Energy Musings - November 7, 2023
Orsted's U.S. offshore wind business problems continue to multiple. Now it wants to the $300 million it put in escrow to assure it built Ocean Wind 1. New Jersey is not happy.
New Jersey And Orsted Spar Over Wind Project Cancellation
A day after announcing it was abandoning offshore wind projects off the New Jersey coast, Danish developer Ørsted wrote to the New Jersey Board of Public Utilities saying it was withdrawing from the agreement it had signed with the state under which it would forfeit the money it pledged to assure the Ocean Wind 1 project would be built by 2025 and to develop infrastructure in the state to support the offshore wind industry. This agreement was designed to protect New Jersey’s previous largesse for Ørsted.
In July, New Jersey Governor Phil Murphy engineered a deal with Ørsted giving it roughly $1 billion of federal tax money owed to residents under provisions of the Inflation Reduction Act to help them lower their electricity bills. The highly contentious agreement was wrestled through the legislature by the barest of margins. Murphy grew nervous about that agreement following Ørsted’s August 31 announcement it was looking at potentially having to write off $2.3 billion in U.S. offshore wind investments because they were no longer financially feasible.
In the company’s August press release, it cited Ocean Wind 1, along with Sunrise Wind and Revolution Wind, as projects adversely impacted by supplier delays and possible knock-on effects regarding final installation dates. Such delays could impact revenues and add additional costs, hurting project profitability. Østed also noted that its discussions with U.S. regulators about additional Investment Tax Credit qualification for Ocean Wind 1 and Sunrise were “not progressing as we previously expected.” For these reasons, it was warning investors of the potential write-off.
Murphy was concerned that the project he had gone to bat for was in financial trouble. While Ørsted didn’t say it would stop developing Ocean Wind 1, the risk was obvious. Company CEO Mads Nipper told investors that if it could not create value from projects for shareholders he was prepared to “walk away.” Given this warning, Murphy engineered an agreement for Ørsted to post $300 million to guarantee that Ocean Wind 1 and state infrastructure spending would move forward.
Under the terms of the agreement, $100 million of Ørsted’s commitment was at risk if Ocean Wind 1 was not built on time. The company says it has already transferred $200 million into the escrow account. The company said it was rescinding the agreement because the Board of Public Utilities had not taken final action to approve the agreement. However, the BPU says it approved an escrow agreement with Ørsted on September 27 and a guarantee agreement on October 11.
Call in the lawyers! Oh wait, a provision in the agreement that the two parties reportedly agreed to said that they would not sue each other over any dispute unless they tried and failed to resolve it through negotiations. We must await the next moves by the respective parties. Given the comment by Murphy upon learning of the cancellation of Ocean Wind 1 and 2, we suspect New Jersey will play hardball with Ørsted, something it has not encountered yet in developing its U.S. offshore wind business. So far, U.S. regulators have essentially given in to the wants and desires of offshore wind developers, including Ørsted in approving projects. Murphy’s comment suggests a new landscape. He said: “Today’s decision by Orsted to abandon its commitments to New Jersey is outrageous and calls into question the company’s credibility and competence.”
Our only window into how Ørsted has handled contractual arrangements for its offshore wind projects was through the pre-filed testimony of Rhode Island Energy officials involved in the evaluation of the Revolution Wind 2 contract that they rejected. Those officials gave the Rhode Island Public Utilities Commission chapter-and-verse about the shortcomings of the bid measured against the specific requirements outlined in the bid package. Ørsted failed to adequately address numerous issues. (We have covered these issues in earlier Energy Musings available at energymusings.substack.com.) The officials also addressed the required planning that the company left incomplete which jeopardized the viability of the project and its target operational date.
Monday night’s scheduled hearing before the Rhode Island Public Utilities Commission was canceled. We had been looking forward to learning more about the proposed contract between Rhode Island Energy and Danish offshore wind developer Ørsted and its joint-venture partner New England utility Eversource Energy for Revolution Wind 2. Ørsted indicated a week ago that it was pulling its bid. The company said that the terms of the bid were only valid for six months, which expired in mid-September. We suspect the decision to pull the bid was part of Orsted’s attempt to control its operating costs while it attempts to develop a new business plan as CEO Nipper told analysts last week. We doubt this is the end of Revolution Wind 2, but time will tell. And we are eagerly awaiting the next steps in the New Jersey saga.