Northeast States to Extend Contract Terms for Offshore Wind

Rhode Island and probably Connecticut will allow developers to sign 30-year deals for offshore wind power, lowering the monthly cost to consumers of the power they generate by spreading out the term of the payments, much like a mortgage works. The actual cost of constructing and operating the facility, of course, remains the same whether it is a 20-year or 30-year term. An issue with increasing the term is that wind facilities may only produce power for 20 to 25 years, which is why current contracts were set up for a 20-year term. If the wind facilities are dismantled after 20 year or 25 years, stranded costs could result, which means that consumers may still pay but receive no power. These two New England states already suffer from some of the highest residential electricity rates in the nation, and they are searching for ways to reduce prices while still pushing the Biden Administration’s climate policies.

The U.S offshore wind industry is struggling due to its exorbitant costs, supply chain issues, inflation and high-borrowing costs. As a result, industry lobbyists are pushing state lawmakers for longer contracts to finance these very expensive megaprojects. Currently, Massachusetts law limits the contracts between wind-farm developers and the utilities that buy their power to 20 years. Industry representatives want the limit raised to 30, arguing that spreading the costs of these multibillion-dollar projects over a longer time period would reduce the monthly costs for businesses and consumers that pay for the power. Contracts longer than the life expectancy of the generating units give the companies a revenue stream on paper they can point to as benefitting their bottom line.

The massive expense is a major obstacle in the construction of the U.S. offshore wind industry, and with rising interest rates and materials costs due to Bidenomics, developers are scrapping contracts and paying fines across several Northeast states. Only one commercial-scale wind farm has been built so far, off Long Island, New York, and only one other has started construction: Vineyard Wind, off Massachusetts.

As regulators in Massachusetts, Connecticut, and Rhode Island weigh the next round of bids to build projects in waters south of Martha’s Vineyard, industry lobbyists have been pushing for longer financing deals. Rhode Island already allows 30-year contracts and Connecticut state lawmakers enacted a bill to push their state’s limit to 30 years as well. In Massachusetts, however, there are mixed views from lawmakers on the issue. One representative is for it because it provides more options for consumers to get lower pricing. Another is against it because it would lock in Massachusetts consumers into paying prices that reflect the current market and technology, while technology can and will improve and along with it, lower costs.

The state-overseen contracts between utilities and wind-farm developers are seen as crucial to getting the offshore wind industry off the ground. Political leaders in all three states want offshore wind power to get the region’s grid off natural gas, whose costs are less than half of those for offshore wind.  They are working together for the next round of bids with the hope that they can move the offshore wind industry forward after the recent cancellations.

In March, four developers submitted bids to the three states that, if fully awarded, would bring contracts for nearly 5,600 megawatts of power—less than the 6,800 megawatts the states wanted. The bid prices have not been revealed, but they are almost certainly much higher than previous rounds of bids. If they are too high, they may get rejected.

RENEW Northeast, an industry lobbying group, argues that the 20-year limit was based on older technology available seven or eight years ago, involving turbines that were not designed to last much longer than two decades. According to RENEW, turbine design has improved significantly since then, and extending the contracts to 30 years could save consumers hundreds of millions of dollars each year while not increasing a project’s overall cost. The group compares it to the difference between paying off a house with a 30-year-mortgage instead of a 15-year one; the house costs the same, but the monthly payments are substantially lower. A 30-year mortgage makes the house more affordable than a 15-year mortgage. While the term limits on the mortgages may be comparable, however, the object in question is not. Houses have been built to last centuries, far longer than the 20-to-25-year life of a wind facility, and often the resale value of a home increases over time.

The Ocean Winds joint venture behind the SouthCoast Wind proposal also wants the term change, arguing that it could mitigate any huge rate spikes caused by soaring fossil fuel prices, a frequent occurrence in New England during cold spells or supply disruptions.  Natural gas prices have risen in the past due to shortages arising from the region’s opposition to natural gas pipelines, especially in cold weather. Further, Ocean Winds’ argument assumes the wind turbines can operate in extreme cold, but in Texas that has not been the case.

Even if the Massachusetts legislature joins with its counterparts in Connecticut and Rhode Island, it is still not clear if the change would happen quickly enough for the current round of bids. RENEW argues there could be enough time to adjust the pricing in the current bids, and reduce the potential for sticker shock as the winners are slated to be announced in early August. The legislators are not in agreement, seeing the change impacting the following round of bids. The Healey administration remains open to the 30-year term idea, particularly for the next round of bids, as a way of reducing energy costs while providing more certainty for the offshore wind industry.

Extending offshore wind contract term lengths could have an impact on project pricing, but must be weighed against the additional long-term costs and risks for customers. Further, utilities may not be in agreement. One of the three major electric utilities in Massachusetts, Eversource, is against 30-year contracts because twenty-year contracts have shown to be the most feasible to protect against long-term developments with new technologies and in supply markets. Longer contracts increase the risk that the locked-in prices can get more out of sync with the market and new technologies. The other two major utilities, National Grid and Unitil, have not yet commented on a 30-year term.

Conclusion

Northeast states are groping at straws to get the offshore wind industry off the ground, despite its exorbitant costs to consumers. Now, rather than a 20-year term for contracts, they are looking at a 30-year term, which would lower the monthly costs, without changing the total project costs. Offshore wind is an exceedingly expensive technology that is over 3 times the cost of onshore wind and over 2 times the cost of natural gas combined cycle technology. Further, offshore wind is intermittent and weather-driven, so that it needs back-up power that natural gas technology does not need and those costs are not included in the price differential. Lawmakers are pushing wind and solar power ostensibly because of climate change, yet consumers have shown that they do not want to pay for the higher costs associated with that transition. And, since wind facilities have only a 20-to-25-year life, a 30-year term may produce stranded costs that consumers may need to continue paying beyond the period of the wind facility’s useful life. Voters need to decide for whom these lawmakers are working and determine what is in their best interest during the oncoming election.