Keith Martin, Partner, Chadbourne & Parke
A number of lessons emerge from the offshore wind projects that have been attempted to date in the United States. Deepwater Wind has a $290 million, 30-MW project under construction in the Atlantic ocean three miles from Block Island off the coast of Rhode Island. The project will use five, 6-MW Alstom Haliade 150 turbines.
Cape Wind came very close to closing in December 2014 on the financing for the $2.5 billion, 364-MW first phase of a 468-MW wind farm in Nantucket Sound near Martha’s Vineyard off the Massachusetts coast. When the financing failed to close by December, the two utilities that agreed to buy the electricity from the project under long-term contracts cancelled the contracts.
Cape Wind is asserting that it is entitled to an extension of the construction-start deadline in the contracts due to force majeure: the prolonged litigation that the project has had to endure with opponents. Talks with the developers, lenders and equity investors involved with the two projects as well as with other less advanced projects suggest more than a dozen lessons for anyone attempting another such project in the future.
Chadbourne acted as counsel to the lenders on the financing for Block Island and as financing counsel to the developer of Cape Wind. Scale and timing Block Island demonstrates it may be better to make the first project a small project as proof of concept before moving to a larger scale. A developer should consider developing a large project in legally-separated phases to allow for financing of manageable tranches. This approach requires smart planning during project development in lease negotiations, interconnection queue requests, and negotiation of the framework turbine supply agreement, foundation installation contract, cable and boat contracts, and power purchase agreements.
Develop a project this way does not preclude a single large portfolio financing later if market conditions permit. These are already complicated projects because of the number of contractors involved. A large and expensive project requires lots of financing parties, increasing the difficulty of holding everything together. Offshore wind projects are intensely political. The high capital cost per installed megawatt means the projects rely on political support to get done. Both Block Island and Cape Wind had power purchase agreements that paid the projects more than $200 a MWh. Such contracts require support from the governor and state public utility commission to pass through the wholesale power price in rates. From this, the lessons are:
Move as quickly as possible though the development process. There is no time to spare. The longer the development cycle, the more likely the politics are to change and for a smaller developer to run out of money. Cape Wind saw Deval Patrick (D), who was a strong supporter of the project, leave office at the end of 2014, to be replaced as Massachusetts governor by Charlie Baker (R), who opposed the project in the past and has at best a hand’s-off policy about the project, viewing it as a private contracting dispute between the developer and the utilities.
Chris Christie (R) called in 2010 for turning New Jersey into a wind superpower, seemingly to lose interest around the time he started running for president, leaving a pilot wind farm proposed by Fishermen’s Energy off Atlantic City to struggle. Once the project moves into financing, move rapidly to find common ground and not let negotiations bog down. Well-funded and determined opposition groups can kill a project.
Avoid choosing a site that invites well-financed opposition. The latest offshore sites that the federal government has been putting out for lease are likely to face less interference because they are farther from shore. Offshore wind projects involve multi-contract construction arrangements. The projects are not like conventional power projects on land where there is a fixed-price, turn-key construction contract for the entire project under which the EPC contract “wraps” construction by warranting that all the project components will work together when the power plant is fully assembled.
An onshore wind farm usually has two contracts: a turbine supply agreement and a balance-of-plant construction contract. With offshore wind, there is no one or even two contractors who take responsibility for the entire project.
It is important to make sure everything fits together in terms of risk coverage, timing, damages, who pays what to whom, and what happens if there are delays in construction. Both Block Island and Cape Wind proved that lenders can get comfortable with the multi-contract construction arrangement and some legal challenges. The Block Island financing closed with such an arrangement, and the senior lenders were prepared to close on Cape Wind, helped by a $150 million loan guarantee that was expected from the U.S. Department of Energy. DOE was not taking first loss, but its presence was a form of political risk insurance.
Filed Under: News, Offshore wind