Offshore Wind: Inside the Financial Web
Early 2024 saw a group of financial deals that have implications, in a broad sense, for how offshore wind projects may be financed. While offshore wind projects might be thought of as being in the ‘utility finance’ basket, they are ultimately high-risk deals that might better suit the portfolios of ‘infrastructure investment’ which, in recent years, has taken a shift towards tolerating more uncertainty when it comes to cash flows.
A 2022 article from consultants McKinsey, titled “Infrastructure investing will never be the same”, drives the point home, with the consultants writing that traditionally staid and stable, infrastructure investing had been shaken up by revolutions in energy, mobility and digitization. They add: “These assets offer many of the characteristics that infrastructure investors look for: real assets, protected market positions, and the potential to generate stable cash yields. However, to get exposure to these new asset classes, investors will have to accept a period of significant investment and negative cash flow, along with development, technology and commercial risks.”
Maritime industry participants have been closely following the progress of Charybdis, a Wind Turbine Installation Vessel (WTIV) being constructed at the Seatrium AmFELS yard in Brownsville, Texas, by a subsidiary of Virginia-based utility Dominion Energy, for use in building its 2.6 GW Coastal Virginia Offshore Wind (CVOW) project. The vessel will support the installation of 176 turbines on the seabed, 27 miles off the coast of Virginia Beach, as well as three offshore substations, and both the offshore and onshore transmission configuration. In early April, Dominion launched the still-under-construction WTIV, to be based at Hampton Roads. To achieve the milestone, Dominion completed the welding of the ship's hull and commissioned the vessel's four legs and related jacking. A month later, the monopile installation at CVOW began with DEME’s DP3 Installation vessel Orion. Monopiles, brought in from Rostock, Germany, are being stored at the Portsmouth Marine Terminal - a repurposed container handling facility.
Image courtesy DEME
As projects move ahead, financiers with expertise in structuring renewable energy deals are now eyeing offshore wind. Only a few months prior to the Charybdis launch, Dominion announced that fund packager Stonepeak - which is an alternative investment firm putting money to work on behalf of pension funds, endowments and other large institutions, with end-2023 assets under management (AUM) of $65.1 billion - had taken a 50% stake in the CVOW project. As explained in press announcements, Stonepeak will pay Dominion an amount slightly under $3 billion, representing half of the utility’s capital outlays so far.
Overall project expenditures are projected at $9.8 billion, but the deal structure builds in contingencies for costs topping $11 billion, by the expected completion date late in 2026. Stonepeak is no stranger to shipping, taking a position in TRAC Intermodal in 2020. A year later, it acquired Teekay LNG LP, a listed limited partnership with 47 LNG tankers and 21 LPG carriers, for $6.2 billion. Importantly, its investment funds have recently been behind wind farms offshore Taiwan. Infrastructure investors, a broad group, can structure deals in ways that utilities cannot, and can apportion risks and returns among multiple entities - examples are the common General Partner (GP)/ Limited Partner (LP) structures.
Thus, they may be willing to take on more uncertainties than the traditional utilities. In a recently announced deal, the green-minded investment management giant BlackRock took over the well-known Global Infrastructure Partners (GIP), with more than $100 billion AUM. GIP already has presence in offshore wind, with holdings producing in the North Sea, Borkum Riffgrund 2, Gode Wind 1 and Hornsea, as well as a stake in BluePoint Wind, a future producer in the New York Bight still in the planning stages.
Image courtesy Dominion EnergyAnother specialist in the sector, Copenhagen Infrastructure Partners (CIP), through two investment funds with K/S structures - set up to attract smaller non-institutional investors - currently holds a 50% stake in Vineyard Wind 1, alongside Avangrid, a subsidiary of the Spanish utility giant Iberdrola. Electricity production from a handful of installed turbines began feeding the Massachusetts grid in February 2024. When completed later in 2024, the 62-turbine Vineyard Wind will have a capacity of 806 MW. CIP’s existing portfolio also includes numerous onshore wind producers, the East Anglia 1 project in the UK, with other offshore projects in its pipeline.
