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9 November 2022

Second Wind PPA in a month deemed not economically viable

The second Power Purchasing Agreement (PPA) in a month, related to a wind project, has been deemed economically unviable. This time around Shell and Ocean Winds, the companies in charge of the Mayflower Wind Project, have joined Avangrid in asking for the PPA to be renegotiated – more on the Avangrid story can be found here.

The 405 MW Mayflower project, also located in the state of New England, had its PPA signed in April 2022 with three energy utility companies: Eversource Energy, National Grid and Unitil. Since then supply chain issues in the form of steel prices going up, and general inflation, have left project developers in need to renegotiate in order to turn a profit on the project.

The rough cost breakdown for an offshore wind project is the following: an offshore turbine is valued at around $900/kW. With the most powerful wind turbine – although in a prototype stage at the moment – being the 14MW GE Haliade-X, this would round up to $12.6 million. The cost of the turbine itself is believed to represent only 40% of the total cost of the project, out of which the machine body, tower, pile foundation and submarine cables account for 45%, 27% and 19% of the capex. Operation and maintenance, loan interest and tax account for 48%, 30% and 22% of the Opex.

But on November 4th, the Massachusetts DPU (Department of Public Utilities), rejected the motions brought forward by both the Commonwealth and Mayflower Wind Projects as the three utility companies with which the developers signed PPAs had indicated that they do not intend to renegotiate them. The original PPAs for Commonwealth and Mayflower were set at $72/MWh and $76.7/MWh respectively.

One of the main reasons behind the DPU rejecting these motions is the fact that Avangrid has been aware of this financial turmoil regarding its PPA for more than month and did not disclose any of these finding until the motion was filed. Yet its shareholders and investors were made aware of this on September 22nd and have been told that the project had been postponed until 2028 with the PPAs soon to be renegotiated.

The DPU gave Avangrid and Shell-Ocean Winds a deadline of November 9th to notify itself and the three utility companies of whether they will go ahead with the projects or completely back out.

On November 7th, Shell-Ocean Winds filed a letter withdrawing its motion for a one-month suspension of the PPA. In the letter, the developer retains its stance over the matter reiterating that the “global supply and macroeconomics” are still affecting the project and that a “detailed third-party analysis” will be provided as proof demonstrating the economic challenge faced by developers.

But the problem here is not that the DPU or the utility companies don’t believe that month old PPAs don’t work anymore given everything that happened in the past six months, but it probably begs the question ‘why should we face lower profits then?’

In reality though it’s not all doom and gloom for wind. We recently attended the Offshore and Floating Wind Europe Conference organized by Reuters Events and got a feel for what the people involved with such projects on a daily basis, think of the industry. A very detailed view over the immediate future of the Wind industry can be accessed via our new paper titled Wind industry blown off course by recession – promises a full recovery.

We have strong reasons to believe the industry will make a recovery as not everyone is shying away from wind projects. Just by way of example, UAE based renewables developer Masdar, is planning a 10GW wind farm in Egypt, under a deal agreed around COP27. The project is aimed at 2035. Masdar claims that the project will output 48,000 GWh per year and replace $5 billion worth of natural gas.