Vineyard Wind’s delay in securing a final federal permit to start construction hasn’t dented widespread interest from banks and investors, who remain ready to provide debt and tax equity finance for the pioneering $2.8bn US offshore project.
They expect the Department of Interior (DOI) to greenlight the planned 84-turbine, 800MW array off the southern coast of Massachusetts in 2020, after President Donald Trump’s administration last week re-affirmed that offshore wind is an important component of its “America First” energy strategy.
Investors have lined up for several core reasons that include the deep balance sheets of joint project owners Avangrid and Copenhagen Infrastructure Partners (CIP), and the success CIP and Avangrid’s parent Iberdrola have had building successful offshore wind projects in Europe.
Another is the 20-year revenue stream that is double in many cases PPAs being done onshore now in the US and the quality counterparties that are the buyers – Massachusetts electricity distribution companies. Also, winds are steadier and stronger in the maritime environment and rapidly advancing turbine technology promise more energy capture, adding to the project’s revenue potential.
Vineyard had set financial close for 1 November, but this was upended in early August when Interior Secretary David Bernhardt surprised many in the industry by ordering regulators to expand their environmental review of the project.
The analysis, due for completion in January, will identify best practices for offshore wind project design in federal waters along the east coast and provide a template that will enable subsequent projects to navigate the regulatory process more smoothly.
Vineyard’s response was to scrap an aggressive timeline with construction start this year that would have allowed initial deliveries to Massachusetts electricity distribution companies in January 2022. Plans had called for completion of an initial 400MW capacity by the end of 2021 and balance within the next 12 months.
Financing the project
After two years of exploring alternatives and preparation, project finance was to have been a mix of sponsor equity, perhaps 20% of its capital stack, tax equity and debt. “We were basically right there ready to go on Vineyard,” Yale Henderson, head of the tax equity desk at JP Morgan Capital, told last week’s offshore wind conference here.
Vineyard had pre-qualified for the one-time federal investment tax credit (ITC) at 21% of capex using “physical work” eligibility criteria that would be earned if, and when, turbines enter commercial operation within a four-year window for project completion.
As the developer does not have enough tax liabilities to make use of the credits, it brought in market-making investors such as money-center banks who can monetise them, some of whom made tax equity commitments for the project as far back in 2017.
“Without giving out state secrets, what I can tell you is we had more than two times the amount of tax equity available to this project than the project needed,” Martin Pasqualini, managing director of CCA Group, a boutique financial advisory firm, that worked with Vineyard on the package, told the conference.
Others with a smaller tax position were also ready to consider financial support for the project, according to dealmakers.
“Asking them whether they can invest in a project two years out is difficult. Asking them much closer to COD when they might even go in, the response was almost uniformly positive in terms of level of interest,” said Henderson.
With construction start now likely in 2020, the question has arisen whether Vineyard could still qualify for 21% ITC or settle for less, which would add to borrowing costs.
Chief executive Lars Pedersen told Recharge that Vineyard will “definitely want to explore” testing the flexibility of ITC language as there is precedent for the US tax authority to allow for extenuating circumstances such as a permitting delay.
“I think it is difficult to say what kind of flexibility there could be. We think we were a special case. It was not something we were in control of,” he said. “We hope we can get relief.”
Vineyard timeline ‘no longer feasible’ after US regulatory delay
On the debt side, “We saw a tremendous response from the bank market,” Nuno Andrade, head of structured finance in the Americas for Santander Bank, told the conference. “Europeans and others have been waiting for this [US] market to open. There is a lot of pent-up demand for investing in these projects.”
Debt was thought to have comprised about half of Vineyard’s capital stack. As Santander and other banks went into the market for Vineyard, they also considered project bonds and other financing vehicles, but found these to be less efficient capital in this case.
“On some of what is most efficient there is also something around execution risk and speed you have to get certain things done in. Our original timeline we ran on where we were planning to sign next week, that was an ambitious timeline but could, for sure, have been done with permit in hand,” Henrik Tordrup, a CIP partner who played a leading role in bringing Vineyard to scheduled financial close, told the conference.
For lenders, hot button issues for Vineyard and other proposed US offshore projects are construction risk and related logistics, and interface risk between the contracting parties that typically involve contractual provisions that might include collaboration and cooperation clauses, design documents and specifications.
Andrade noted there is a risk perception among potential first-time lenders about placing a big turbine in the ocean, and this requires banks with sector experience in Europe spending a lot of time educating the US bank market.
Project finance is an exercise in risk allocation and for sponsors, a major risk lies in the development phase in the US, where the offshore market is driven by federal government permitting. but financial market players are optimistic the sector has a bright future.
“The same evolution that occurred with onshore wind, occurred with solar and so on. Everything is meeting at the right place – the technology, the sponsors. Hopefully, at some point in the near future, the US permitting process,” said Henderson
Add Tordrup: “When it is all up and running, it is different than onshore wind but in my personal opinion, it is not more risky than onshore wind. On the contrary.”
Darius Snieckus contributed reporting for this article