Deal structuring benefits from governmental incentives
Beyond the construction and deployment phases, the long-term nature of operating offshore wind, with fixed contracts with durations of 10 years or more, is nicely suited for another financial tool, known as the tax equity package. Offshore wind takes advantage of incentives, including tax credits, that were greatly expanded under the Inflation Reduction Act (IRA), enacted in August 2022. These types of structures enable the project owners to raise cash from the sale of investment stakes to financial institutions, who can then utilize tax credits from previous programs (Investment Tax Credits, and sometimes, Production Tax Credits), combined with new incentives in the IRA. Describing the financing for Vineyard Wind 1, Avangrid said: “The $1.2 billion investment transaction was reached with J.P. Morgan Chase, Bank of America and Wells Fargo, making it the largest single asset tax equity financing and the first for a commercial scale offshore wind project.” The tax equity package is tied to a highly complicated ‘partnership flip’ that has been used in many renewable energy packages - after the financial institutions are paid off, the project developer, in this case Avangrid and CIP, garners all, or nearly all, of the upside.
Ups and downs
Beyond the IRA, the Biden Administration is now looking further out into the future and further offshore, with its Floating Offshore Wind Shot initiative, aimed at reducing costs for electricity generation from floating turbines. At end April, the Bureau of Ocean Energy Management (BOEM) announced that it was looking closely at lease auctions in deep waters offshore Oregon and Maine and seeking comments to preliminary proposals.
While offshore wind continues to make strides in the United States, recent complications have derailed is forward momentum. The news is not all bad. Namely, at end March, Ørsted got the green light from BOEM on the 924 MW Sunrise Wind project, with 95 Siemens Gamesa turbines to be deployed south of Block Island. In another deal where utility Eversource is pulling back, Ørsted also inked a deal to acquire Eversource’s 50% stake in Sunrise Wind. The project has also been greenlighted by New York State Energy Research and Development Authority (NYSERDA).
The good news comes with setbacks, though.
In late April, NYSERDA pulled back on an ongoing offshore wind solicitation. Three projects, each with 1.3 GW expected production, were put on hold before Power Purchase Agreements had been signed, as turbine manufacturer GE Vernova backed away from plans to produce turbines with 18 MW capability, with a likely cost increase related to the installation of a greater number of smaller turbines of around 16 MW. Earlier retreats, where potential power providers paid termination penalties after having signed Power Purchase Agreements (PPAs), included Ørsted scrapping its Ocean Wind I and Ocean Wind II projects off the New Jersey coast, which would have delivered a combined 2.2 GW. The developer said that macroeconomic factors have changed dramatically over a short period of time, with high inflation, rising interest rates, and supply chain bottlenecks impacting its long-term capital investment.
Previously scuttled deals had included Avangrid cancelling its PPA with utilities in Connecticut, effectively pulling the plug on the Park City Wind, an 804 MW project. Noting that the original pricing of its output had been agreed four years earlier, in 2019, Avangrid pointed to “…unprecedented economic headwinds facing the industry including record inflation, supply chain disruptions, and sharp interest rate hikes, the aggregate impact of which rendered the Park City Wind project unfinanceable under its existing contracts.”
A pair of projects that have not been terminated, in spite of all the obstacles, further exemplifies offshore wind’s suitability for the infrastructure investors at a time that conventional utilities are better suited to focus on the more predictable landside transmission/ distribution businesses. In February, 2024, at around the same type as its announcement of being acquired by BlackRock, GIP bought a 50% ownership share in two offshore projects - South Fork Wind (already producing 132 MW off Long Island) and Revolution Wind (coming online in 2025), as Eversource shifted its focus to the onshore side of these projects. As in the Sunrise Wind transaction, Ørsted will remain in the deal as a 50% partner.
