After considerable difficulties in 2023, northeast states are ‘leaning in’ to offshore wind rather than turning away
The recently closed tri-state auction for offshore wind capacity in the US – the results of which will become known mid-year – demonstrates that states have doubled-down on their commitment to offshore wind, despite a tumultuous 2023.
That was the clear message emerging from analysis of the US offshore wind market in a recent webinar from Aegir Insights.
Massachusetts, Rhode Island and Connecticut announced they intended to work together for what will be New England’s first multi-state procurement of offshore wind capacity in October 2023. Bids for the tri-state auction – which is expected to drive cost efficiencies through procurement at scale – are in, and the level of awards arising from them will consolidate what Aegir Insights senior research analyst for the Americas Signe Sørensen describes as ‘a new price equilibrium.’
“First and foremost, the tri-state offshore wind auction shows the three states in question – and northeast states in general – are ‘in it for the long term’ with offshore wind,” says Ms Sørensen. “That is very welcome, given that 2023 was full of news about offtake contracts being cancelled, leaving states with gaps in their energy transition plans.
“After a tumultuous 2023, 2024 has been characterised by efforts by the Federal government and states to get the sector back on track, not least with these large offtake auctions organised by the northeast states.
“In the last six months alone, more than 9 GW has been awarded by New York and New Jersey. The tri-state auction has the potential to award more than 5 GW, based on the bids that were submitted. It is likely that at least a couple of those bids will secure awards, so by the summer, more than 10 GW of offshore wind contracts will have been awarded in the US market in less than a year. Those kinds of numbers mean the reset of the American offshore wind market is a reality.”
Ms Sørensen says the tri-state auction is especially important because it sees the “revival and redemption” of some of the projects that caused such an uproar when they were cancelled in 2023.
When the wave of cancellations of offtake contracts started in 2023, it actually started in the states that are behind the tri-state auction. Projects like Commonwealth Wind, Park City Wind and South Coast Wind 1 became uneconomic because of macro-economic changes. They cancelled contracts with Massachusetts and Connecticut, two of the states now involved in the tri-state auction. “For a while, the future of offshore wind in the US seemed uncertain, but now, with this storyline of cancelled projects being rebid,” Ms Sørensen says, “it is becoming apparent that a cancellation isn’t the end of the storyline for a project or for the states that found themselves missing an offshore wind project or two.”
As Ms Sørensen notes, New York was the first state to take action to address the ‘capacity gap’ from cancelled projects, awarding a record-high number of gigawatts in its third auction round, almost immediately after that launching an expedited fourth offshore wind auction, making it possible to award new contracts to ‘legacy projects’ that had become uneconomic that were in danger of also being cancelled. That strategy proved to be a success, and in early 2024 contracts were awarded to some of those legacy projects, enabling developers to press ahead with them instead of walking away.
“Now we are seeing that story repeating itself with the tri-state auction,” Ms Sørensen explains. “The states that were hit by the cancellations are not turning away from offshore wind, rather they are leaning in, and are even more determined to regain momentum and make offshore wind part of their energy transition, welcoming bids from projects that were cancelled.
“In fact, Connecticut has responded to the cancellation of the 800-MW Park City Wind project by increasing the capacity available in the auction, making it quite clear the state wants to regain what was lost as fast as possible, sending a clear signal that it remains committed to offshore wind. There is a pretty good chance that we will see some of these legacy projects win contracts in the tri-state auction, with higher prices than before, as we saw in New York.”
As Ms Sørensen also explains, although there was a penalty for developers that cancelled projects in 2023 – which was in the range of US$50-60M – and although there were calls for developers to be dropped from future auctions, that would have severely limited the number of potential bidders.
“The projects that were cancelled were also among some of the most mature in the US,” says Ms Sørensen. “Excluding them from bidding again would have endangered the energy transition in those states.”
She notes that, in fact, the consequences for the developers that cancelled projects are fairly limited – in Massachusetts and Connecticut they will have to post a higher security when bidding, as was the case in New York, but the effect of this on projects will be relatively limited because many of them will be able to initiate construction quite soon after securing a contract. This will limit the likelihood of any problems arising. “The likelihood of them ending up in a situation where the higher security payments are triggered is low,” she says.
“Overall, I would say that northeast states have decided they won’t allow the hiccoughs last year to interrupt the buildout of offshore wind more than is necessary. They are willing to let the old projects bid again; they are willing to pay higher prices. They are being quite pragmatic.”
Asked what level prices might come in at in the tri-state auction, Ms Sørensen says she expects them to be broadly similar to those achieved in the most recent auctions in New York and New Jersey.
“I don’t see any reason why the prices should be higher than those in New York and New Jersey, they might even be a little lower, partly because legacy projects that are bidding again have a slight advantage because of their maturity.
“We know that they will bid higher than they did before – that goes without saying – but they should be able to offer attractive prices. Also, some of the projects in older lease areas were less expensive to acquire than more recent lease auctions such as New York Bight.
“And finally, the Treasury recently issued final guidance on the tax credits in the Inflation Reduction Act (see box), which has improved the business case for offshore wind projects, so that should also enable more attractive bids – in fact the states behind the tri-state auction actually postponed the bidding deadlines to enable developers to take that into account.
Overall, she says, the commitment of the northeast states and support from the Federal government in the form of the recent tax guidance should see a new price equilibrium reached for US offshore wind that will endure for some time, one that signals the US market has “successfully been reset.”
Industry, legislators applaud tax rulings that boost US offshore wind
Industry bodies and East Coast political leaders have welcomed Internal Revenue Service (IRS) guidance that will benefit developers of US offshore wind projects.
The guidance for implementation of the IRS Energy Communities Bonus will allow for a greater number of offshore wind projects to benefit from tax breaks. The overall effect will be that offshore wind projects in the US can be developed more quickly and less expensively.
Oceantic Network founder and chief executive Liz Burdock says, “The eligibility expansion for the 10% energy communities credit creates an easier path to market for many offshore wind projects. It channels a greater portion of project funding into the development of ports, laying a robust foundation for supply chain advancement.
“By taking a more holistic approach to the Energy Communities Bonus, consistent with the intent of the legislation, the Biden-Harris administration has ensured that local ratepayers will see cost reductions and long-term, high-wage jobs will be created in the areas that need it most.”
American Clean Power Association chief executive Jason Grumet says the guidance is “a big win for communities in the clean energy transition” that will “spur the growth of offshore wind by encouraging significant private sector investments and new jobs in historically disadvantaged communities.” He says that including ports in the bonus tax credit will revitalise communities that have long been engines of economic growth.
Connecticut Governor Ned Lamont says, “Connecticut appreciates the updated guidance that will ensure more offshore wind projects – and other renewable energy projects – can qualify for and receive federal clean energy tax credits under the Inflation Reduction Act.”
US Senators Chris Murphy (D-Conn) and Richard Blumenthal (D-Conn) say the announcement is “great news for the industry in Connecticut” and will help fulfil what they say is “the true intent of the Inflation Reduction Act.”
Massachusetts energy and environmental affairs secretary Rebecca Tepper says, “As our region solicits bids for the next round of offshore wind projects, this tax guidance represents a down payment on energy independence for the entire country and an investment in clean, affordable energy.”
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