Vineyard Wind ready to move on $3bn project 'in minutes' with US federal green light

Vineyard Wind will be ready “within minutes” of receiving a potential federal construction permit in December to formally launch an expected nine-month effort to achieve financial close for its 800MW offshore wind project, the first at commercial-scale in the US, according to Clay Coleman, finance director at developer Avangrid Renewables.

By then, Avangrid and partner Copenhagen Infrastructure Partners will have waited 16 months for the Bureau of Ocean Energy Management (BOEM), the federal offshore wind regulator, to complete additional environmental reviews and issue a ‘record of decision’ (RoD) for the proposed array off the southern coast of Massachusetts.

The 50-50 joint venture’s latest financial modeling for the $3bn project suggests a capital stack of 60% bank debt, tax equity “a little bit north of 20%”, and the rest sponsor equity, Coleman told a recent American Wind Energy Association conference.

Senior officials at BOEM have said nothing to dampen industry expectations that the agency will approve the developers’ construction and operations plan (COP) for Vineyard Wind 1, almost certainly with modifications.

A green light from BOEM would then require Vineyard to submit both facility design and fabrication and installation reports that would provide specifics for how the wind farm will be built and installed in accordance with the COP and best design and engineering practices. In the interim, the agency will accept public comment on the RoD.

This will be Vineyard’s second effort to arrange project financing, a process that was well-advanced in August 2019 when Interior Secretary David Bernhardt unexpectedly instructed BOEM, an agency of the US Department of Interior, not to advance issuance of a construction permit.

At that time, the developer had offers from US investors to provide more than twice the amount of required tax equity, with more than 50 financial institutions in Asia, Europe and here interested in sourcing project debt.

“The thought process being that once we get a go-ahead, there will be time for us to start polling the market again, putting the band back together to a large extent and moving forward while we wait out the comment period on the permit,” said Martin Pasqualini, a managing director at CCA Group in Boston, the tax equity advisor for Vineyard.

The situation is much the same with debt financing. “We’re just waiting for things to be a little more clear and are preparing ourselves on the sponsor side to be ready to run when things are ready,” said Alberto Garcia, managing director, project and acquisition finance North America at Santander Bank, noting the debt and tax equity processes need to go along together.

A lot has changed since 2019 when Santander assumed a leading role in evaluating different debt financing structures. While Vineyard will again seek to set a US project financing benchmark for an industry trying to embark at scale, the domestic economy is now mired in its worst downturn since second World War.

Particularly affected are several Atlantic states in the US northeast where would-be sector leaders New Jersey and New York are suffering from depressed demand for electric power and double-digit rates of unemployment. Massachusetts is in better economic shape.

Coronavirus-related shocks also continue to roil the international financial system which, among other things, have hurt earnings at banks and in the US, caused some of them to put a hold on tax equity investment for renewables until there is more visibility to project their taxable income.

Lending practices have generally become more conservative given the ongoing economic shakeout. In some cases, banks are struggling with excessive accumulation of capital looking for investment opportunities that provide healthy returns in the present historically low-interest rate environment. In that context, offshore wind has appeal.

The US also will hold national elections next month in an acrimonious political environment whose results promise to strongly impact the industry’s fortunes for the balance of this decade and beyond. Democratic presidential candidate Joe Biden, who is ahead in the polls, wants to turbocharge clean energy development and favours a multi-year extension of federal tax credits.

While this backdrop poses its share of uncertainties, the financial community remains positive that Vineyard will be able to tap the necessary external debt and tax equity and complete negotiations to close funding toward the end of third quarter 2021.

That optimism stems partly from the strength of co-sponsor Avangrid’s balance sheet and parent Iberdrola’s successful track record with financing and construction of large offshore wind projects elsewhere. “Having confidence in your schedule is pretty important because delays are expensive,” said Coleman.

Banks view construction interface risk between the different offshore wind contracts as a hot-button concern for future projects in the absence of a mature US supply chain. A potential complicating factor is the Jones Act, which sets strict rules over use of US-flagged and crewed ships for operations in American waters.

“Construction is front-and-centre. It’s mitigating that finger-pointing risk if something were to go wrong,” Chris Moscadelli, managing director, energy project finance, at Societé Generale, told the conference. Some renewables lenders are used to the single balance of plant contract with onshore wind.

A major positive for Vineyard is that it will have reliable 20-year cash flow from a busbar power purchase agreement, an off-take arrangement that is almost non-existent for US onshore wind.

Vineyard will also have first mover advantage in choosing a Cape Cod landfall location among planned offshore wind projects to send that power to the ISO New England market. Use of a larger capacity turbine would only increase deliverable energy production when the array is fully operable.

While future congestion is possible as more projects come online later this decade, elected officials, energy planners and utilities in the region have begun looking at potential solutions including an offshore grid.

In the months ahead, Vineyard and its financial advisors will also need to allay concern among some potential lenders over lack of data for reliability and operating costs given the US doesn't have large-scale offshore wind farms.

Vineyard anticipates it will likely be easier to raise construction and term debt than tax equity. “I think we’re pretty confident the debt markets are going to be there for us despite any impacts from Covid. Right now, everybody is awash with liquidity,” said Coleman.

“The tax equity markets are a lot more worrisome because it is a very big check we’re looking for. There really is, at this point, a handful of folks that can write it.”

One of those is JP Morgan Chase which controls about one-quarter of the $14bn US tax equity market. The bank is looking to play a leading role in the offshore wind space and under certain conditions, willing to commit unspecified amounts of tax equity up to two years in advance for Vineyard and certain other projects.

“These tax equity investors are very motivated to dig into what is a new product in the US,” said Pasqualini.