The rationale for utilities terminating offshore wind deals, centering on inflation and various other disruptions, are the very same risks that the Stonepeaks, CIPs and BlackRocks of the world, together with the participants in their funds, may be more willing to embrace. Going forward, some of the complex financial structuring may be a way to keep some of the tottering and leaky offshore wind projects afloat. A late 2023 presentation from the American Council on Renewable Energy in conjunction with law firm McDermott, Will & Emery LLP, suggested that, among project developers, the tax equity is expected to be the most available financing source over the next three year. As McKinsey, in its brief aimed at financial institutions, had noted, building relationships with utilities to go after carve-out opportunities can be a way to build scale quickly in many areas where credible at-scale investments are hard to find.
The maritime connection
By definition, there is a maritime component to offshore energy. Can vessel economics make, or break, offshore wind projects? Vessel assets serving the U.S. Outer Continental Shelf have been the subject of spirited discussions, however, few of these dialogues have looked at maritime assets in the context of overall project construction costs. On recently cancelled deals, Ørsted and Avangrid have referred to issues and disruptions with supply chains, with vessels not being mentioned specifically, suggesting that the problems might be on the land side.
Where do maritime assets fit into the jigsaw puzzle that is offshore wind?
When ordered in 2020, Charybdis, with its keel laying in December of that year, was slated for late 2023 completion, at a cost of $500 million. At 85% completion in May 2023, delivery is anticipated for late 2024/early 2025, at an all-in cost exceeding $625 million. Arguably, two years of its capital cost could be allocated to CVOW before the WTIV moves on to other projects serving the coastal United States. Assuming a 15 to 20-year useful life for the asset, which would then move on to other installations, around $60 - $80 million capital cost might be attributed to CVOW. Contrast these ‘back of the envelope’ estimates with overall CVOW project costs pegged at between $9.8 billion and $11.3 billion - construction in non-U.S. yards is less.
Cadeler, a leader in the WTIV space, explained in its end 2023 annual report that it had orders with Asian yards Cosco and Daewoo in place for six newbuilds, and that the aggregate capital expenditures for the newbuilds are approximately €1.8 billion. This works back to €300 million, or roughly $330 million, for each unit.
When Maersk Supply’s WTIV order with the Sembcorp yard in Singapore, was announced in late 2022, reports in shipping media pegged its capital cost at $350 million. The WTIV, when delivered, will initially be deployed at Equinor’s 810 MW Empire Wind field, set to come online in 2026. A Jones Act compliant subsidiary of Kirby Corporation will provide a feeder service, bringing components out from a one-time containership terminal in Brooklyn for installation. Assuming a 20-year lifespan, the WTIV’s capital cost for a one-year timeframe works back to $35 million. Overall Empire 1’s project costs had been estimated at around $3 billion in 2021, prior to a substantial bump up in early 2024.
Image courtesy ØrstedConstruction of vessels in U.S. yards for the offshore wind market can benefit from the U.S. Maritime Administration’s (MARAD) Title XI program, which provides government support for long term financings, available for ‘vessels of national interest’. Dominion’s CVOW will be supported by a Service Operation Vessel (SOV), to be operated by CREST Wind, owned by U.S. company Crowley and Danish specialist Esvagt, under a long-term charter with turbine behemoth Siemens Gamesa now under construction at Fincantieri’s Bay Shipbuilding. According to MARAD filings, this vessel is priced at $168 million. A hybrid-powered SOV for Equinor’s Empire Wind, also based in Brooklyn, to be delivered from Edison Chouest’s LAShip yard in Houma, Louisiana, has been priced at $109 million, MARAD states, under the reported 10-year charter, that comes to around $11 million each year. In mid-May, 2024, another SOV, Eco Edison, also built by Edison Chouest, was christened at the Port of New Orleans. It will be serving three projects tied to Ørsted and Eversource, tasked with handling the land side. These include South Fork Wind, Sunrise Wind and Revolution Wind, a 704 MW project, offshore Rhode Island.