Wind companies want to recoup escalating costs: How will that affect electric rates?

The anticipated rate impacts of a new generation of offshore wind turbines are getting new scrutiny, as the world’s biggest energy companies ask the state for more money for wind energy to reflect the escalating costs of building the projects.

Offshore wind farm costs, which five years ago were expected to decline in coming years, instead have soared with rising inflation and interest rates — new costs that would be borne by ratepayers if project developers have their way. The likely increases are causing some to ask for greater transparency about costs and the cumulative impacts of new green energy sources needed to decarbonize the power grid.

New York State is embarking on an energy revolution that puts offshore wind in a central role in powering grids over the next 20 years amid phased-in state law requiring utilities to wind down fossil fuel plants. Since 2019, the state has awarded contracts for more than 4,000 megawatts of offshore wind, enough to power millions of homes, on its way toward a fully carbon-free grid by 2040. That's just under half the goal of 9,000 megawatts by 2035, a figure some say is only half of what ultimately may be needed. 

When the first generation of projects was announced, then-Gov. Andrew M. Cuomo's administration said the first two projects, Sunrise Wind and Empire Wind 1, would hike average New Yorker's bills by no more than 73 cents a month, despite construction costs estimated to approach $7 billion. A separate set of awards in 2020 for more than 2,000 additional megawatts will increase average bills by about 95 cents a month. (The South Fork Wind Farm set for completion later this year would add around $1.60 to average monthly customer bills, developer LIPA has said.) 

Escalating costs tied to material, labor and interconnection costs of the projects has led wind-farm companies, many of them international oil and gas giants, to request changes in their previously negotiated contracts to help cover the costs.

To date, the New York State Energy Research and Development Authority, which is negotiating the contracts, has characterized the bill impacts to customers as relatively minor, and wind farm developers have deferred to NYSERDA estimates in discussing bill impacts. But the requests for higher-cost contracts is leading some to question how customer bills will be impacted, particularly in the high-cost downstate region.

Just last month, New York City and a coalition of 55 large energy users asked the state Department of Public Service, which is reviewing the request to reopen the power contracts, to force developers to fully disclose the new costs before any increase is approved.

The groups cited “excessive redactions of critical information” in the wind farm companies’ filings, saying the absence of specific figures “means that customers do not know the total amount of additional compensation that these developers are asking them to pay, nor can they evaluate the claimed need for such relief.”

Last week, state Comptroller Thomas DiNapoli released a report saying even as state planners may be falling short in reaching their power goals, they need to do more to clearly show how the transition will impact customers’ wallets.

“Every effort should be made to clearly identify how the transitions to the state’s electric generation fleet and transmission grid will affect consumer electric bills in the future and to hold down costs to the state’s electric customers,” DiNapoli’s report said.

The request for more cost transparency comes as Orsted and Eversource, the developers of Sunrise Wind, began preliminary construction work on the 17.5-mile underground cable in Brookhaven Town that will connect the Massachusetts-coast power array to the LIPA grid. The on-land cable work itself involves a $200 million contract to Melville-based Haugland Group.

Earlier this year, Orsted USA’s Danish parent cited rising costs of the Sunrise Wind project in taking a $365 million impairment charge to reflect a "decrease in the value of Sunrise Wind in the company’s financials due to macroeconomic challenges and other project-specific challenges," the company said. 

Separately last month, Rhode Island Energy, the largest utility in Rhode Island, decided not to move forward with a power-purchase agreement for another Orsted/Eversource project known as Revolution Wind 2, citing a power contract reported to be “too expensive.”

Bloomberg News recently calculated the levelized cost of electricity from federally subsidized U.S. offshore wind farms jumped almost 50% this year from 2021 levels. It likely influenced Avangrid’s recent decision to withdraw its commitment to build Commonwealth Wind for Massachusetts, paying $48.9 million in fines to get out.

In its filing seeking to increase the power cost for Sunrise Wind, Orsted noted its budget for the project had increased by an undisclosed amount, and that without increase, the developers “would not be able to obtain a final investment decision allowing it to fully construct the project.”

As the financial stakes grow for customers, observers say transparency on rate impacts, including the cumulative impact of other projects needed for offshore wind such as battery storage systems and costly new transmission lines, is key.

The final bill impact of offshore wind “remains a mystery, and kind of a disturbing one (because) they’re rushing full speed ahead on this without knowing what it’s going to cost people,” James Hanley, a fellow at the fiscally conservative Empire Center for Public Policy in Albany, said last week.

The Public Utility Law Project, which advocates for low- and fixed-income utility customers, is reviewing the wind companies’ petitions with an eye on rate impacts, said Laurie Wheelock, executive director and counsel.

“For PULP, a major question is the rate increases associated with whether this is approved, how this will affect ratepayers?” Wheelock said. “We also see this as a big precedent-setter for things moving forward.”

Sunrise Wind will deliver its 924 megawatts of energy into the Long Island grid at a power station in Holtsville, with most of the energy powering an estimated 600,000 Long Island homes. LIPA has 1.2 million customers. When it announced the project awards in 2019, New York State said Sunrise Wind and Empire Wind 1, which will deliver its power to the New York City grid at Brooklyn, would cost New Yorkers a combined 73 cents a month, despite their combined price tags estimated to exceed $6 billion.

