Offshore wind industry united on pricing adjustments

MASSACHUSETTS POLICYMAKERS  may be split on whether offshore wind developers should be allowed to adjust the pricing in their existing power purchase agreements to cope with changing economic conditions, but there is no disagreement – within the industry at least – that adjustments should be permitted on future contracts.

In filings with the Department of Energy Resources, every offshore wind developer and equipment supplier said some sort of mechanism for adjusting prices in the face of inflation and interest rate hikes is a must as the state moves forward with its fourth offshore wind procurement later this year.

Avangrid, Shell Energies, Ocean Winds Norh America, and Orsted Americas were all on board. Equinor and Vineyard Offshore blacked out their responses. Among equipment manufacturers, General Electric, Crowley, Siemens Gamesa, and Vestas were all supportive.

The comments came in response to a question posed by the Department of Energy Resources asking the best way to account for current and future rates of inflation and other supply chain and economic pressures.

The specific answers varied slightly, but the overall theme was similar – earlier procurements took place at a time of low inflation and stable interest rates, so fixed pricing made sense even for projects that could take as long as five years to build.

“Obviously, the era of low inflation and interest rates has come to an end,” Ocean Winds North America said in its filing. “Consequently, it is certain that a procurement that does not provide an indexation mechanism will see bids that reflect a very high risk premium.”

A risk premium is a bid adjusted upward to reflect economic uncertainty. The companies argue it makes more sense to let wind farm developers submit bids without a risk premium knowing subsequent pricing adjustments would be allowed if economic conditions fluctuate.

Most companies favor indexing winning bids to some measure of inflation or economic volatility. Some companies favor a one-time adjustment, others favor continual adjustments.

The industry consensus on indexation comes at a time when several of the key players are caught between regulatory regimes.

Avangrid was selected last year as a winner of the state’s third procurement and subsequently negotiated a 20-year power purchase agreement with the state’s three utilities. When interest rates and inflation took off, the company said the power purchase agreement was no longer adequate to secure financing for the project.

Avangrid is now seeking to terminate its existing agreement and wants to bid on the next procurement, but is facing pushback from some lawmakers and resistance from the Healey administration.

SouthCoast Wind, a joint venture of Shell New Energies and Ocean Winds North America, said it is in the same boat with its power purchase agreement, but hasn’t said yet whether it wants to terminate its existing contract.

In their filings with DOER, both wind farm developers said they favored indexing future bids to inflation.

SouthCoast Wind’s response was straightforward, urging state officials to “require all bidders to submit pricing that will be subject to a onetime adjustment for an inflation index when the project reaches financial close.”

Avangrid’s response went into great detail. “Price indexation is a paradigm shift necessary for the offshore wind industry to flourish. It will give developers confidence they can deliver economically viable projects, while shielding electricity consumers from developers achieving irrational profits,” Avangrid said. “Absent price indexation and/or an ability to renegotiate prices with DOER due to extraordinary endogenous circumstances, developers will be forced to bid in exceedingly high returns to cover any potential contingency.”