoast has pursued, and is open to other solutions, and even after factoring in potential tax incentives; termination, and payment of a financial penalty for termination, has become the prudent commercial course to realise the Project due to material and unforeseen supply chain and financing cost increases affecting the whole offshore wind industry,” said Francis Slingsby, SouthCoast CEO.

As a result, the developer said it has “recently initiated discussions with representatives of the Commonwealth of Massachusetts and the Massachusetts electric distribution companies to terminate our existing Power Purchase Agreements [PPAs].”

SouthCoast, previously named Mayflower Wind, set a record for lowest offer in Massachusetts’ round 2 tender in 2020 with an accepted bid of $77.76/MW for 804MW of capacity. Per state law at the time, this new low became the bid ceiling for the next round.

SouthCoast was awarded a further 405MW with a $75/MWh offer in the state's round 3 in 2021, while Avangrid’s Commonwealth Wind project was selected at $72/MWh.

In January, DPU approved amendments to the 2020 PPAs that cut SouthCoast's rate even further, to $70.26/MWh, the lowest price for American offshore wind.

The amendments were requested by the power buyers, the New England utilities Eversource, Unitil and National Grid, based on a contract clause that allows for a rate reduction if the project becomes legally eligible for investment tax credits (ITC) “in excess of 12%”.

Although SouthCoast has been broadly supportive of Avangrid's efforts to cancel the Commonwealth project, it has maintained that it would stand by the PPAs.

The reversal seems to have taken state regulators by surprise, though.

Massachusetts has contracted 3.2GW across three projects towards its mandate of 5.6GW of capacity by 2027. Its round 4 solicitation for up to 3.6GW anticipates the potential withdrawal of Commonwealth but would not be sufficient to meet targets if SouthCoast were also cancelled.

Declining project economics

The attempted withdrawal of a second project underscores the deteriorating economics of offshore wind capacity contracted by states years ago.

Industry advocacy group American Clean Power Association (ACP) noted in its first quarter offshore wind market report that levelised cost of energy (LCOE) had risen over 16% in a single year, from $84/MWh in 2021 to $98/MWh in 2022 as 40-year high inflation continues to bite.

Roughly half of the projects contracted by states are below the current LCOE, an indication of the struggles the sector faces.

“This may have insulated some projects from price spikes,” she said.

Investment tax credits included in the landmark Inflation Reduction Act (IRA) will likely also go a long way towards bridging the gap, allowing developers to offset up to 40% of the capex.

“With a well-designed procurement, we calculate $71[per MWh],” he said, adding that this could range from $53 to $82/MWh, with investment tax credits included.

Rising costs and other economic risks are also fuelling calls for permitting reform.

Offshore wind projects take between eight and ten years to move through the state and federal process, resulting in long gaps between when PPAs are issued and permits approved.

“The longer that gap, the more likely that some unanticipated event is going to happen that could impact the economics of a project,” said Kaplowitz. “If we can get the permitting process to be to be more efficient and predictable, we can reduce those uncertainties.”