Unlike South Fork Wind, whose $2 billion contract value is listed on the state comptroller's OpenBook website, neither Sunrise nor Empire projects and their contract values are listed. Those two contracts "have not come to our office for review and/or filing," DiNapoli spokeswoman Jennifer Freeman said. "We agree. Transparency is needed here."
When it comes to the rate impacts of projects, wind-farm companies defer questions to NYSERDA.

Lauren Shane, a spokeswoman for Equinor, explained, "As the developer, our role is to produce the power and provide it into the grid. We don’t set the rates — those figures are provided by NYSERDA." 

NYSERDA spokeswoman Kate Muller denied that wind farm companies are forbidden under contract from discussing their own internal estimates of rate impacts after contracts have been awarded. 

"During an open solicitation, bidding companies may be unable to disclose certain economic information about projects if disclosure could impact the competitiveness of the solicitation," she said. "Once awards are made, NYSERDA's contracts do not forbid developers from discussing their own specific cost-to-customer impacts of these projects.

Newsday's questions to NYSERDA included an estimate that the Sunrise Wind farm had a $4.2 billion all-in cost. Muller asked, "Where did the $4.2 billion come from?" When asked if the number was correct, Muller didn't respond.

To help the developers recoup their costs and a profit, the state instituted a scheme that required utilities across the state to purchase offshore renewable energy credits from the projects, which provide a premium to the developers above the market energy prices. Under the requests from the wind energy companies, that premium would increase to reflect the higher costs the companies are facing from inflation in the years since the contract awards.

Observers say the state is likely to approve the requested cost-adjustment increase, noting it already included just such an adjustment clause in more recent contract awards. The state also would avoid the cost and time delay of having to put the same contracts out to bid again, Hanley said.

But just how much costs could increase from the 73 cents isn’t known. As Newsday previously reported, the companies in their state filings largely redacted disclosures about how much the cost of their projects have increased, and how much more customers would be forced to bear.

Even before the request for an increase, relatively little visibility into the projected impact of Sunrise Wind and other projects was forthcoming. When asked, Orsted spokeswoman Meaghan Wims cited New York State estimates in disclosing the cost, and declined to provide any further information about how much it might increase.

“We will have to see what decision the PSC takes,” she wrote in response to Newsday questions. Previously, she added, the State Energy Research and Development Authority “estimated the average bill impact for residential customers for both Sunrise Wind and Equinor’s Empire Wind 1 to be less than a dollar a month.”

In addition, Wims noted, “Once offshore wind farms are constructed, the 'fuel' is free, and Sunrise Wind is expected to operate for 25+ years.”

Asked how the state arrived at the 73-cent figure, NYSERDA's Muller responded with a statement explaining how offshore renewable energy credits, which provide developers with a premium over the market energy prices to cover development and other costs, work.

The credits allow for “payments to the counterparties to rise and fall inversely to a composite average of New York’s energy and capacity market prices, which provides protection for ratepayers and projects against volatility in utility bills and project revenue. Multiple long-run electricity market scenarios were developed to forecast reference energy prices and reference capacity prices used to estimate the expected average OREC cost.”

Under the original 2019-approved contract, Empire Wind 1 has an escalating "strike price" ranging from $99.08 per megawatt hour in the first year to $159.60 per megawatt hour in the last. Sunrise Wind contract has a fixed strike price of $110.37 per megawatt hour. 

Asked how the requested increase in the costs wind farm companies are now asking for could impact the state's 73-cent estimate, Muller declined to say, noting only that the agency is "looking carefully at the petition, and plans to provide input as the administrator of these contracts before the public comment period closes on August 27.”

As for Sunrise Wind alone, which will feed chiefly into the Long Island grid, Muller said: “Once the Sunrise Wind project comes online, the average bill impact for residential customers statewide based on the terms of the existing contract and electricity forecasts assessed at the time of the awards announcement is estimated to be approximately $0.36 per month. The direct impact to Long Island customers may differ from the average statewide residential customer depending on the utility and the amount of electricity consumed.”

Martin Cantor, director of the Long Island Center for Socio-Economic Policy, said the state’s explanation of the costs is head-scratching.

“What they say doesn’t make sense to me,” he said. “In effect, we’re going to be paying 100% of the construction costs … We’re talking billions in construction costs for these things. Long Islanders are going to have to pay that.”

Tom Falcone, chief executive of LIPA, said it's the utility's job to keep rates in line even as the transition revs up more costly offshore wind. LIPA has its own contract for what would be the first utility-scale offshore wind farm in federal waters. South Fork Wind, also by Orsted and Eversource, is expected deliver its 130 megawatts of power to a substation in East Hampton by year's end, at a cost to average customers LIPA estimates at $1.60 a month. 

"We will look at the bill impacts and try to make sure they are moderate and reasonable," Falcone said, of the greater fleet of wind power expected to make its way onto the LIPA and state grids. "We know what's coming and know that our strategies are to minimize the cost."

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.